The Fed finally says “enough”
It would be interesting to know what Fed people like Bernanke and Yellen privately think of the ECB. Here’s an interesting story on Draghi (who is actually one of the more competent people over there):
Europe is leading a rout that has wiped more than $5.5 trillion from the value of equities worldwide. While data on everything from industrial production in Germany to manufacturing in the U.K. has contributed to the gloom, sentiment began souring on Oct. 2, when European Central Bank President Mario Draghi stopped short of spelling out how many assets the ECB might buy to head off deflation.
“The shock to markets has been so big in the past days, I have doubt that equities will recover from this very quickly,” Francois Savary, chief investment officer of management firm Reyl & Cie., said in a phone interview from Geneva. “Draghi’s latest communication to the market was a nightmare.”
A few years back I used to occasionally point out how much market wealth could be destroyed by the statement of a Fed official. Of course real economists pay no attention to stock market reactions because everyone (wrongly) knows that stock traders are irrational. I’m tempted to compare central bankers to children playing with matches, except that children rarely do $5.5 trillion in damage.
In one of the most bewildering statements I’ve ever seen Paul Krugman make, he seems to excuse the ECB’s ineptitude:
Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength.
I suppose Krugman’s defenders will insist he meant “strength” being applied in evil ways. If so, I’d have to agree. But most normal people would assume he’s defending the ECB. Unbelievable.
Meanwhile, in the US things are a bit more sane:
Futures pushing higher this morning and stocks around the world stabilizing after a crazy week. Talking-class market watchers are attributing the rally off market lows yesterday to comments St Louis Fed President James Bullard made on Bloomberg TV.
About an hour into the trading day Thursday, with the S&P 500 (^GSPC) at its lows and the smell of fear in the air Bullard took the mic and had his Battle of Agincourt “Once more into the breach…” moment.
“We have to make sure that inflation expectations remain near our target,” said Bullard in reference to the FOMC’s ongoing war against deflation. “And for that reason, I think a reasonable response by the Fed in this situation would be to…. pause the taper at this juncture.”
Just like that feverish selling broke. Bullard’s stirring cry to non-action ringing in their ears, traders began furiously bidding for shares. Yes, a non-voting Fed board member’s oblique reference to the possibility that the Fed may not completely eliminate its now $15 billion monthly QE program this month marked the lows for the correction thus far.
How big was Bullard’s bluster? Based on the World Bank’s estimate of the total market capitalization of US stocks the 2.5% gain in equities just in the States is worth about $420 to $450 billion.
HT: TravisV, J.V. Dubois
Tags:
17. October 2014 at 06:34
Scott –
You wanted a view on the ECB rate increases of 2011 and their relationship to the recession which the Euro Area has experienced since then.
Here is my analysis. Have at it.
http://www.prienga.com/blog/2014/10/17/did-the-ecb-tank-the-euro-zone
17. October 2014 at 06:35
I would say that the Fed pays an undue amount of attention to traders and to the stock market. Do you think the Fed “put” is a good thing for the efficient functioning of capital markets?
17. October 2014 at 07:02
MaynardGkeynes:
Of course it’s not a good thing, though I would say that traders and the stock market are forced to pay an undue amount of attention to the Fed. If the Fed behaved responsibly and targeted according to a reasonable formula, then they wouldn’t have to.
If I’m a passenger on an airplane, I don’t want to have to pay an undue amount of attention to the captain. But if his piloting is constantly threatening to make us crash, I will.
17. October 2014 at 07:06
Maynard, just because heroine would be hypothetically bad for you doesn’t mean you shouldn’t take your insulin when you need to. If the Fed was targeting asset prices as a way to avoid reasonable fluctuations in value, the past 15 years would hardly be good evidence of it.
17. October 2014 at 07:08
Maynard, we have analogies, and we’re not afraid to use them…. 🙂
17. October 2014 at 07:11
Marcus Nunes: “Bullard needs psychiatric meds”
Indeed!
http://thefaintofheart.wordpress.com/2014/10/16/bullard-needs-psychiatric-meds
17. October 2014 at 07:13
ssumner wrote:
Just for fun, we thought we’d try that for what happened after Chicago Fed President Charles Evans indicated that the Fed would likely slip its plans to hike short term interest rates, with the resulting expectation changing from 2015-Q2 to 2015-Q3 impacting the U.S. stock market on Monday, 13 October 2014. We estimate that shift in expectations cost the S&P 500 some 54 points in value.
With a total market cap on 30 September 2014 of $18.809 trillion, the S&P 500 had a value of 1972.29. Dividing the market cap by the index value suggest that the index is made up of the equivalent of 9.537 billion shares.
If we multiply that equivalent number of shares by the change in stock prices associated with the change in expectations driven by Evans’ comments, he would be personally responsible for the destruction of nearly $515 billion of the index’ market value on that Monday.
That’s not to say that he couldn’t have done 10X the damage, but that would have involved a more drastic shift in expectations.
17. October 2014 at 07:14
@JohnThatcher: Prof Summer appeared to be applauding gov Bullard’s remarks, which is why I raised the question. Assuming he agrees with you and me about the Fed put, it would seem he would have to reconcile these two positions, which would be quite enlightening with regard to an apparent paradox that has perplexed me for some time.
17. October 2014 at 07:16
Steven: I read your article and it is laser focused on interest rates policy. This however was not the main point of Scott’s argument. He and other MMs are adamant that interest rates are not a good indicator of the stance of monetary policy. However pointing to this increase is a usefull reminder about different behaviour of FED vs ECB and it is also great when engaging anybody who sais that Europe experiences “zero lower bound” problem for years.
So what is a good way to compare how tight/easy are US and Eurozone monetary policies according to MMs (and also Ben Bernanke in one of his speeches)? It is NGDP and inflation. When it comes to former there is a great post on that by Lars Christensen here: http://marketmonetarist.com/2014/09/11/end-europes-deflationary-mess-with-a-4-nominal-gdp-level-target/
When it comes to inflation it may suffice to say that inflation is 0.3% right now which is much worse than in USA. Conclusion: monetary policy is tighter in Eurozone than in USA. And that is an understatement. Eurozone monetary policy is utter disaster and exactly opposite of what is needed.
17. October 2014 at 07:46
Steven, You misunderstood my argument. The two rate increases are just a piece of meat I throw to the “concrete steppes” people. The way you measure monetary policy is to look at NGDP growth. (QE is also a poor measure) By the NGDP indicator the ECB has clearly been far tighter, and did cause the slowdown in RGDP growth in the eurozone.
If you are going to look at interest rates, you need to consider changes in the expected future path of interest rates, relative to the future path of the Wicksellian equilibrium rate, which is much harder to do.
Maynard, The Fed should not focus on stock prices, but rather NGDP futures prices. But first they need to create the NGDP futures market.
Ironman, Good example.
JV, Exactly.
17. October 2014 at 07:49
Wow, the S&P 500 is now up 1.89% for the day……
17. October 2014 at 07:58
Obama should have named Bullard his Ebola Czar.
17. October 2014 at 08:01
That’s all fine, Scott and JV, except that there is a clear departure point at Q3 2011.
What we can see is a 50 bp increase in ECB rates. What else to you have, specifically? Or do you believe that the ECB increases had nothing to do with it? What is your specific explanation for the deviation of US from European growth from Q3 2011?
17. October 2014 at 08:05
Big positive China news?
http://www.businessinsider.com/wsj-china-central-bank-stimulus-2014-10
I suspect it isn’t, the Shanghai Composite is slightly down for the day……
17. October 2014 at 08:08
What news just sent U.S. stocks rip-roaring higher? ECB? Germany? Bullard? Something else?
17. October 2014 at 08:13
JV –
I don’t understand your argument. You can argue it one of three ways.
1. You can say there was a policy change at the ECB in 2011 which led to a proximate recession. That’s pretty plain on the graph. But it doesn’t explain the duration. I’d spot you a six month downturn for the ECB mistake. But three years? No way.
2. You can argue that the path of underlying interest rates–which were higher than the US rate–were baking in a recession. But then you have to explain the differential and explain how you could forecast a recession from that. Either you argue that ECB rate increase was irrelevant, which is what Scott is sort of saying, or you’re arguing some sort of “hair trigger”, which requires more explanation.
3. You could argue that NGDP was deteriorating for reasons other than monetary policy, eg, some sort of supply or demand shock. OK, but then ECB policy is at best incidental and focus has to be on those underlying drivers. What were they?
I am all ears. I have been neck deep in QE papers for days, so go ahead, impress me with some technical stuff. I’ll wade through it.
17. October 2014 at 08:16
Egads…the Fed should be increasing QE until we see four quarters of real GDP above 4% annual growth….gun the presses…a little inflation is a lot better than sustained ZLB recessions…
17. October 2014 at 08:25
Scott,
Some random thoughts and questions:
(1) Higher equity prices are great for those in the market and looking to sell or borrow. They are not wonderful for those not in the market looking to buy. Unless, that is, you believe the Fed can always come to the rescue to propel equity prices upward for forever. Then everyone wins! Is it a proper role of the Federal Reserve to provide a “put” on equity prices?
(2) If one believed in an omnipotent central bank how much higher should the rational investor price the S&P 500 index? Five times higher? Ten times higher? How much market valuation is lost because investors do not trust the Central Bank will save them?
(3) Given that equity prices reflect fundamental economics, corporate financial strategies, monetary expectations and aggregate investor expectations how does one decipher which factor is most relevant to predicting real economic growth?
17. October 2014 at 08:34
Let me reply to Maurizio over here, where more will see it:
Maurizio says:
“To your question “Why did ECB’s modest rate increase sink Europe?” I think Scott Sumner can simply reply that it wasn’t the interest rate increase that sank Europe, but the collapse of NGDP. (Which the ECB is responsible for.)”
I get that. But then Scott is not blaming the ECB for starting a recession, but for failing to recognize that one was starting. That’s an entirely different sin.
But then I put it back to you. Monetary and fiscal policy during 2011–with the exception of ECB 50 bp rate increase–were essentially unchanged in the US and the Euro Zone. So if we exclude the ECB rate increase, there were no material policy changes in either the US or Europe. But the US took off and the Euro Zone fell into recession.
And we explain that how? Why did that happen? The answer seems to be that something happened to RGDP. Something that was different in the US and Europe. OK. What was it?
17. October 2014 at 09:05
” I’m tempted to compare central bankers to children playing with matches, except that children rarely do $5.5 trillion in damage.”
I know Scott was very careful to speak in terms of “market wealth”, but we should be careful here about our assessment of “damage”. Is a reduction (temporary?) of “market wealth” really the destruction of $5.5 trillion in “real wealth”? That’s an esoteric question on which most people will disagree. Is that the proper assessment of the “damage”? After all, this blog is called “Money Illusion”. My stock portfolio might have decreased 5 percent or so in the past week; however, the good news is that the PE ratio decreased and the dividend yield went up on that same portfolio. I don’t get too excited unless this has a negative effect on future earnings (and it may well have).
That’s not to say that a drop of $5.5 trillion in market value, whether or not caused by Fed remarks or policy, isn’t bad news. But, in the current environment, the question might more relevantly be, “what effect does that (temporary?) drop have on future consumption and/or economic performance”? As far as I know, estimates of the wealth effect of stock portfolios is that they reduce consumption by 5 to 10 cents per dollar “lost” and this is gradually over a one to two year period ( this relates, of course, to the effect on short-term consumption and not “wealth” per se). Most studies also seem to indicate the effects are mainly direct (i.e. on those owning stocks) and not indirect.
Again, I agree with the general thrust, but maybe not completely the assessment of the total amount of “damage”.
17. October 2014 at 09:10
Please. $5.5 trillion in stock market “wealth lost” mostly means the Euro has strenghtened.
It is not like ($5.5 trillion / Euro GDP) worth of real goods suddenly vanished.
Toilet paper wealth is not real wealth.
17. October 2014 at 09:25
And right on schedule to educate the “masses”, the tautological argument for why continual debasement of the currency is necessary.
“Why deflation is so scary”
http://finance.yahoo.com/news/why-deflation-is-so-scary-202724649.html
If you believe nonsense like that in this article then you would have to believe that national economies never experienced economic growth until fiat currency and fractional lending were implemented.
Why can we not be honest with ourselves? Inflation is the juice that sustains ever increasing debt leverage. Ever increasing debt leverage is the juice that sustains inflated price levels of assets. What a wonderful merry-go-round. Of course this merry-go-round will only continue to spin if a “Central Bank” can perpetually manipulate price levels. A feat that is proving incredibly challenging given the deflationary forces of technological progress.
But is this merry-go-round the ideal economic system? On whose authority? Thus the argument for inflation is a tautology. It is necessary because it is necessary.
Parting thought #1: How robust is an economy if it is perpetually reliant on the coordinated pulling of monetary levers? Is that not actually a sign of weakness rather than strength?
Parting thought #2: If technology continues to make things “cheap” and does so at an exponential rate what hope is there for the Central Bank to maintain ANY price stability according to its measures?
17. October 2014 at 09:30
@steven
Steven, I think this is best responded with an analogy.
Suppose a patient is infected by a virus. The virus then causes high fever in the patient. The fever in turn causes heart failure and death.
Now let us ask: did the virus cause the death? I think we can respond that it didn’t, because we are postulating that the death was caused by the temperature itself. I.e. if you had acted so as to lower the temperature of the patient (e.g. with a cold pack), death would not have occurred. So the virus itself was not the cause of the death. The high temperature was. (This is like saying: the financial crisis itself was not the cause of the depression; the subsequent deflation was. This is what Scott Sumner believes, I think.)
Now suppose a doctor fails to lower the temperature. Can we say the doctor _caused_ the death of the patient? You are basically saying: no, he just failed to recognize the virus. But this is beside the point. The point is that he failed to lower the temperature. The temperature was the cause of the death, not the virus. If he had kept the temperature lower, he would not even need to recognize the virus.
17. October 2014 at 09:39
Correct, Maurizio. You are saying NGDP targeting is the amoxicillin of monetary policy. I do get that.
Apropos of which, there’s a joke about a woman who walks into a doctor’s office feeling ill and says, “Doctor, I feel terrible, could you tell me what I have?”
And the doctor says, “Well, we could do some tests. In three weeks, I am sure I could tell you what’s wrong.”
“Three weeks!” cries the woman, “Can’t anything be done now?”
The doctor replies coolly, “Of course, I could give you amoxicillin and you’ll feel fine in three days. But I won’t be able to tell you what infection you had.”
So yes, I get the analogy. But is also means that NGDP targeting will be ineffective against shocks to real GDP. It can help smooth a transition, but it won’t make the problem go away, just as amoxicillin is ineffective against viruses. In many cases, it won’t do what Scott is proposing.
17. October 2014 at 09:42
Yellen *is* acting sane and discussing the problem of inequality.
http://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm
As a thoughtful liberal and defender of Krugman, I’d make the point that Krugman has a very, very dark view of Europe so when he says Draghi has been a source of strenth, he has a very low bar. The low bar would be Germany with which Draghi has been fighting. Krugman’s view is that when Draghi said he’d do whatever’s necessary, he prevented Europe from going over the cliff. Now the question is what Draghi can get over the objections of Germany.
One of the times Krugman admitted he was wrong was after he predicted that the Euro would likely break up. He admitted he didn’t foresee how much pain the periphery could endure. Like I said he has a dark view. On Charlie Rose the other night, he said if Draghi and Germany didn’t turn things around, Marie Le Pen could win in France and pull them out of the Euro.
17. October 2014 at 09:48
By the way, Scott is correct in suggesting that amoxicillin would work in the Euro Zone, for reasons that have everything to do with this post: http://www.prienga.com/blog/2014/10/15/the-cost-of-euro-zone-membership
On the other hand, we would expect it to be largely ineffective in the non-Euro Area countries.
In any event, the RGDP elements are up next in chapter I am currently writing. Back to work.
17. October 2014 at 09:55
@Peter K,
There is a differing opinion about the Fed Chairman and inequality:
“Of seven major things that cause income inequality, four are Fed-sponsored, two are government-sponsored, and one [innovation] is as it should be.”
http://globaleconomicanalysis.blogspot.com/2014/10/irony-of-day-yellen-moans-about-income.html
17. October 2014 at 10:07
Steven, Don’t take this the wrong way, but the economics in your blog post is almost completely wrong. You say it’s unlikely that there would be a knife edge situation, when in fact standard models of fiat money say we are always on a knife edge, and that with a fixed interest rate policy the economy will eventually spiral to hyperinflation or hyperdeflation.
And also that if you move rates above or below the Wicksellian equilbirium you will set in motion a cumulative process that ends very badly, without remedial action. They did not take remedial action.
You may not agree with the standard model, or perhaps you aren’t aware of it, I don’t know. But I’m not saying anything controversial when I say a tight money policy by the ECB could have caused the path of NGDP that we have seen since 2011. You can get that out of any NK or monetarist model. If you disagree with the standard model you need to explain what’s wrong with it, not just that it seems implausible to you.
And most importantly, you cannot look at central bank actions in isolation, they must be viewed in the context of the action relative to what would have been required to keep NGDP on target. The most powerful action a central bank can take is forward guidance.
Many people assume the path of NGDP is determined outside the central bank, and then central banks can nudge it this way or that, like a tugboat moving an ocean liner. Not so, the central bank IS THE OCEAN LINER. The central bank determines the path of NGDP, it doesn’t just “happen.” NGDP is a monetary variable, totally unlike RGDP. In contrast, it would make sense to talk about the central bank nudging RGDP this way or that.
Peter, You misread Krugman, He didn’t say Draghi was strong, he cited the ECB as a source of strength. The ECB has been disaster, and the Germans have one or two votes out of 25.
Vivian, If asset price movements could be identified as “temporary” then the EMH would not hold and it would be easy to get rich. I think the EMH does hold, and thus treat asset market declines as real.
Dan, As always you completely misunderstood my post. I would never argue that central banks should try to prop up asset values. Except NGDP futures contracts.
17. October 2014 at 10:25
“Vivian, If asset price movements could be identified as “temporary” then the EMH would not hold and it would be easy to get rich. I think the EMH does hold, and thus treat asset market declines as real.”
So, if the stock market valuation declines by, say, $100 billion on a given day, you equate that with a $100 billion decline in *wealth* and not just market valuation?
Scott, everything is temporary. This has nothing to do with the EMH.
17. October 2014 at 10:43
Vivian, The EMH says the market is roughly a random walk. If the market falls by 1%, doesn’t the future market value of the stock market usually fall by about the same amount? Ditto for oil. Isn’t oil for delivery in 2 years now much cheaper than a month ago? (I’m actually not certain, just asking)
17. October 2014 at 10:55
Scott,
You seem to be avoiding the issue of what “wealth” is. Here’s some food for thought:
http://economix.blogs.nytimes.com/2010/04/30/where-all-that-money-went/
Scott, “the future market value” is only what the future brings. Today, the market is up about 1 percent (so far). Does that mean that the one percent we “lost” yesterday has magically been regained? So, that one percent loss yesterday was permanent?
This has nothing to do with the EMH, which, I think, almost everyone does not comprehend.
17. October 2014 at 11:02
I woke up this morning thinking, “Oh, my God, I lost 1 percent of my “wealth” as measured by market value. Shall I get the gun out? But, then, I thought, on the other hand, my dividend yield has gone up and the price to earnings ratio has gone down. Shall I have a champagne breakfast? On further reflection, I thought, well, maybe things are not so different after all. So, I settled on my normal routine of oatmeal and coffee.
17. October 2014 at 12:08
Vivian, the value of a stock is nebulous. At any given point in time, the best estimate of the value of a stock is the current market price, according to EMH. If you disagree, you should be buying or selling accordingly.
17. October 2014 at 12:11
On gets the sense that Bullard was taken to woodshed:
http://thefaintofheart.wordpress.com/2014/10/16/bullard-needs-psychiatric-meds
He bombs market, and Yellen says “no Bub, YOU are going to go back out there and recant.”
17. October 2014 at 13:12
Let’s take them one at a time:
“You say it’s unlikely that there would be a knife edge situation, when in fact standard models of fiat money say we are always on a knife edge, and that with a fixed interest rate policy the economy will eventually spiral to hyperinflation or hyperdeflation.”
Are you saying, Scott, than any 50 bp increase in interest rates will immediately lead to a three year recession? Why didn’t it happen to the US in 2010?
Do interest rates matter? Sure. Do they matter that much? No, not unless the economy is inherently unstable, at some tipping point. OK, but how do I know that? What’s the metric that you use?
“And also that if you move rates above or below the Wicksellian equilbirium you will set in motion a cumulative process that ends very badly, without remedial action. They did not take remedial action.”
The ECB lowered interest rates continuously from late 2011; the Fed did not. Yet the EZ went into recession, the US did not.
“And most importantly, you cannot look at central bank actions in isolation, they must be viewed in the context of the action relative to what would have been required to keep NGDP on target. The most powerful action a central bank can take is forward guidance.”
There’s quite a lot on written on forward guidance. Most of the QE effect is attributed to forward guidance. But it wasn’t a huge effect, particularly not associated with QE2, which is the relevant QE for 2011.
Why don’t you put together a graph showing visually what you mean. I’ve done two today, and might have a third tonight. Show us how, in mid-2011, when the EZ had tracked the US for six years wrt GDP growth, it was obvious that the US would not fall into recession, and that the EU would. (And as you recall, I made a recession call for both the US and Europe in April of 2011.)
Was the difference between Europe and the US monetary or fiscal policy? I don’t think it was, and if it was, it was only the ECB 50 bp–which is simply not enough to tank a continent for three years. I am very hard pressed to believe that monetary policy is the key to the problem–although I agree that it is the key to the solution, at least for the Euro Zone.
17. October 2014 at 14:21
I think I kind of get Vivian’s point. If the real future value of cash flows remains unchanged, but a change in real discount rates changes the present value of those cash flows, then is the present value clearly the guidepost to use?
I think we can still say that the present value is the appropriate measure, though this is a more subtle distinction than simply second guessing current prices.
Housing is a great example. I argue that home prices in the 2000s were relatively reasonable, and reflected very low real interest rates. But, a lot of this is simply a product of baby boomers looking for low risk investments with better yields than treasuries, and so there is some capital accumulation going into new homes, but a lot of it is just a transfer to existing home owners as prices are bid up. Then, at the other end, there will be a transfer from baby boomers to future home buyers when they sell the homes at relatively lower prices.
So, there is this big hump of capital accumulation in housing that will be temporary, and in the meantime, rents might just move along in a relatively stable, linear fashion. So, as a proportion of annual expense, homes represent a stable portion of cost of living, but for a while they represent asset appreciation.
In terms of inflation and cost of living, and value in terms of income and expenses, that stable rent level is the important data.
So, are we wealthier because our houses are temporarily worth more, or is it just paper profit? I still argue that as a wealth measurement, the home value is the important value. The increase in home values represents the real need for baby boomers to defer consumption. Deferred consumption is worth more to them, in nominal terms, than it might be worth to those coming before or after when interest rates are higher. So, in effect, the baby boomers are transferring value to the earlier and later generations in order to pay for their unusual demand for deferred consumption. They have to be more productive in order to fund this transfer, and that added production is reflected in current home values.
But, again, I think these are subtle distinctions.
17. October 2014 at 14:52
The expectations fairy seems to have morphed into an expectations valkyrie.
Dan. W: Inflation is the juice that sustains ever increasing debt leverage. When the argument is about getting inflation up to 2%pa? That is not going to sustain much in leverage.
And the feat is not very hard at all; at least, not if you are the RBA (Reserve Bank of Australia) and also worry about income expectations (at least implicitly).
17. October 2014 at 16:36
Stephen, I’m answering because I feel you fundamentally misunderstand MM, and I’m going to provide my understanding in the hope that I’ll get it all right and therefore Scott can focus on writing new blog posts that I’ll enjoy reading.
“Are you saying, Scott, than any 50 bp increase in interest rates will immediately lead to a three year recession? Why didn’t it happen to the US in 2010?
Do interest rates matter? Sure. Do they matter that much? No, not unless the economy is inherently unstable, at some tipping point. OK, but how do I know that? What’s the metric that you use?”
No, no, Scott would never say that. Never ever. Not once.
Interest rates do not determine the stance of monetary policy. You look at NGDP growth.
NGDP growth determines the stance of monetary policy.
That’s why you’re always on edge. Because when NGDP (or inflation) is running higher, you tighten monetary policy (one way of doing that is increasing interest rates). When NGDP is running lower, you loosen monetary policy (one way of doing that is decreasing interest rates).
It’s a constant balancing act. That’s what Scott means.
Thus, you must always adjust monetary policy to the situation at hand. It’s like driving a car: if you don’t touch the wheel, eventually your car’s going to end up in a ditch. A small change will grow and grow until you’re upside-down.
This also answers why the ECB lowered rates since 2011, and is doing worse than the Fed. Why? Because the ECB is not doing enough. What is enough? Enough is what will stabilize NGDP growth.
The ECB let NGDP and inflation drop, making procyclical monetary policy, while the Fed didn’t (as much). That’s why the ECB is still suffering.
17. October 2014 at 19:24
The war drums for negative interest on reserves beat strong:
http://www.bloombergview.com/articles/2014-10-17/just-try-to-refinance-i-dare-you
17. October 2014 at 21:51
Janet Yellen gives a speech… on inequality?
http://federalreserve.gov/newsevents/speech/yellen20141017a.htm
17. October 2014 at 22:38
“Isn’t oil for delivery in 2 years now much cheaper than a month ago? (I’m actually not certain, just asking)”
Scott (and Brian),
Why are you equating price with “wealth”? Never reason from a price change?
If oil delivery is cheaper than a month ago, that would be a loss of “wealth” for producers of oil. But, is it a gain of “wealth” for consumers in a similar amount?
Do all these changes in nominal prices reflect a one-for-one, dollar-for-dollar change in *real wealth*?
Just ask’in.
17. October 2014 at 23:30
Saturos,
So we can add to the list of topics for modern central bankers-
(1) Financial stability
(2) Exchange rates
(3) Financial stability
(4) The consumption/investment split
(5) Financial stability
(6) Real wage growth
(7) Financial stability
(8) The relative position of bond-holders
(9) Financial stability
(10) The housing market
(11) Financial stability
(12) Fiscal stability
(13) Financial stability
(14) Unemployment
(15) Financial stability
(16) Inequality
– and central bankers haven’t forgotten about (17) financial stability.
(Inflation is an interesting secondary indicator, I suppose.)
18. October 2014 at 00:24
On financial stability, can anyone explain to me what is more important for financial stability than a stable path for total spending? (Given that credit is lending past income in hope of profit from expected future income.) Just asking.
18. October 2014 at 01:53
Lorenzo from Oz,
No, but I’m sure that few central bankers (or people generally) have ever thought about it that way.
As you suggest, the best macroprudential policy is a good orthodox macroeconomic policy.
18. October 2014 at 07:24
Before praising Bullard, this article should be read: http://blogs.wsj.com/economics/2014/10/09/feds-bullard-worried-markets-fed-not-on-same-page-on-rate-outlook/
So, only one week before talking about easing he was talking about tightening. Either Fed policy changes from week to week or members of the FOMC have no idea about what is going on. Either way, comments of this type only add uncertainty and volatility to markets. With irresponsible behavior of this type, it is a mystery as to why anyone could construct a model of policy effects based on “forward guidance.”
18. October 2014 at 07:56
This should go under Scott’s Great Minds Think Alike post, but;
http://www.gatesnotes.com/Books/Why-Inequality-Matters-Capital-in-21st-Century-Review
———-quote———-
I am also disappointed that Piketty focused heavily on data on wealth and income while neglecting consumption altogether. Consumption data represent the goods and services that people buy””including food, clothing, housing, education, and health””and can add a lot of depth to our understanding of how people actually live. Particularly in rich societies, the income lens really doesn’t give you the sense of what needs to be fixed.
There are many reasons why income data, in particular, can be misleading. For example, a medical student with no income and lots of student loans would look in the official statistics like she’s in a dire situation but may well have a very high income in the future. Or a more extreme example: Some very wealthy people who are not actively working show up below the poverty line in years when they don’t sell any stock or receive other forms of income.
It’s not that we should ignore the wealth and income data. But consumption data may be even more important for understanding human welfare. At a minimum, it shows a different””and generally rosier””picture from the one that Piketty paints. Ideally, I’d like to see studies that draw from wealth, income, and consumption data together.
———–endquote————
Maybe he’d like to help enable an NGDP futures market.
18. October 2014 at 13:20
Everyone, I address Bullard in the next post.
Vivian, You said:
“Scott, “the future market value” is only what the future brings. Today, the market is up about 1 percent (so far). Does that mean that the one percent we “lost” yesterday has magically been regained? So, that one percent loss yesterday was permanent?”
I think you are wrong on this. The finance experts says stocks are roughly a random walk. Suppose I’m playing coin flip for money. I lose a dollar. Have I really lost a dollar? Yes. Suppose the next flip I win a dollar. Does that mean I din’t lose a dollar the previous flip? No, I really lost one. Every toss is independent. If I had not lost the previous flip, I’d be 2 dollars ahead. That’s the logic of random walks, and the logic of modern finance theory, AFAIK.
Steven, You said:
“The ECB lowered interest rates continuously from late 2011; the Fed did not. Yet the EZ went into recession, the US did not.”
This just completely misses the point. Indeed your entire comment completely misses the point. You are trying to think in concrete terms and you just can’t. Monetary theory is harder than quantum mechanics, don’t go in thinking your “common sense” is any use at all. Those interest rate movements are completely meaningless, as what matters is the interest rate relative to the Wicksellian equilibrium rate. The target rate increases of 2011 sent the eurozone Wicksellian equilibrium rate into a tailspin. So even when they were cutting rates in late 2011 and 2012 policy was actually getting tighter, as the Wicksellian rate was falling faster. And that fall was triggered by what you call “small” rate increases. It’s a knife edge.
Why do some countries get away with not having those problems? Because they manage policy (and expectations) in such a way that their Wicksellian equilibrium rate is far more stable. They adjust policy as needed to keep NGDP growing (usually). Their rates are ENDOGENOUS. The ECB doesn’t do that as much.
Now you’ll say “but wait a minute, we can’t observe the Wicksellian equilibrium rate, much less the gap.” But that’s why you look at NGDP, it tells you if there is a gap, or if things are right on target. Just ignore interest rates entirely, I just mentioned them as a sort of throwaway, here’s how the ECB might have made people more bearish, if you insist on looking at interest rates (which you should not.) The concrete steps people are wrong. I’m saying that even if they are right, policy was tightened in 2011.
Kevin, Yes, I can imagine changes in wealth that do not impact the future flow of consumption (say a change in time preference.) There’s an interesting question about how to think of that. But surely if monetary policy is affecting wealth it is almost certainly affecting the future flow of consumption.
Not much time, I agree with most of the comments.
18. October 2014 at 14:40
Steven,
Sumner is taking you for a ride. Sumner wrote:
“You are trying to think in concrete terms and you just can’t. Monetary theory is harder than quantum mechanics, don’t go in thinking your “common sense” is any use at all.”
This is a textbook example of “The Sublime”. Sublime values beckon people, yet are too large and amorphous to be fully captured in concepts; that very resistance to articulation is taken as evidence that the sublime towers over us. Then, people look to authoritative others, ‘the subject presumed to know’, to comprehend the sublime value that beckons with its promise but escapes full understanding.
You’re being hoodwinked by a priest.
18. October 2014 at 14:42
Scott, I totally agree. That’s another problem with the tendency to see monetary policy working through lower rates. Monetary policy is mostly working through consumption expectations.
18. October 2014 at 23:29
Scott (and Brian),
I’ve asked you more than once to indicate what, in your mind, “real wealth” is. You are evading the issue. Why? I’m not going to avoid the issue, so I’ll directly state that “real wealth” is not equal to one’s current expectations of future wealth. Raising expectations might be one intermediate goal of monetary policy, but surely the *ultimate* goal is to increase real wealth? You are conflating the means with the end. Brian expressed this nicely when he wrote that “the value of a stock is nebulous”. Real wealth is not “nebulous”, that’s why it is real.
According to your view of things, my “real wealth” decreased significantly on Thursday and increased significantly on Friday. But, my proportionate share of the underlying assets, the factories, the commodities, the intellectual and human capital hardly changed at all. The Federal Reserve “destroyed” none of those things on Thursday, nor resurrected any of them on Friday. I am distinguishing *real wealth* from the rather more esoteric (and nebulous) concept of how one *prices* estimated future wealth. The Federal Reserve may have influenced the consensus crowd and the latter may have changed their estimates as to future wealth (and then back again), but they did not change, destroy or create our collective wealth in any real sense. In focusing exclusively on the current *price* of the market, you seem to have fallen into the trap of thinking that a money illusion is real.
Also, this:
“Suppose I’m playing coin flip for money. I lose a dollar. Have I really lost a dollar?”
That was a clever bit of diversion. Rather than asking whether *I* lost a dollar; the more relevant question you should ask in this context is have *we* lost a dollar? Has that dollar been “destroyed”? 🙂
19. October 2014 at 06:14
Patrick, Yes, I liked that Gates review.
Kevin, Agree, but why not expectations for all 4 components of NGDP?
Vivian, Do you think tight money caused the disaster of 1929-33? If so, doesn’t that prove it has a huge effect on real wealth? If not, why don’t you think monetary policy caused this disaster?
Wealth will always be subjective, the market’s evaluation of the worth of assets. There is nothing “real” beyond that that we have access to, it’s our best estimate. (This relates to my Rortian pragmatism.) Factories must be measured in dollar terms, not tons of steel. The dollar value of factories (real or nominal) will change with monetary policy. Tight money might cause mass unemployment, making factories less useful.
19. October 2014 at 07:10
“Vivian, Do you think tight money caused the disaster of 1929-33? If so, doesn’t that prove it has a huge effect on real wealth? If not, why don’t you think monetary policy caused this disaster?”
Scott,
While I’m sure that “tight money” played its role, I’m not of the school that wants to attribute everything to *one* cause to the exclusion of all others, even though that isn’t directly to my point. (And, even if I did “think that”, I seriously doubt it would “prove” anything).
Here, you are moving the goalposts. I never questioned the fact that monetary policy may (eventually) have an effect on *real wealth*. I questioned the assertion that a $5.5 trillion drop in stock market prices (or any daily swing in market *prices* you might care to mention) can be equated with $5.5 trillion of “damage” to real wealth, much less that the Fed would have caused all that, all on its own.
19. October 2014 at 09:26
Good point.
19. October 2014 at 12:37
Stock idea: Goodyear Tire!
David Tepper sometimes sounds like a brilliant Market Monetarist:
http://blogs.barrons.com/focusonfunds/2014/10/01/tepper-on-bloomberg-tv-u-s-economy-looks-good-stock-valuations-not-high
http://www.valuewalk.com/2014/10/david-tepper-talks-bonds-buffett-gross-charity-video-transcript
But sometimes, David Tepper seems clueless:
http://brontecapital.blogspot.com/2014/01/when-hedge-doesnt-work.html
19. October 2014 at 13:41
Presentation: JPMorgan’s Complete Guide To Everything Happening In The Markets
http://www.businessinsider.com/jp-morgan-q4-guide-to-the-markets-2014-10
19. October 2014 at 13:41
“Take One Look At This Chart, And You’ll Understand Why Wall Street’s Uber-Bulls Are Psyched”
http://www.businessinsider.com/dow-jones-industrial-average-super-cycles-2014-9
19. October 2014 at 13:42
No one really knows but my gut feeling is that U.S. stocks are reasonably valued…..
Tom Lee: In Five Years, I Think The Dow And S&P 500 Will Double
http://www.businessinsider.com/tom-lee-dow-and-sp-500-to-double-2014-10
21. October 2014 at 04:33
Vivian, You said:
“According to your view of things, my “real wealth” decreased significantly on Thursday and increased significantly on Friday. But, my proportionate share of the underlying assets, the factories, the commodities, the intellectual and human capital hardly changed at all. The Federal Reserve “destroyed” none of those things on Thursday, nor resurrected any of them on Friday.”
Maybe I misunderstood you. If you literally mean “none” I obviously disagree. Wealth was destroyed. The central banks destroyed lots of wealth, in the same way they destroyed wealth in October 1929 without blowing up factories. If you mean they destroyed wealth but not physical factories, my response would be “so what.” Wealth is much more than physical objects. It includes a smoothly running economic system, that puts those factories to work.
I agree that not 100% of the $5.5 trillion figure cited can be directly blame don monetary policy.
21. October 2014 at 06:41
Thanks Scott. It’s hard to say by how much, but it appears we are no longer $5.5 trillion apart on that question. In any event, after their destructive rampage last week, let’s raise a toast to all that wealth the Fed is busy creating today in the markets. 🙂
22. October 2014 at 02:00
Vivian, If only it was the Fed doing this. 🙂