The case for Powell
David Beckworth has an excellent piece in the NYT explaining the case for reappointing Jay Powell for another 4 year term. Since I don’t have much to add, I’ll instead focus on one part of David’s article that I agree with, but fear that some may misinterpret:
Perhaps the most important element that Mr. Powell could bring to a second term as Fed chair is humility. After taking the helm in early 2018, he oversaw four interest rate hikes motivated by a belief that the economy was exceeding its “speed limit” and might soon overheat, with undesired price increases around the corner. Mr. Powell, however, had begun doubting that the Fed actually knew the speed limit of the economy and admitted as much in an August 2018 speech. Later, after the Fed was forced to reverse itself with interest rate cuts in 2019, he acknowledged to Congress that the Fed had indeed underestimated how much room the economy had to grow.
It is rare to see a Fed official, especially a chair, admit a mistake so soon after it happens. Rather than a demerit, this willingness to learn is precisely what a president facing the uncharted waters we are in would want in a central bank leader.
This midcourse correction is an example that I often cite as reason to be optimistic about monetary policy. Indeed before Covid hit in 2020, it was the primary reason why I thought we might finally get that elusive “soft landing”. Alas, that was not to be, but we’ve recovered so quickly that I am once again getting my hopes up for a soft landing in the 2020s. Being able to reverse course when you’ve made a mistake is one of the most important attributes of being a good Fed chair.
So why do I worry that some may misunderstand this example? My fear is that people will assume that the Fed made a mistake because it raised rates 4 times in 2018 and then turned around and cut them 3 times in 2019. That’s not why David and I view 2018 as a mistake. The natural rate of interest moves around, and the policy rate should move with it. Rather David’s appraisal is based on evidence that, in retrospect, a more expansionary policy in 2018 would have led to an outcome closer to the Fed’s target. The Fed misjudged the economy’s “speed limit”
Just so that you don’t think that I’m splitting hairs, let me throw out a claim (which David may of may not agree with), which will help to clarify what it means for the Fed to make a mistake. Fed mistakes do not occur when the Fed reverses course on interest rates, they occur when the inflation/employment outcome is unfavorable. More specifically, when the economy is far from the Fed’s target of 2% PCE inflation and high employment. And here’s my radical claim: The two years in question (2018-19) were the most successful Fed policy in my lifetime, perhaps in all of Fed history. Not one of the best pair of years, the very best.
During my lifetime, there are only a couple two year periods that look even close to 2018-19. One is 1999-2000, when inflation was equally close to 2%. But in that case the unemployment rate was higher than in 2018-19. The only other two year period with similarly low unemployment was 1968-69, but that was purchased at the cost of severe overshooting on the inflation front. So 2018-19 was the very best 2-year period.
Then why do David and I view this as evidence of a policy mistake? Because it could have been even better. If money were a bit easier in 2018, then inflation during 2018-19 would have been slightly closer to 2% and unemployment would have been a bit lower. But again, while this was a policy mistake, it was also the smallest policy mistake in modern Fed history, at least by my estimation. Every other 2-year period was worse.
Confused? Now you see why I fear some people might misinterpret this point. They might assume David is talking about the famous “Mistake of 2018” like it was some sort of huge policy blunder. If it had been a huge blunder, then the case for re-appointing Powell would be weak.
Instead, what we observed is the Fed making a small mistake in 2018, and quickly correcting the mistake in 2019. Think of a bus that is going down the highway. It drifts six inches from the center of the lane, and the driver quickly and smoothly adjusts the steering to bring it back on center. That’s a lot better than having the bus drift onto the gravel shoulder and have the driver lurch back so sharply that people lose their lunch! Powell is like a skilled bus driver, making small and agile corrections to keep aggregate demand on course.
The obvious objection to this post is that I’ve assumed all Fed chairs are dealt the same hand. That’s a fair criticism, especially regarding real shocks like the Covid recession. But most recessions in the US are caused by demand shocks, i.e. bad Fed policy. So it really does make sense to judge the Fed based on macroeconomic outcomes, at least in most cases (not in 2020).
A better objection is that the natural rate of unemployment moves around, and that Powell benefited from a low natural rate in 2018-19 (compared to say the 1970s and 1980s, when the natural rate was higher.) I agree, but that just means that 2018-19 was one of the best 2 year periods ever, perhaps not the very best. The bottom line, however, is that inflation slightly below 2% and unemployment below 4% is a really good outcome, at least relative to any other period in US history.
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7. August 2021 at 00:43
Scott,
I’ll point you back to your post of December 2018, where I commented extensively on Powell’s incompetence to which I must now admit that I was very wrong.
https://www.themoneyillusion.com/whats-the-problem/
As it turns out Powell quickly figured out that running the Fed was simple. Put your foot on the gas when you’re going to slow and take your foot off when you’re going to fast.
It’s only air brain academics like Bernanke who tie themselves in knots because they’ve made a career out of expounding on the complexities of monetary policy and don’t realize that in reality it’s a simpleton’s task.
7. August 2021 at 03:07
Would you try to micromanage the supply of apples?
End the Fed from micromanaging the supply of money. And while we are at it, let’s end the communist democrats who have been nothing but kill-joys and bigots since 1830.
From Slavery to Jim Crow, to vaccine passports and globalist governments, the libtards have consistently been the biggest threat to human liberty.
7. August 2021 at 08:39
Scott, thank you for this post, and consistently pointing out how monetary policy is a dynamic activity. To continue your bus driver analogy, I think it’s worth pointing out that the Fed can only see a limited distance down the road and can’t predict the actions of other vehicles. Who the hell knows what PCE and unemployment rate will be like two years from now? If it’s 1.7% PCE and 3% unemployment for a few quarters that could mean things are okay, but if unemployment starts drifting up, then action is warranted. Whatever the circumstances, we can only hope that the action will be subtle and timely.
What could improve performance for the Fed is an NGDP futures market that would allow a slightly better view of the “road ahead.” I recall reading about that somewhere on the Internet.
7. August 2021 at 08:42
“What could improve performance for the Fed is an NGDP futures market that would allow a slightly better view of the “road ahead.” I recall reading about that somewhere on the Internet.”
Hmm, that doesn’t sound familiar – you must be imagining things! 🙂
7. August 2021 at 13:50
I didn’t think there was a good reason to replace Yellen, and I don’t think there’s a good reason to replace Powell now, unless we could get a true NGDPLT evangelist in his place. Even if we could though, this isn’t the Greenspan Fed, and that’d only be one vote on the FOMC.
Powell is a breath of fresh air. He’s shown himself to be intelligent, reasonable, and open-minded. Policy during the pandemic recession represented a notable improvement over policy during prior recessions, and this obviously wasn’t a preventable recession from the monetary policy perspective. NGDP growth ended up roughly back on the pre-recession track, which is still tight, but at least it didn’t get tighter. And, most would disagree with my perspective that money is tight right now.
For those who think roughly 2% real growth is the best we can do, monetary policy is just about right. The stock market is implicitly saying that just over 4% mean NGDP growth what should be expected about as far as the eye can see.
7. August 2021 at 16:16
Nice teaching post Scott, and I agree, but the chances of most people *not* misinterpreting David’s comment are at best about as good as people accepting the EMH. People like the idea that someone – whether their central bank chair or fund manager – knows more or is smarter than everyone else, such that reversals in policy instrument changes – whether real or apparent (apparent in the sense that they are driven by changes in the natural rate of interest rather than mistaken priors) – are viewed negatively, just as asset price volatility is viewed as refuting the EMH.
7. August 2021 at 17:00
Rajat, Yes, for many years now I’ve accepted that educating people on monetary policy is basically hopeless. The EMH is a good analogy, as you say. Even though we now know that 2006 wasn’t a house price bubble, you’ll never convince people on that point.
The cognitive illusions are just too powerful.
7. August 2021 at 17:10
Your comments on the Fed harbor an ambiguity. On the one hand, you wish the Fed would target expected NGDP (LT), and so you must have a negative reaction when Fed policy results in expected NGDP deviating markedly from a smooth upward path, positive otherwise. On the other hand, you take as your standard for judgment the target at which the Fed has announced it is aiming: 2% PCE inflation and low unemployment—actual, not expected, inflation and unemployment. Of course, even when the Fed is hitting its target *right now*, if the market were to expect, say, 1% inflation and 6% employment *next year*, the market would probably be proven right, and so *in the near future* you *would be* in a position to criticize Fed policy. But for now you would be committed simply to praise. It is in this latter vein that you say: “Fed mistakes . . . occur . . . when [and only when] the economy is far from the Fed’s target of 2% PCE inflation and high employment.”
There is a theoretical tension between, “The Fed should announce expected NGDPLT, and then execute it,” and, “The Fed should act so as to achieve 2% PCE inflation and low unemployment” (“theoretical,” because in practice they are not greatly different). It is sometimes a struggle to determine upon which you are relying at any given moment.
By the way, good post!
7. August 2021 at 17:15
Scott,
What are you talking about? You’ve been extremely successful in educating huge numbers of people about monetary policy!!
8. August 2021 at 01:05
Chair Jerome Powell says:
“’it interferes with the
03:19 process of credit intermediation that
03:22 banks undergo they take in deposits they
03:24 lend it out “to the extent the policy
03:26 rate is negative your your your crushing
03:29 down on bank margins and that makes them
03:31 lend less and there are other you know
03:33 possible negative effects there I think
03:35 I think the evidence is mixed it’s not
03:37 it’s not clear either way we also have
03:39 we have institutional arrangements here
03:42 that would that would not work with
03:43 negative rates I wouldn’t say those are
03:44 decisive things like the money market
03:46 funds fund industry which a lot of
03:48 companies of various kinds use to fun
https://www.youtube.com/watch?v=mtixgCEEt_4
‘credit intermediation’ ≡ ‘economic ignoramus’?
8. August 2021 at 01:17
“In order to reach such conclusions, neoclassical and central bank economists worked backwards: What kind of model comes to such conclusions? Answer: A model that operates in a dream-like idealized world. What are the features that define such a world? A long list of assumptions needs to hold, creating a bizarre theoretical Neverland: perfect information, complete markets in equilibrium, perfect competition, zero transaction costs, no time constraints, perfectly flexible prices that adjust all the time, everyone is very selfish and does not care about others, and people are not influenced by others. Why do all these assumptions matter? Because neoclassical economists have proven that they all need to jointly hold true, for market equilibrium and efficient markets to exist, . . . ”
https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy/
8. August 2021 at 05:14
You have been very persuasive on the success of Powell—-so all of this makes sense (To repeat for the 100th time, I do not understand the “how” of monetary policy——but I do generally understand the “what” as you define it—-and your predictions and quasi predictions are always close to right—-so I have faith in your judgment—-and Powell’s).
I assume you believe Fiscal policy matters —a lot. The Fed can impact unemployment and inflation——that is it’s stated purpose——-but Fiscal policy can impact economic efficiency and growth and within that framework the Fed also can influence it. But not more than is permitted by Fiscal policy. Fiscal policy creates a boundary. Is that true?
But it is Fiscal policy that is owned most by the political process. For me, the idea that lower taxes (which means lower participation by Govt in the creation of GDP) and lower regulation is a better path to efficiency and growth seems obvious. Yet, in my lifetime, this has been an idea that has been resisted at an ever increasing rate.
By and large the Fed works outside of the political construct
8. August 2021 at 06:44
Great reply postkey.
re: “The natural rate of interest moves around, and the policy rate should move with it”
No economist should be a party to such pseudo economic analysis.
Both TFP growth, and the output gap are greatly underestimated.
Summers and Stiglitz are lost. It’s incomprehensible, but from the standpoint of the payment’s system, banks don’t loan out deposits (double entry bookkeeping on a national scale). Deposits are the result of lending. Ergo, all bank-held savings are frozen.
That destroys the velocity of circulation. That reduces AD. That is the sole cause of secular stagnation, not demographics, not robotics, not globalization, not monopolization.
Both stagflation and secular stagnation were predicted in 1961.
see: “Commercial Banks and Financial Intermediaries: Fallacies and Policy Implications–A Comment Leland J. Pritchard Journal of Political Economy Vol. 68, No. 5 (Oct., 1960), pp. 518-522
“The case against commercial bank saving accounts”
Leland James Pritchard 1964 Banker’s magazine
“The economics of the commercial bank : savings-investment process in the United States” Leland James Pritchard 1969
“Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
“Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386
The repercussions are profound and universally mis-understood. As Dr. Leland James Pritchard, Ph.D., Economics Chicago 1933, M.S. Statistics, Syracuse, predicted in 1963. His 1959 economic syllogism posits:
#1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
#2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
#3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods” (CAPEX)
8. August 2021 at 06:57
2018 was a big FOMC mistake. If, as Scott Sumner claims, monetary policy was too tight, then the economy would have fallen off deeper and faster.
Dr. Philip George predicted it. George may not completely understand what happened, but he was right. Link “The Riddle of Money Finally Solved”.
See: Dr. Philip George – October 9, 2018: “At the moment, one can safely say that the Fed’s plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”
It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.
This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.
This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent, lost to both consumption and investment). In a twinkling, the economy begins to suffer.
8. August 2021 at 07:05
In “The General Theory of Employment, Interest and Money”, pg. 81 (New York: Harcourt, Brace and Co.):
John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an:
“optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”
In almost every instance in which Keynes wrote the term “bank” in his General Theory, it is necessary to substitute the term non-bank in order to make Keynes’ statement correct.
This is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, the elimination of Reg Q ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency Economic Stabilization Act of 2008, sec. 128. “acceleration of the effective date for payment of interest on reserves”, etc.
8. August 2021 at 07:07
The pundits are more confused today than ever. It’s like George Selgin (who testified before Congress), July 20, 2017:
“This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”
See e-mail:
Re: My comment: Savings are not a source of “financing” for the commercial bankers
Dan Thornton
Thu 3/9, 2:47 PMYou
See the graph below.
http://bit.ly/2n03HJ8
Daniel L. Thornton
D.L. Thornton Economics LLC
These Ph.Ds. don’t know a debit from a credit.
8. August 2021 at 09:04
Targeting N-gDp is all wrong. The FOMC’s monetary policy objectives should be formulated in terms of desired rates-of-change, roc’s, in monetary flows, volume times transaction’s velocity, relative to roc’s in the real-output of final goods and services -> R-gDp.
Roc’s in N-gDp, or nominal P*Y, can serve as a proxy figure for roc’s in all physical transactions P*T in American Yale Professor Irving Fisher’s truistic: “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.
“Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured.
See: Toward a More Meaningful Statistical Concept of the Money Supply Leland J. Pritchard, The Journal of Finance, Vol. 9, No. 1 (Mar., 1954), pp. 41-48 (8 pages)
The “Holy Grail” is inviolate & sacrosanct.
1/1/2021 ,,,, 0.65
2/1/2021 ,,,, 0.66
3/1/2021 ,,,, 0.70
4/1/2021 ,,,, 0.71
5/1/2021 ,,,, 0.78
6/1/2021 ,,,, 0.80
7/1/2021 ,,,, 0.88
8/1/2021 ,,,, 0.66
9/1/2021 ,,,, 0.36
10/1/2021 ,,,, 0.35
11/1/2021 ,,,, 0.29
12/1/2021 ,,,, 0.21
1/1/2022 ,,,, 0.18
2/1/2022 ,,,, 0.13 problem in 1st qtr.
3/1/2022 ,,,, 0.06
4/1/2022 ,,,, 0.00
So, any talk of “tapering” is the wrong approach.
8. August 2021 at 12:42
I consider myself an avid follower of news, but only learned in 2021 that the Fed had decided it was free to interpret its stable prices mandate as permitting a policy of pursuing symmetric, time-averaged 2% PCE inflation for its own sake. How did they establish that they had the authority to substitute their “stable prices” mandate for a policy of “stable price increases”?
The desirability of inflation in itself would seem to be a political question that the FOMC alone is not competent to decide. Shouldn’t these policy changes have been subject to a process of formal public comment? The “Fed Listens” events would seem to have been a poor substitute for that.
8. August 2021 at 15:48
Philo, Even if a second best policy goal is only 90% as good as NGDPLT, it’s best to hit the goal rather than create economic instability by doing things that are at variance with what the markets expected, and then having to create a shock to get back to 2% inflation.
8. August 2021 at 18:38
Scott,
You said,
“Even if a second best policy goal is only 90% as good as NGDPLT, it’s best to hit the goal rather than create economic instability by doing things that are at variance with what the markets expected.”
That is spot on. It’s simple to do… there’s no excuse for failure, and b) it’s why Bernanke was the worst Chair in Fed history and Powell the best.
8. August 2021 at 19:49
How long before Powell has to start making some tough decisions about employment? Is Powell capable of causing a recession, even if reporters start to complain that doing so helps Trump and Republicans. Can the US really maintain central bank independence? It is easy to stand up to Trump, because everyone in the media and academia, etc, etc, will praise you. But making decisions that help Trump, and dealing with media and journalists who increasingly view themselves as activists, not reporters or analysts, is a different story.
9. August 2021 at 05:52
To Spencer Bradley Hall
What you call the proper “fed’s” objectives, I call the tools they use to meet their objectives——minimum unemployment given a target inflation——Do you think that inside Scott’s framework, those tools are not used? I assume he thinks they are and should—perhaps I am wrong.
I was not aware that It was controversial that deposits create money (The M1 money) —-you seem to think it is.
Money as a medium of exchange must be high enough to meet the needs of any entity that purchases anything——so when the demand for money declines or rises velocity and supply need to adjust relative to each other for those needs to be met. I have no idea how that happens (I assume it happens) to prevent unwanted deflation or inflation but I assume that is what the Fed is trying to accomplish.
M1 is at an all time high—-including the percent of its 1 year recent rise—-and Velocity is at an all time low. I do not know how that happens——except I assume if the Fed were tightening, there would be less M1—-given the current velocity. I don’t know how the Fed can impact velocity.
9. August 2021 at 06:05
@Michael Rulle:
Aggregate monetary purchasing power, AD, equals money times the velocity of circulation (not N-gDp as the Keynesian economists claim).
Vi is a “residual calculation – not a real physical observable and measurable statistic.” Income velocity may be a “fudge factor,” but the transactions velocity of circulation is a tangible figure.
I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
Money demand is viewed as a function of its opportunity cost-the foregone interest income of holding lower-yielding money balances (a liquidity preference curve). As this cost of holding money falls, the demand for money rises (and velocity decreases).
Dig deeper. As Dr. Philip George says: “The velocity of money is a function of interest rates”
Dig deeper. As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
https://monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html
Thus, the way to manage Vt is to gradually drive the banks out of the savings business. It’s a palpable crime, but the economy is being run in reverse. In the circular flow of income, savings is not synonymous with the money supply. Monetary savings, income not spent, is an unrecognized leakage in Keynesian National Income Accounting.
From the standpoint of the banking system, savings is a function of the velocity of deposits, not a function of their volume. With the NBFIs, investment follows savings. With the DFIs, investment elicits savings.
I.e., income redistribution is accomplished by putting savings back to work, c. $15,022.8 trillion.
Banks don’t loan out savings. Contrariwise, the money stock is altered when banks invest.
Savings flowing through the nonbanks never leaves the payment’s system (where all savings originate). There is simply a transfer in the ownership of existing DFI liabilities within the payment’s system (an exchange in the counterparties of existing deposit liabilities, a velocity relationship).
That’s the very reason why velocity has fallen since 1981. Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:
“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity” — because economists don’t know a debit from a credit.
9. August 2021 at 06:23
You should read “Greenspan’s Fraud: How Two Decades of His Policies Have Undermined the Global Economy”
The money stock used to be important:
https://www.nytimes.com/1982/04/13/business/fed-shift-on-money-supply-due.html
“CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decision making process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”
This is grade school stuff. It’s stock vs. flow.
Contrary to Friedman, there is no “Fool in the Shower”. The distributed lag effect of money flows, for both R-gDp and inflation, are mathematical constants, and have been for > 100 years.
See: “History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag. In a later paper (1937, p. 323), he stated that the basic problem in applying the theory of distributed lags “is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.” Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.
9. August 2021 at 07:05
re: “Powell the best”
Bernanke bankrupt America. Powell ushered in MMT.
Mal-investment (“impacts resource allocation”), stems from the fact that adding infinite, artificial, and misdirected money products (blunt LSAPs on sovereigns, QE-forever) 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, produces an income stream) and increases the exchange value of the U.S. $.
9. August 2021 at 11:25
It’s as Sumner says, pump, and keep pumping, until you germinate an induced demand, so as to propagate sustainable momentum in the economy.
There is no need for Powell to taper. AD is falling.
10. August 2021 at 15:21
“… we argue that the typical strong emphasis on the role of the expansion of bank reserves in discussions of unconventional monetary policies is misplaced. In our view, the effectiveness of such policies is not much affected by the extent to which they rely on bank reserves as opposed to alternative close substitutes, such as central bank short-term debt. In particular, changes in reserves associated with unconventional monetary policies do not in and of themselves loosen significantly the constraint on bank lending or act as a catalyst for inflation …
In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.”
http://www.bis.org/publ/work292.pdf?noframes=1
10. August 2021 at 19:43
Can we give a little money so that we do not have to encounter ads on your blog? That would be so nice.
11. August 2021 at 00:13
” . . . clearly the federal
17:04 reserve hasn’t got a clue what’s going
17:05 on at the moment
17:07 in fact jay powell has more or less
17:08 conceded that in his latest
17:09 congressional testimony . . . ” ?
https://www.youtube.com/watch?v=r_fPcpfGWRM
11. August 2021 at 05:09
Susie, Sorry about that. I told them not to use popup ads. I’ll look into it.
11. August 2021 at 06:28
There are monetary targets, and one is inflation, the monetary fulcrum. Powell has disavowed monetarism.
Powell: “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
Powell: “There was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time” Powell refers to M2.
These time-dependent mechanics are subject to the limitations of all logical models, analyses based upon broad statistical aggregates, namely, the data cannot be compiled accurately, defined fittingly, or applied in a manner which conforms to rigid theoretical constructs.
But the evidence suggests otherwise:
Parse date; roc in M*Vt; cpi
01/1/2020 ,,,,, 0.11 ,,,,, 257.971
02/1/2020 ,,,,, 0.03 ,,,,, 258.678
03/1/2020 ,,,,, 0.21 ,,,,, 258.115
04/1/2020 ,,,,, 0.40 ,,,,, 256.389
05/1/2020 ,,,,, 0.46 ,,,,, 256.394
06/1/2020 ,,,,, 0.50 ,,,,, 257.797
07/1/2020 ,,,,, 0.53 ,,,,, 259.101
08/1/2020 ,,,,, 0.56 ,,,,, 259.918
09/1/2020 ,,,,, 0.61 ,,,,, 260.28
10/1/2020 ,,,,, 0.68 ,,,,, 260.388
11/1/2020 ,,,,, 0.79 ,,,,, 260.229
12/1/2020 ,,,,, 1.26 ,,,,, 260.474
01/1/2021 ,,,,, 1.31 ,,,,, 261.582
02/1/2021 ,,,,, 1.41 ,,,,, 263.014
03/1/2021 ,,,,, 1.51 ,,,,, 264.877
04/1/2021 ,,,,, 1.60 ,,,,, 267.054
05/1/2021 ,,,,, 1.65 ,,,,, 269.195
06/1/2021 ,,,,, 1.79 ,,,,, 271.696
07/1/2021 ,,,,, 1.99 ,,,,, 273.003
08/1/2021 ,,,,, 1.97
09/1/2021 ,,,,, 1.90
10/1/2021 ,,,,, 1.91
11/1/2021 ,,,,, 1.76
12/1/2021 ,,,,, 1.87
01/1/2022 ,,,,, 1.92
02/1/2022 ,,,,, 1.49
03/1/2022 ,,,,, 1.23
04/1/2022 ,,,,, 1.14
05/1/2022 ,,,,, 1.06
11. August 2021 at 07:08
Inflation is not accelerating. Inflation has peaked. Step on it.
11. August 2021 at 08:45
Carnegie Mellon study shows that highly educated Americans are the most “vaccine hesitant”.
Just more proof that timid and submissive Sumner’s, who do what the CDC tells them to do without once questioning their draconian mandates, are the true Neanderthals.
Inflation is also climbing as Sumner’s radical democratic crony’s spend more and more and more…omg and more and more and more…it never ends.
Oh btw, the entitled social science losers behind their desk, the same dummies who have never produced any product or service, tell us we’ll all be better off without police. Here is an idea: how about we stick those social science dorks in a community by themselves without police, and the normal/intelligent people will keep police in our communities.
Let’s see how things go!
Social science is for the low IQ crowd. Intelligent people choose hard science, and/or are entrepreneurs.
11. August 2021 at 10:53
Yeah, well that’s the problem Rinat. You have a group of people who read propaganda newspapers and think they are “educated”, and then you have others who actually read the medical studies. A recent Harvard/MIT study shows that MRNA does have some hazardous long term consequences, and that it does alter one’s DNA. We knew that before, because in the laboratory all of the animals die! They die because the immune system attacks itself.
Moreover, a prokaryote is about 1 micron, which is 1/1000 of a millimeter. You are not going to stop that with an ordinary mask. There is a reason “gas-masks” exist, and there is a good reason why soldiers don’t wear 3M, lol.
And a spike in rates is simply due to the shedding.
At any rate, that CM study doesn’t surprise me. Those who read the studies know that most of the CDC’s guidelines are counterfactual.
12. August 2021 at 03:39
While Powell made n0 explicit predictions that I can recall, my impression was he was “signaling” that near term inflation would drop—-which it has not. I also recall Scott mentioning——not from a prediction perspective—-but a monetary theory perspective—-that under certain conditions (which I don’t recall what they were) it might be necessary for Powell to target “3%” (not in the the AIT sense) in order to keep employment where it needs to be.
My impression of shorter term might be way too short. The one prediction many made——which so far is holding up is GDP and employment are recovering rapidly. So that seems good.
Except GDP is lower than forecast and markets seemed to be relieved——not because it missed target—-because as if it expected target to be missed by more. But 1.8 mill new jobs in last 2 months must be the dominant factor——-it’s hard to call that bad.
Then for kicks, the Pfizer vaccine’s last test shows it doesn’t work so well (42%? I hope the p-value was low—-:-). I did impressionistically say that “I was surprised the percent of deaths WITHIN the lower groups were not even higher—relative to the older groups given how much lower the percent of deaths within the older groups should have declined—since they got two times the percent of vaccines.
But—-basically deaths across the board just declined—-yay vaccine. But what is with the 42%? A new test to prove Delta should shut as down?
From my seat in the middle of sports land the excitement around baseball and in particular the NFL is so high——they will shut schools before they don’t let people into stadiums.
For now I am very optimistic——in the Scott sense. Everything is a disaster but mandates should not happen—his disaster is political——-“nationalism” and the “dopey left”. I am starting to get used to,it. Go Dodgers!
14. August 2021 at 04:48
“In the last forty years, the National Bureau of Economic Research (NBER) reports that the low in inflation readings occurred an average of 15 quarters (3.75 years) after the end of each recession.”
Inflation is a monetary policy choice.
14. August 2021 at 05:29
re: “I was not aware that It was controversial that deposits create money (The M1 money) —-you seem to think it is.”
The BOE misses the point:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
I believe in physics, the natural science. I believe that economics is as Irving Fisher said, “an exact science”.
Leland Pritchard, the smartest man that ever lived (who became a millionaire on a teacher’s salary, which he said, anyone can do), published a “very revolutionary paper” in 1961. He broke “classical bonds”.
There is, as Einstein said, “a harmonious reality underlying the laws of the universe”, based on “the vagaries of observations”.
Pritchard’s economic theories are astonishing, mysterious, and counterintuitive. “What science teaches us, very significantly, is the correlation between factual evidence and general theories.”
Princeton Professor Dr. Lester V. Chandler, Ph.D., Economics Yale, theoretical explanation was:
1961 – “that monetary policy has as an objective a certain level of spending for gDp (sounds like N-gDp level targeting today), and that a growth in time (savings) deposits involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of demand deposits, DDs.”
Chandler’s conjecture was correct from 1961 up until 1981 (during the “monetization” of time deposits, the transition from clerical processing to electronic process, and the end of gated deposits).
Thus, the saturation of DD Vt (end game) according to Corwin D. Edwards, professor of economics. [Edwards attended Oxford University in England on a Rhodes scholarship and earned a doctorate in economics at Cornell University. He spent a year teaching at Cambridge University in England in 1932. He taught at New York University in 1954, the Chicago School from 1955-1963, the University of Virginia, and the University of Oregon from 1963-1971.]
Edwards: “It seems to be quite obvious that over time the “demand for money” cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all”
That is, as stagnant (or frozen) time deposits became unhinged (the deregulation of Reg. Q ceilings), the velocity in the residual deposits were to be an offset in AD. The increased “demand for money” would thus be compensated in the turnover of the ungated transactions’ deposits.
Leland Pritchard, Ph.D., Economics, Chicago, 1933, M.S. Statistics, Syracuse: “It seems highly improbable (and in contradiction to Professor Chandler’s theoretical analysis, that the stoppage in the flow of these funds is entirely compensated for aby an increased velocity of the remaining demand deposits. It is quite probable that the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on gDp.”
Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:
“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity” — because economists don’t know a debit from a credit.
14. August 2021 at 06:07
“How do banks operate and where does the money supply come from? The financial crisis has heightened awareness that these questions have been unduly neglected by many researchers. During the past century, three different theories of banking were dominant at different times: (1) The currently prevalent financial intermediation theory of banking says that banks collect deposits and then lend these out, just like other non-bank financial intermediaries. (2) The older fractional reserve theory of banking says that each individual bank is a financial intermediary without the power to create money, but the banking system collectively is able to create money through the process of ‘multiple deposit expansion’ (the ‘money multiplier’). (3) The credit creation theory of banking, predominant a century ago, does not consider banks as financial intermediaries that gather deposits to lend out, but instead argues that each individual bank creates credit and money newly when granting a bank loan. The theories differ in their accounting treatment of bank lending as well as in their policy implications. . . . ”
https://www.sciencedirect.com/science/article/pii/S1057521915001477
15. August 2021 at 06:00
All monetary savings, bank-held savings (funds held beyond the income period in which received), originate within the payment’s system. The source of interest bearing deposits is other bank deposits (derivative deposits from a system’s perspective), directly or indirectly via the currency route (never more than a short-term situation), or through the bank’s undivided profits accounts). As time deposits grow, demand deposits are depleted, dollar for dollar.
From the standpoint of the entire banking system, banks pay for their earning asset with new money – not existing deposits. All bank-held savings are intertemporally frozen.
From the standpoint of the entire payment’s system, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume.
From the standpoint of the entire system, commercial banks never loan out, and can’t loan out, existing funds in any deposit classification (saved or otherwise), or the owner’s equity, or any liability item. Every time a DFI makes a loan to, or buys securities from, the non-bank public, it creates new money – demand deposits, somewhere in the payment’s system. I.e., all deposits are the result of lending and not the other way around.
Savers never transfer their funds out of the payment’s system unless they hoard currency or convert to other National currencies. The typical ways to reduce the volume of bank deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a banks service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.
Bank-held savings are never transferred to the nonbanks; rather monetary savings are always transferred through the nonbanks. The NBFIs are the DFIs’ customers. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that the nonbanks can “attract” savings from the DFIs, for the funds never leave the payment’s system.
And the source of bank deposits (loans=deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit (operations between the Reserve and commercial banks and their nonbank customers).
That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period.
In other words, the commercial banks cannot expand their earning assets by attracting something (derivative deposits) that they collectively already own. Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot, per se, increase the size of the banking system.
15. August 2021 at 06:16
Whereas the 1966 Interest Rate Adjustment Act created a .50% interest rate differential (the first cap in savings for the nonbanks since 1933), in favor of the Savings and Loan Associations, the Mutual Savings Banks, and Credit Unions (the thrifts), the Emergency Economic Stabilization Act of 2008 provided a preferential interest rate differential in favor of the commercial banks, which induced nonbank disintermediation (an outflow of funds or negative cash flow).
Thus because of this monetary policy blunder, during the GFC, the shadow banks initially shrank by $6.2 trillion dollars while the banks were unaffected, growing by $3.6 trillion dollars.
I.e., paying interest on interbank demand deposits destroys velocity, it inverts the short-end segment of the retail and wholesale “money market” funding yield curve (in the borrow short to lend longer, savings-investment paradigm).
It permits the banks to outbid the nonbanks for loan funds. The opposite scenario is impossible, the nonbanks cannot outbid the banks for loan funds. The NBFIs are not in competition with the DFIs. The prosperity and welfare of the DFIs is dependent on the NBFIs putting savings back to work, completing the circuit income velocity of funds.
The only way to activate monetary savings is for their owners, saver-holders, to invest/spend directly or invest/spend indirectly outside of the commercial banking system. I.e., the U.S. Golden Era in Capitalism was in 2/3, financed by velocity. Now we have the opposite scenario.
15. August 2021 at 14:57
“Because June’s Y/Y tally was also 5.4%, and July’s number did not display acceleration, the credit markets gave a huge sigh of relief. Core CPI, which excludes food and energy, was even better: 4.3% Y/Y in July vs. 4.5% in June.”
16. August 2021 at 23:22
” Even though we now know that 2006 wasn’t a house price bubble, you’ll never convince people on that point.
‘Someone’ is not convinced?
‘The explosion of subprime mortgages was also not a secret, it was widely talked about in the business press. The fact that increasing numbers of mortgages were being issued with low or even no down payment was also widely known. And, the fact that people were spending in a big way out of their newly generated housing wealth was well-known. Greenspan even wrote about it.
If the Fed had done research documenting these, and other facts, showing that the housing market was indeed in a bubble, and top Fed officials regularly highlighted this research in Congressional testimony, public speeches and their writings, it would be impossible for the financial sector to ignore. As it was, the mortgage bankers and brokers, the investment banks, and everyone else involved in the process, was making money hand over fist.
No one gave a damn if a few scattered economists said there was a bubble and it would burst. When it finally did burst, and many banks were pushed to the brink of bankruptcy and beyond (before the government bailed them all out), the people who got them into trouble all got off on the “who could have known?” defense. After all, no one saw the bubble, so how could a highly paid CEO be held responsible if they just made the same mistake as everyone else in believing that house prices would rise by double digit amounts forever?’
https://cepr.net/cheap-talk-from-the-fed-on-global-warming/?__cf_chl_jschl_tk__=pmd_0d96e6dbafa0c2ddf1fc7d6ead33aab61824bc86-1629184454-0-gqNtZGzNAjijcnBszQii
16. August 2021 at 23:27
‘Another’ non-‘bubble’?
“Between 1956 and 1986, the price of land increased by as much as 5,000 per cent in Japan. At the peak of the bubble economy, Tokyo real estate could sell for as much as US$139,000 per square foot, which was nearly 350 times as much as equivalent space in Manhattan. By that reckoning, the Imperial Palace in Tokyo was worth as much as the entire US state of California.”
https://www.scmp.com/magazines/style/news-trends/article/3091222/japan-1980s-when-tokyos-imperial-palace-was-worth-more
17. August 2021 at 13:09
“UMIch survey “Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy”
AD, money flows;
1/1/2021 ,,,,, 0.65
2/1/2021 ,,,,, 0.66
3/1/2021 ,,,,, 0.70
4/1/2021 ,,,,, 0.71
5/1/2021 ,,,,, 0.78
6/1/2021 ,,,,, 0.80
7/1/2021 ,,,,, 0.88 top
8/1/2021 ,,,,, 0.66
9/1/2021 ,,,,, 0.36 bottom
The biggest delta is between Aug. and Sept.
18. August 2021 at 06:37
re: “‘Another’ non-‘bubble’?
Contrary to George Selgin, banks don’t loan out deposits. So, with falling AD, the Central Bank tries to offset the decline in velocity. Unfortunately, money products have a decidedly different character and transmission than savings products.
In the first case, savings products must be expeditiously deployed once they’re activated. They must be judiciously invested (a free market system of appraisal, a matching of savings with investment, a velocity relationship).
In the second case, government sponsored money products increase both the volume and turnover of funds (which tend to contort investment channels, distorting opportunities and asset values, accentuating mal-investment).
Savings products tend to produce an income stream (a payback), while money products are largely confined to a transfer of title to goods, properties or claims thereto. As Martin Wolf says DFI credit is chiefly used: “to buy existing assets, not new ones”.
18. August 2021 at 06:41
People just don’t get it. The DIDMCA of March 31st 1980 turned 38,000 nonbanks (the S&Ls, the MSBs, and the CUs), into banks. It forced the thrifts to act like banks. It caused the S&L crisis. It reduced the velocity of money. It caused subpar economic growth, or Alvin Hansen’s secular stagnation.
18. August 2021 at 13:47
re: “Lorie Logan said that “if a number of counterparties reached the per-counterparty limit on their ON RRP investments and downward pressure on overnight rates emerged, it may become appropriate to lift the limit.”
The money stock can never be properly managed by any attempt to control the cost of credit.
18. August 2021 at 15:57
One for Powell:
Job Openings: Total Nonfarm (JTSJOL)
https://fred.stlouisfed.org/series/JTSJOL