The Fed begins to see the light

Each Fed statement, they inch a bit closer to market monetarism.  The newest statement lowered the forecasts for the future level of interest rates (the so-called dot plot) by about 50 basis points.  That’s still too high, but no longer as out of touch as they were a year or two ago.  Kudos to Kocherlakota and Bullard for seeing the light before the rest of the FOMC.  The long-term trend RGDP growth estimate was lowered again, this time from from 2.0% to 1.8%.  That’s still too high, but it’s getting closer to my estimate of 1.2%.  (The actual growth rate over the past decade has been 1.28%, but I believe the trend is still slowing.)

Question:  Has any school of thought been more accurate than market monetarism (over the past 8 years) regarding these issues:

1.  QE is expansionary.

2.  Negative IOR is expansionary.

3.  Forward guidance can be expansionary.

4.  Low rates are here to stay.

5.  Inflation won’t be a problem.

6.  NGDP and RGDP growth will be slower than the Fed expected.

7.  Sweden erred in not following Svensson’s advice.

8.  Trichet screwed up in 2011.

9.  Monetary policy would offset fiscal austerity in 2013

10.  Cross-sectional evidence for fiscal stimulus vanishes when confined to countries with independent monetary policy.

11.  Denmark would not be forced to revalue their currency upwards.

12.  Ending extended unemployment insurance in 2014 would accelerate job growth by about 1/2 million.

13.  Abenomics would increase Japan’s inflation rate.

14.  Switzerland would make their zero bound problem worse by revaluing the franc.

15. “Austerity” would not stop the UK unemployment rate from falling to full employment.


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66 Responses to “The Fed begins to see the light”

  1. Gravatar of Brian Donohue Brian Donohue
    21. September 2016 at 13:45

    Impressive list. Keep on truckin’.

  2. Gravatar of Chuck Biscuits Chuck Biscuits
    21. September 2016 at 15:01

    Comments?

    http://ramblingsofanamateureconomist.blogspot.com/2016/06/either-model-is-wrong-or-market.html?m=1

  3. Gravatar of Sina Motamedi Sina Motamedi
    21. September 2016 at 15:18

    Amen.

  4. Gravatar of bill bill
    21. September 2016 at 16:35

    The fact that you are more optimistic makes me more optimistic. One area of concern I still have relates to the Fed’s PCE projections. The Fed lowered the 2018 projection to 1.8-2.0%. And 2019 is 1.8-2.1% (still less than a 2% average; three years out!). This feels to me like a soft 2% ceiling. Somewhat closer to the ECB’s target than to a truly symmetrical 2% target. This Fed really really really wants to make the most asymptotical approach to 2% possible.

  5. Gravatar of Gary Anderson Gary Anderson
    21. September 2016 at 17:33

    Central banks should pay attention to GDP. But other aspects of market monetarism can be problematic.

    Low rates are here to stay because of massive demand for bonds. Not sure how you, Scott, can know low rates are here to stay without knowing that bonds are in massive demand. I think you just read it somewhere. Lol.

    So, let’s say low rates are here to stay, and we nudge ourselves into a prolonged recession where asset prices drop? Those low rates will get in the way of returning to prosperity. Raise short term rates and it won’t impact the long bonds. It may even make their yields go down.

    That is my prediction.

    You didn’t predict a guy like Trump gaining traction because of low rates and a slow economy, Scott. He almost could be president. We need to limit bonds as collateral to limit demand for them.

  6. Gravatar of engineer engineer
    21. September 2016 at 17:52

    Back on the political front….

    According to the Military Times poll out Wednesday, the percentage of enlisted troops who said they would vote for Trump was 39.8 percent and 36.1 percent for Johnson. Clinton received just 14.1 percent support while Green Party candidate Jill Stein was 1.3 percent and write-in or other third party candidates were 3.2 percent. The poll also found 5.5 percent of the troops had no plans to vote.

    Among officers, Johnson, the former New Mexico governor, has stronger support than both of the major party candidates. The poll found the percentage of military officers indicating they would support Johnson was 38.6 percent to Clinton’s 27.9 percent and Trump’s 26 percent. Stein, a physician and activist, received just 0.5 percent support, while write-in and other third-party candidates received 3.4 percent; the poll found 3.6 percent of officers would not vote.

  7. Gravatar of Chuck Biscuits Chuck Biscuits
    21. September 2016 at 19:01

    Re. #10, weren’t you and one of your attack poodles busted on this very site about a year ago, for fudging the data? Like your fellow cash-banner and Russophobe Rogoff?

  8. Gravatar of Chuck Biscuits Chuck Biscuits
    21. September 2016 at 19:03

    E.g. see here:

    http://informationtransfereconomics.blogspot.com/2015/06/this-analysis-is-so-bad.html?m=1

  9. Gravatar of Christian List Christian List
    22. September 2016 at 00:14

    @engineer
    Chances are slim that you end up in a city like Aleppo when your leader doesn’t even know what Aleppo is. So I guess it’s understandable to some extent why an US army officer would vote for Johnson.

  10. Gravatar of Ray Lopez Ray Lopez
    22. September 2016 at 00:26

    There’s an easier explanation for most of these facts other than “market monetarism”, whatever that is; simply, the economy has recovered and this caused some variables that Sumner tracks to also recover. Cause (economy recovers, via the built-in natural return to the mean recovery inherent in capitalism) and effect (variables tracked by Sumner recover). Yet Sumner reverses the order of these variables. Like an ant at the head of a river log, Sumner the ant thinks he’s steering the log down the river. The Pied Piper is selling the rest of us down the river with his snake oil.

  11. Gravatar of Chuck Biscuits Chuck Biscuits
    22. September 2016 at 03:53

    @List

    Or maybe, just maybe, actual soldiers realize that a brain fart is far less important than Johnson’s overall position, which is to cooperate with Russia to resolve the conflict peacefully, instead of trying to start WW3 like Sumner and the Clintonites want. Did you even listen to the fucking interview with Johnson?

  12. Gravatar of flow5 flow5
    22. September 2016 at 03:55

    parse dt; / real-output / inflation:

    07/1/2016 ,,,,, 0.11 ,,,,, 0.15
    08/1/2016 ,,,,, 0.11 ,,,,, 0.20
    09/1/2016 ,,,,, 0.10 ,,,,, 0.19
    10/1/2016 ,,,,, 0.03 ,,,,, 0.17 (1)
    11/1/2016 ,,,,, 0.08 ,,,,, 0.17
    12/1/2016 ,,,,, 0.09 ,,,,, 0.09 (2)
    01/1/2017 ,,,,, 0.06 ,,,,, 0.12

    (1) The break in stocks comes in Oct. 9/28 is the liquidity rotation peak
    (2) The break in oil doesn’t come until Dec. And then it reverses. That’s because the demand (not supply) of oil follows the price-level.

  13. Gravatar of Chuck Biscuits Chuck Biscuits
    22. September 2016 at 04:02

    BTW, the Fed has miserably failed at hitting the thing it does target, a 2% inflation rate. Why do market monetarists believe it would be any better at hitting some equally arbitrary NGDP target?

  14. Gravatar of flow5 flow5
    22. September 2016 at 04:05

    Higher N-gDp will only accelerate stagflation. How many economists took accounting 101, vs. calculus?

    From the standpoint of the system, (not an individual bank), DFI held savings have zero velocity. DFIs create new money when they lend/invest. DFIs do not loan out existing deposits, saved or otherwise. The higher the proportion of bank-held savings the lower Vt and thus AD, and the more new money that is required to offset the decline.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2016 at 04:09

    ‘That’s because the demand (not supply) of oil follows the price-level.’

    Both supply and demand determine the price. It’s like a scissor, you need both blades.

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2016 at 04:11

    ‘Why do market monetarists believe it would be any better at hitting some equally arbitrary NGDP target?’

    Because it’s the simplest thing to target.

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2016 at 04:23

    ‘Question: Has any school of thought been more accurate than market monetarism (over the past 8 years) ….’

    Drat, foiled again!

    http://www.wsj.com/articles/macarthur-genius-grant-winners-are-unveiled-1474516860

    Maybe some Trumpian hornblowing?

  18. Gravatar of ssumner ssumner
    22. September 2016 at 04:24

    Chuck, John misses the point–the central bank needs to raise the natural rate, by raising the expected NGDP growth rate.

    But let’s say he’s right—then great news! The BOJ can buy up the entire world with no inflationary implications. Wouldn’t that be wonderful!!!

    (Or might John’s model be leaving something out?)

    And what about currency depreciation? Does he argue that there is zero international goods arbitrage? Really?

    John’s mistake is assuming that monetary policy transmits its effects through changes in the nominal interest rate. Not so, the biggest monetary shock in American history saw almost no change in the nominal interest rate. The other channels are far more important.

    You said:

    “BTW, the Fed has miserably failed at hitting the thing it does target, a 2% inflation rate.”

    Did you see the Fed’s inflation forecasts for 2017, 2018, and 2019? It was 1.9%, 2.0% and 2.0%. Is it my fault if they are lousy at forecasting?

    As far as point #10, we showed that fiscal austerity has no effect for countries with an independent monetary policy. If Keynesians don’t like our study, do another one the “right way”. But they have not been able to do so, which speaks volumes.

    As for my foreign policy views, I see Clinton as a dangerous militarist—so no, you don’t have a clue as to what I believe.

    But go ahead and keep making a fool of yourself Chuck, I’m enjoying it. Ray was starting to get kind of boring. How many times can you mock someone for not know what the AS/AD model is?

  19. Gravatar of Brian Donohue Brian Donohue
    22. September 2016 at 05:34

    Interesting bond market reaction yesterday. Inflation expectations edged up a couple bps (suggesting there was some chance of a hike right built in to Tuesday’s close), but real (TIPS) yields fell 5 bps (negative market reaction to news). That’s a decent-sized one day move, so I’d think a chunk is attributable to Yellen yesterday.

    Anyway, my take is that the markets will absorb another quarter point hike in December ok.

    Related question: what if the Fed raises rates in December but doesn’t make a corresponding increase to IOR? Seems to me this would be expansionary, increasing inflation and bank willingness to lend. It could reduce voluntary reserves at the Fed by a decent chunk.

  20. Gravatar of engineer engineer
    22. September 2016 at 05:56

    “it’s understandable to some extent why an US army officer would vote for Johnson”

    Or perhaps it is because as an officer you are taught the
    six pillars of character: Trustworthiness; Respect; Responsibility; Fairness; Caring; and Citizenship. These are the reasons that a prisoner of war in the face of torture who does not betray his fellow soldiers and country is a hero. These are the reasons you never insult a gold star mom. These are the reasons you enlist in the military when you know that you will see action, despite being cannon fodder for the IED of the day. Character counts. Building big buildings using illegal aliens doesn’t show character. Using charitable donations to make self portraits and settle lawsuits doesn’t show character.

  21. Gravatar of flow5 flow5
    22. September 2016 at 06:15

    “Both supply and demand determine the price. It’s like a scissor, you need both blades.”
    ————-

    Money flows, peak to trough, fell by 80% from 1/2013 to 1/2016. That propelled the $’s exchange rate higher at the same time. Oil fell by 70% during the same period. That’s no happenstance.

    Only price increases generated by DEMAND, irrespective of changes in SUPPLY, provide evidence of monetary inflation. There must be an increase in aggregate demand which can come about only as a consequence of an increase in the volume and/or transactions velocity of money. The volume of domestic money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions, the exchange value of the U.S. dollar, and the flow of goods and services into the market economy.

  22. Gravatar of bill bill
    22. September 2016 at 08:10

    @ Brian D
    I think the Fed would have to sell over a trillion dollars of the Treasuries and MBS’s on its balance sheet to move the Fed funds rate higher without increasing IOR. Maybe over two trillion. This is one reason why I believe that people underestimate the magnitude of the effects of paying IOR. Personally, I’d rather that the Fed never increase IOR again. In fact, it should be illegal for the Fed to pay IOR in excess of the 1 month T-bill. Let them start shrinking the balance sheet by 10 billion per month instead, while lowering the IOR rate to zero, until NGDP growth is on track for 4% to 5% NGDPLT.

  23. Gravatar of Alexander Hamilton Alexander Hamilton
    22. September 2016 at 08:27

    Who is Chuck Biscuits? I’ve been away a while, do we have a new tamed idiot?

  24. Gravatar of Scott Freelander Scott Freelander
    22. September 2016 at 10:39

    Scott,

    What is a “dangerous militarist”? Hillary’s definitely made some big mistakes, but you’re not a pacifist. Do you see validity in the balance of power framework? How do you generally think the US should project power overseas?

  25. Gravatar of Ironman Ironman
    22. September 2016 at 11:08

    ssumner,

    I agree with Brian Donohue that it’s an impressive list. I do wonder though how complete the list is – do you keep a similar tally for predictions where we’re still awaiting the outcome? Or for those that didn’t pan out?

  26. Gravatar of Brian Donohue Brian Donohue
    22. September 2016 at 12:09

    @Scott @bill,

    Thanks bill. I don’t see a lot of talk about IOR. Scott, when people talk about the Fed raising the FFR to 0.50%, do they imagine a corresponding increase to IOR or not? It seems to me this is a big difference. If the FFR goes to 0.50% but the IOR stays at 0.50%, is that even net contractionary?

  27. Gravatar of Brian Donohue Brian Donohue
    22. September 2016 at 12:13

    @Scott and @bill,

    I think the Fed selling some of its longer-dated portfolio might help against an inverted yield curve. Undo Operation Twist, as it were- the issue today is not a very steep curve, like we saw in 2011, but the opposite. Clearly, a chunk of QE has been financed not by printing money, but rather by tapping the voluntary reserves.

    Couldn’t the Fed print money to pay out any decline in reserves too? Would this be better or worse than selling some of its portfolio?

  28. Gravatar of bill bill
    22. September 2016 at 12:20

    @ Brian D
    Good questions. I really don’t know. It still blows my mind that the Fed zero IOR for 95 years and only started paying them in October of 2008.

  29. Gravatar of Art Deco Art Deco
    22. September 2016 at 12:52

    What is a “dangerous militarist”?

    When you live in a country where conscription has been in effect for about 35 of the last 223 years, where 1% of the workforce is in the active duty military, where perhaps 4% of domestic product is accounted for by military expenditure, where the intelligentsia has disdained the military for upwards of 50 years (something true of the intelligentsia’s dependents and hangers-on like Al “you’ll end up like these guys” Gore), where (as we speak) about 12% of a typical male cohort will have time in uniform, where it requires an act of Congress for a military professional to be permitted to serve as the minister in charge of war or in charge of the admiralty (something done only a few x), where all of two (2) military professionals have ever occupied the presidency, any talk of ‘militarism’ is humbug.

  30. Gravatar of Ray Lopez Ray Lopez
    22. September 2016 at 13:09

    @ssumner – You seem to be obsessed with what I have to say. Perhaps you realize I’m on the right side of history, which will show that monetarism and trying to predict the economy with bogus e-CON models is fraudulent. Your profession’s heyday was in the 1960s, as was Friedman’s. It’s been downhill after that, though Keynesianism is also bogus. It’s no excuse that Shiller got the Nobel Prize for essentially advocating that economics is nonlinear and unpredictable (that’s what he means by ‘animal spirits’, though he doesn’t have the courage to be explicit).

    PS–(Sumner)”Ray was starting to get kind of boring. How many times can you mock someone for not know what the AS/AD model is?” – I incorporated by reference the Wikipedia AS/AD entry. Is this not enough for you? I also have on my bookshelf Blanchard’s Econ 101 book, and have gone through the section on AS/AD. Strawmen seems to be your strong point.

  31. Gravatar of JNCU JNCU
    22. September 2016 at 14:20

    Dr. Sumner, a general question.

    If the interest rates ever go up, the market price of most assets of the FED would drop. That would make the the FED technically inssolvent, if I am not mistaken.

    Wouod that be a a significant problem for the FED or the economy as a whole?

  32. Gravatar of Ray Lopez Ray Lopez
    22. September 2016 at 14:32

    @Sumner – I realize the depth of your ignorance after reviewing Chap 13 of Mankiw’s Macroeconomics (2003). That a short-run AS curve slopes upwards can be due to three theories: (1) sticky wages (Mankiw: “Most economists conclude that the sticky-wage model cannot fully explain aggregate supply”), (2) sticky prices (related) or (3) the Lucas “imperfect information” model (which seems the most reasonable to me). Note your “sticky” theories are a messy gunk and don’t really explain nuch says Mankiw. Further, you seem to think AD shifts due to money illusion, when in fact if money is neutral it might simply shift due to changing tastes. The “Diamond” model where you end up with the same output but a higher price due to shifting AS / AD curves are nothing but a textbook exposition and have nothing necessarily to do with real life, or with money neutrality. You’re welcome.

    PS–an old dog like you should be teaching me new tricks, not the other way around, but that’s OK, we can all learn something new regardless of age.

  33. Gravatar of Gary Anderson Gary Anderson
    22. September 2016 at 14:56

    Like I say, monetarism has its place and would be useful when GDP is crumbling. But I bet, Scott, that Trump is a result of QE. The wealth divide caused by QE caused Trump.

    You can’t be proud of that Scott. Come on Scott, you can’t be proud of the wealth gap creating Trump.

  34. Gravatar of Scott Freelander Scott Freelander
    22. September 2016 at 17:29

    Gary,

    If the Fed’s done anything to help bring Trump to prominence, it’s that they’ve under-stimulated the economy.

  35. Gravatar of Scott Freelander Scott Freelander
    22. September 2016 at 17:50

    Brian Donahue,

    The Fed Funds rate is already around .5%, and the move from .25% was contractionary. And selling longer term Treasuries and replacing them with shorter term ones misses the point. The focus on interest rates is mistaken from the perspective of stimulus. What’s important is that enough stimulus is seen as permanent enough. The Fed lacks credibility when it comes to reflation.

    Focus on how much new money is being created and how permanent market reactions indicate it’ll be. It’s markets that must be convinced.

  36. Gravatar of Scott Freelander Scott Freelander
    22. September 2016 at 18:07

    Scott,

    Can the Fed’s lack of credibility be quantified? Can the total amount the Fed paid for asset purchases, for example, during its QE efforts, be precisely indicative of its lack of credibility?

    That is, can the size of the asset purchases when near ZLB be compared to what would be required if the Fed didn’t have an issue with ZLB, or to an ideal Fed that had 100% credibility?

  37. Gravatar of Chuck Biscuits Chuck Biscuits
    22. September 2016 at 18:53

    @sumner

    So, put your “missing pieces” into the standard model and see what happens. What’s that? There is no market monetarist model after all these years? It’s someone else’s job to formalize your preset conclusions? I see. Do you really wonder why mainstream schools of thought don’t take you seriously? That wouldn’t necessarily be an issue, excretory that being recognized by establishment economists (esp. those advising the levers of power) is clearly what you claim.

    BTW, if your only issue with central banks buying up everything in existence (which in reality they can’t, in case you haven’t noticed) is whether it would be inflationary or not, I’d hate to see what a “libertarian” like you considers statist.

  38. Gravatar of Ray Lopez Ray Lopez
    22. September 2016 at 23:19

    @Chuck Biscuits – good points made, indeed, Sumner’s NGDPLT monetarist model is just a word salad. That said, none of these models work, whether math-based or not; DSGE standard models also are deficient, see: http://noahpinionblog.blogspot.gr/2014/01/the-equation-at-core-of-modern-macro.html

    The Fed’s balance sheet going from less than 1T to over 4T does not bother Sumner since he feels any bad paper bought by the Fed magically becomes AAA rated once it’s owned by the Fed. I guess that’s true if the Fed never plans to sell it, but, as you say, eventually with this attitude the Fed will throw good taxpayer money after all the bad paper on the marketplace and own all the bad paper. In short, bailouts forever.

    The quicker people realize both Keynesianism (DSGE / neo / paleo, etc) and Monetarism are dead, and the economy cannot be ‘managed’, the easier is the road to non-serfdom. Otherwise we’ll have the government expand from 40% of GDP to 100%.

    From a personal point of view, Sumner simply is concerned with job preservation. He doesn’t mind if the entire economy goes to Hades so long as he and his economists are deemed by society as relevant (and get paid). Very common in any trade. E.g., if you let police and military run a country you get a police state, if you let economists, lawyers, politicians and financiers run the country you get a muddled, cartelized mess, what we have now.

  39. Gravatar of Scott Freelander Scott Freelander
    23. September 2016 at 01:51

    Chuck,

    When Scott mentions central banks buying up all assets in the world, it’s just ad absurdem. I would think that would be obvious.

  40. Gravatar of Scott Freelander Scott Freelander
    23. September 2016 at 01:55

    Ray,

    You have a habit of talking about things you don’t understand, and worse, arguing over them. It’s pretty clear you don’t understand the Bernanke paper you constantly cite, and it’s obvious you don’t understand DSGEs either. Simply citing the work of others with little-to-no understanding of what they mean just makes you look like a fool.

  41. Gravatar of PeterP PeterP
    23. September 2016 at 02:18

    The 1st two statements are wrong.

    MMT has been more correct than MMs, by a mile. The world is waking up to fiscal policy being irreplaceable.

  42. Gravatar of Ray Lopez Ray Lopez
    23. September 2016 at 04:29

    Off-topic: Quantity theory of money (QTOM) scatter diagram from a Mankiw textbook, “Macroeconomics” (5th ed, Fig. 4-1). Note 1870s vs 1990s, 1950s, 1920s vs 1930s (both about the same)
    Quantity theory of money,Fig. 4-1 showing the growth in money supply with inflation rates by decade.
    { Decade, Inflation rate(i), Growth rate (g) in money supply, Comment}:
    {1920s,i=-2.2%,g=2.5%,compare to 1930s}
    {1930s,i=-1.9%,g=2%,nearly same as 1920s yet radically different GDP, proving the Fed did not radically change its money creatin stance from the 1920s to 1930s. True, they could have eased more in the 1930s, but the point is they did not change much from the 1920s, they contracted by 0.5% /yr more, and inflation was roughly the same between the two decades},
    {1950s & 1990s, i=2.2%, g=3.8%/yr, compare to 1870s, a period of deflation}
    {1870s,i=-1.8%,g=4.1%,hence nearly same money supply growth gives positive inflation in 1950s, 1990s and negative inflation in 1870s}
    The scattershot diagram is full of such anomalies. If you include the decades of the 1910s, 1940s and 1970s (two World Wars and the Oil Shock decade) you get a significant correlation between inflation and money growth rates, but otherwise, it’s not so strong.
    If this is the evidence behind the Quantity Theory of Money (and the bogus assumption of constant velocity), I want my money back. No doubt Sumner has an esoteric explanation that nobody but him understands, but for the rest of us without the secret Sumnerian decoder ring, the obvious inference is that the QTOM does not compute. At best, you can say the QTOM works somewhat during inflationary times, but not elsewhere.

    @Scott Freelander — projection of inadequacy noted. I cite my work, while you just type ad hominem and conclusions.

  43. Gravatar of Scott Sumner Scott Sumner
    23. September 2016 at 06:58

    Brian, In order to raise rates in December, w/o raising IOR, they’d have to immediately unwind ALL of the previous QE. It’s the unwinding of the QE that would be contractionary.

    Alexander, They come over here every so often, thinking it will be easy to shoot holes in my ideas. After a while they leave like a dog with its tail between its legs, or decide (like Ray and Gary) to stay and become the village idiot.

    Scott, I don’t have strong views on foreign policy, but I am OK with mutual defense treaties. For me, the key is CLARITY. Let the world know exactly what your policy is. For instance, Obama made a mistake with his chemical weapons “line in the sand” which he then failed to back up.

    Ironman, I don’t have any formal lists (even this list was just off the top of my head.) One weakness in my model is explaining why long term rates sometimes rise on easy money announcements, and sometimes fall. I don’t understand that yet. My worst posts tend to be on non-monetary subjects, such as my infamous post entitled “The American Union.”

    https://www.themoneyillusion.com/?p=1980

    Perhaps readers can find some examples of failures, I’m sure they are out there. But I do think many people don’t pay attention to the tests devised by other bloggers. Who remembers than in January 2015 Tyler Cowen said Denmark would be a test of whether Switzerland was forced to devalue? Who remembers that in early 2014, Krugman said we’d soon get a test of whether extended unemployment benefits discouraged work? Or that Michael Pettis predicted that Chinese growth would average 3% during this decade? Or that Peter Schiff predicted a recession in the US this year? If I did not keep track of this stuff, it would disappear down the memory hole.

    JNCU, It could make them insolvent, although it’s not likely. It would not be a problem in a technical sense, but might be politically embarrassing.

    Ray, This is why I love making fun of you. Tying to dig out of the hole, you end up deeper. You provide three reasons why the AS curve might slope upwards, ALL THREE OF WHICH IMPLY MONEY IS NOT NEUTRAL.

    Q.E.D.

    Scott, If we had a NGDP futures market, and if they had a clear target, it would be much easier to measure their lack of credibility. Now we can just get a rough idea.

    Chuck, The “standard model”? Haven’t you read Paul Romer’s new paper? I suppose by that definition Milton Friedman had no “model”. After all, he lacked a DSGE model, where money does all the work via changes in interest rates!

    I’ve got plenty of “models,” which you’d recognize if you knew what a model was.

    In any case, people like Woodford have models showing the benefits of NGDPLT in a DSGE framework, why would I try to reinvent the wheel? I have very different objectives.

    On your second point, you got it backwards. Read one of my “inflation or socialism” posts. Central bank balance sheets are smallest when inflation is highest.

    Peter, MMT??? The people who tell us that “money is endogenous”, like it’s some sort of profound revelation? Or that “banks don’t lend out reserves”? Is that some kind of joke?

  44. Gravatar of Willy2 Willy2
    23. September 2016 at 09:02

    – My prediction: The FED will lower the FFR.
    – Both MM & MMT guys are a bunch of nutcases.

  45. Gravatar of Tom Brown Tom Brown
    23. September 2016 at 09:46

    Scott Freelander, you write:

    Can the Fed’s lack of credibility be quantified?

    Maybe it’s something that you can only tell whether or not it was sufficient after the fact. Kind of like how you can judge the effectiveness of intercessory prayer: if the patient dies despite your prayers, then you weren’t doing it right. =)

  46. Gravatar of Scott Freelander Scott Freelander
    23. September 2016 at 12:29

    Scott,

    I know it’s off-topic for this thread, but I think libertarians and liberals are often very naive about foreign policy when it comes to non-interventionism. I consider myself more of a realist and see things from the balance of power perspective, believing the US has an instrumental role to play in helping maintain/shift balances of power in favor of freer commerce, for example, around the world.

    I suspect one of Russia’s end games, for example, is to develop more support for greater supply restrictions in the world oil market, for example, along with expanding their spheres of influence in eastern Europe and the middle east.

    Obviously, the Iraq invasion was a disaster from a balance of power perspective, so Clinton deserves some criticism for her support of that war, but she’s the only candidate running who seems to acknowledge that there are legitimate contests underway for shaping various regions of the world to fit the interests of various players, and the US plays an indispensable role.

    I’m glad you’re more utilitarian than many libertarians and liberals on these matters and think you’re very much correct about the utility of NATO and importance of setting clear expectations in the foreign policy realm.

  47. Gravatar of bill bill
    23. September 2016 at 12:33

    Scott,
    Off topic question. I really like NGDPLT and see its improvement over the current inflation targeting as two fold. NGDP is a better target and Level Targeting forces the Fed to make the target more symmetrical and honest. But what do think about the “lost” NGDP for a couple years of undershooting or “excess” NGDP for a couple of years of overshooting? What I mean is this. Ignoring compounding, a 5% level target over say 5 years would be:
    1.0, 1.5, 1.10, 1.15, 1.20 = 5.50 of NGDP over the 5 years

    In a hypothetical recession where the Fed eventually gets us back in the 5th year to the right rate of NGDP. There is still a missing amount of NGDP:
    1.0, 1.03, 1.08, 1.14, 1.20 = 5.45 of NGDP over the 5 years and 5.45 is less than 5.50.

    This is obviously still much better than this situation:
    1.0, 1.03, 1.06, 1.09, 1.12 = 5.30 of NGDP and no attempt to get back to the original trend.

    So looking at the 5.45 vs 5.50 of NGDP made me wonder if some sort of “cumulative NGDPLT” should be considered? It also made me wonder about the fifth year in those two scenarios. Since there was less NGDP in years 2-4 in the second scenario, would that lead to less wealth or capital being on hand by the fifth year even if annual NGDP were back on track? And if so, would that mean that the NGDP in year 5 in scenario 2 likely be composed of slightly more inflation and slightly less RGDP?

  48. Gravatar of Go Team GB! – NGDP Advisers Go Team GB! - NGDP Advisers
    23. September 2016 at 13:05

    […] Some think this is just the new normal, but most market monetarists know this is just what the Fed wants, low, slow economic growth and inflation well below 2% and unemployment at 5%. Who cares that it kills prosperity? The Fed certainly doesn’t. It is happy to piously say that such matters are the responsibility of the government. Money is neutral in the long run, experts agree, but ask any wage slave about their lack of nominal wage growth, and consequent lack of real wage growth, and they will tell you otherwise. We are not advocating the (US) liberal nirvana of inflationary Venezuela, just 5% level growth in nominal income rather than 2-3% as now. […]

  49. Gravatar of ssumner ssumner
    23. September 2016 at 15:57

    Bill, I agree that RGDP would probably be a bit higher with the steady NGDP growth, but I doubt it would make much difference.

  50. Gravatar of Scott Freelander Scott Freelander
    23. September 2016 at 18:01

    Scott,

    Coukd part of the reason productivity low right now in the US be due to years of relatively low investment?

  51. Gravatar of Ray Lopez Ray Lopez
    23. September 2016 at 20:23

    @ Scott Freelander – OT, you should be aware of a few things. First, the Bernanke et al. FAVAR paper was discussed by the commentators on this board (Sumner refuses to read it, ostritch style) before you showed up here; my conclusions are the group consensus (I had misread the paper’s 3.2% to 13.2% as a confidence interval when in fact it’s a range for a variety of different economic variables). Second, there are different versions of the FAVAR paper, make sure you get the one that discusses the range 3.2% to 13.2% (First draft: April 2002, Revised: December 2003, “Apart from the interest rates and the exchange rate, the contribution of the policy shock is between 3.2% and 13.2%. This suggests a relatively small but still non-trivial effect of the monetary policy shock”), the ‘relatively small’ finding of a Fed policy shock was so controversial that several monetarist commentators in other forums discussing the paper suggested an alternate way of measuring vector correlations to augment their values (including taking absolute values squared rather than signed values) and make this range seem bigger, which suggests to me the paper was viewed negatively by monetarist diehards. Third, from your other posts here it seems you are very jejune about economics. I’m not here to tutor you, but, should you feel a need to reach out to me my email is: raylopez88 at gmail dot com. Good luck.

    @ssumner – “You provide three reasons why the AS curve might slope upwards, ALL THREE OF WHICH IMPLY MONEY IS NOT NEUTRAL”, thanks, I stand corrected. So the difference between you and me is that I think the short-term AS curve slopes upwards very steeply then becomes vertical (recall Bernanke’s 3.2% to 13.2% figure, see above) while you think the AS curve slopes upwards more gently. I believe in Mankiw’s textbook I saw how the slope of AS/AD depends on inflation, so that at the zero bound (low inflation) the slope is very steep, which is bad for trying to change Y (output), while for high inflation the slope is more shallow (I could be wrong, but that’s what I recall). Hence, monetarism doesn’t work at the zero bound. And, I think the FAVAR paper argues that historically monetarism’s effect is “relatively small”, even in the ‘golden years’ of the US Fed, 1959-2001 (including the Great Moderation). If monetarism was “relatively small” then, it’s trivial now. Good debate, thanks again.

    PS–you should do a post on this, I think your readers would learn a lot from my dialogue with you.

  52. Gravatar of Gary Anderson Gary Anderson
    24. September 2016 at 04:22

    Freelander, about stimulus. So, I reject libertarianism. I don’t think that explains squatt. But I also think NK is just a way to get more bonds into the hands of the bond starved banks and counterparties. The people need something in return for this new gold.

    So, monetarism holds the key, but not buying assets after a point. At some point, buying assets just becomes a tax.

    Like Zero Hedge said, the ECB bought assets and it cost 18 Euros to produce 1 Euro of growth. At some point, asset buying loses its luster.

    Helicopter money is monetarism, and it is all that is left. Friedman is a genius and yet the monetarists fear him. It is crazy, crazy.

    The BOJ owns 33 percent of the bonds and 60 percent of the ETF’s. To that I say, why would Sumner want them to buy more assets? Like I said somewhere, they could buy all the fish in the sea, or a galaxy maybe. But that would not trickle down much. But the BOJ won’t do helicopter money, calling it dirty money.

    The BOJ is made up of a bunch of clowns.

    Monetarism without helicopter money is what caused Trump.

  53. Gravatar of Scott Freelander Scott Freelander
    24. September 2016 at 05:30

    Gary,

    Helicopter money without Fed credibility won’t work either. Let’s say the Fed or Treasury sent every adult checks. If the Fed then went on to aggressively raise interest rates to try to counter the rise in inflation, what’s been achieved?

    I can’t help but agree with the market monetarists that the Fed can do plenty with it’s current physical transmission mechanisms. It chooses not to do more.

  54. Gravatar of Scott Freelander Scott Freelander
    24. September 2016 at 05:35

    Ray,

    I’m confident you don’t understand that paper. I suspect you aren’t anymore familiar with time series analysis than I am. Some of us are honest and realistic enough to know we’re laypeople when it comes to economics. We read blogs like this to try to stay informed and learn some fundamentals.

  55. Gravatar of Ironman Ironman
    24. September 2016 at 09:28

    ssumner wrote:

    Ironman, I don’t have any formal lists (even this list was just off the top of my head.)

    Totally understand. Several years ago, we did a project where we kept track of every prediction that was made on our site over a three year period, which was a pretty monstrous undertaking. Even though we did relatively well at it, there are a lot of questions that need to be addressed that make it a hassle (What is the prediction? When does it apply? What evidence is needed to validate the outcome? What constitutes a hit or a miss? How should near misses be treated? Etc.) The informal route is a lot less hassle, but will be subject to questions of confirmation bias – a lot of people who make predictions tend to only remember and self-report the ones that came true.

    Perhaps readers can find some examples of failures, I’m sure they are out there. But I do think many people don’t pay attention to the tests devised by other bloggers.

    Absolutely correct. The same holds true for the talking heads on various news shows, where many of the predictions that get made are quickly forgotten and flushed down the memory hole.

    Since Money Illusion has an active readership who regularly participate in the site’s comments, it might make for an interesting crowdsourcing project – pick a year in the past (ideally where enough time has lapsed for the outcomes of the predictions to have since been determined), have readers identify predictions made in regular posts during that year, then count up the hits and misses. If nothing else, you can get an entertaining post to more completely report the outcomes.

  56. Gravatar of Ray Lopez Ray Lopez
    24. September 2016 at 10:20

    @Scott Freelander – “I’m confident you don’t understand that paper.” – quit projecting please. I have a science background and code, some of my stuff is on the web and used by dozens. And the paper is not hard to understand, the killer sentence is excerpted above. You don’t have to understand vector autoregression to understand the conclusion: the Fed is largely impotent even during policy shocks, such as Greenspan’s 1994 shock decision to raise rates, which caught everybody off guard. 3.2% to 13.2% out of a 100% change, statistically significant but hardly earth shattering (BTW, if it’s any consolation, and I suspect it is, Sumner thinks such a trivial range is actually quite a lot–or so he implied in the comments once–I am guessing he is using a ‘Roman scales’ analogy where a little bit of force tips the balances, but it’s hard to say since he’s pretty silent about the paper, never having read it, afraid he might learn something)

  57. Gravatar of Gary Anderson Gary Anderson
    24. September 2016 at 11:17

    Scott F you said:

    “Helicopter money without Fed credibility won’t work either. Let’s say the Fed or Treasury sent every adult checks. If the Fed then went on to aggressively raise interest rates to try to counter the rise in inflation, what’s been achieved?”

    First of all, raising short rates would not stop the demand for long bonds. So the conundrum would still be in place. Inflation will not be that great. Millennials will pay off student loans, to spend another day.

    The millennials are in a depression. It is time to apply helicopter money. I don’t see inflation as a massive threat. After all, HM is only a one time thing, maybe 6 to 18 months. Then it stops.

    Trust me, carefully applied, helicopter money would work as Eric Lonergan has said. As it is, millennials will be paying student loans in their senior years. How will that help the economy grow, Scott?

  58. Gravatar of Scott Sumner Scott Sumner
    24. September 2016 at 12:23

    Scott, The problem is not so much low productivity, as slow growing productivity.

    Ray, You said:

    “you should do a post on this, I think your readers would learn a lot from my dialogue with you.”

    ROFL. They have already taken EC101.

    And I love how you think you understand Bernanke’s paper, while Bernanke himself does not understand his own paper. If Bernanke really were so dumb that he did not understand his own paper showed that money is not neutral, then why would you think he’s smart enough to rely on?

  59. Gravatar of Scott Sumner Scott Sumner
    24. September 2016 at 12:49

    Ironman, These are good projects for someone to do, just not me.

  60. Gravatar of Scott Freelander Scott Freelander
    24. September 2016 at 14:54

    Scott,

    Yes, I didn’t express myself well. Could the lower investment that comes with economic slowdowns account for slower productivity growth?

  61. Gravatar of Ray Lopez Ray Lopez
    25. September 2016 at 11:02

    @ssumner – “And I love how you think you understand Bernanke’s paper, while Bernanke himself does not understand his own paper. If Bernanke really were so dumb that he did not understand his own paper showed that money is not neutral, then why would you think he’s smart enough to rely on?” ??? What? Bernanke said (read it and see) that the 3.2% to 13.2% effect (out of 100%) of Fed policy shocks from 1959-2001 was small but statistically significant to show money non-neutrality. But the small size of this clearly indicates the SRAS curve is nearly vertical, that is, money is (largely) more or less neutral. Nothing to write home about.

  62. Gravatar of ssumner ssumner
    25. September 2016 at 12:30

    Scott, Maybe for a year or two, but I doubt it would impact current productivity growth.

    Ray, So why doesn’t Bernanke believe that?

  63. Gravatar of Alexander Hamilton Alexander Hamilton
    25. September 2016 at 16:53

    PeterP, Lol. Just lol. MMTers are flat earthers.

  64. Gravatar of Scott Freelander Scott Freelander
    25. September 2016 at 19:01

    Scott,

    I thought that since the economy is still below capacity, perhaps lower investment is still leading to lower productivity growth. Many economists are discussing the hypothesis that shift in employment to the service sector is responsible for some of the low productivity growth.

  65. Gravatar of ssumner ssumner
    26. September 2016 at 05:38

    Scott, With an unemployment rate of below 5%, any previous shortfall of investment should be leading to ABOVE trend real GDP growth today, as we would be engaged in catch-up growth. The level could still be below trend, but the growth rate should be above.

  66. Gravatar of Scott Freelander Scott Freelander
    26. September 2016 at 14:00

    Scott,

    Thanks for the explanation. Unfortunately, such things aren’t obvious to some of us who only had a few lower-division econ courses in college.

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