The good, the bad, and the ugly

The good: Letting inflation rise temporarily during an adverse supply shock, as the EC101 textbooks recommend.

The bad: Holding inflation right at the target when there’s an adverse supply shock and saying to hell with the unemployed, as the inflation-phobic German central bankers recommend.

The ugly: Allowing inflation to fall sharply during an adverse supply shock.

Guess which option America has chosen?

David Siegel interviewed me for an hour on the role of monetary policy during the C19 crisis:

In the near future I expect to do several more such interviews.

Off topic: File this under “nobody knows anything about politics” (a reference to the old Hollywood saying about films.) A few months back I recall Ross Douthat saying that Trump had no chance to win if the US were in recession. Well, we are likely to be in a depression on election day, and he’s still favored to win in the betting markets (albeit only slightly.) If you had told me that a very unpopular president would run for re-election during a depression and have an even chance of winning, I would have thought you were crazy. Especially given the fact that while the epidemic was an exogenous shock (bad luck) he certainly didn’t take it at all seriously for several months. Biden could run commercials of Trump seeming to minimize the threat. The government itself (CDC, etc.) screwed up badly. Even though that’s not primarily the president’s fault, voters used to blame presidents when their administration screwed up.

And Trump will still probably win.



7 Responses to “The good, the bad, and the ugly”

  1. Gravatar of Gene Frenkle Gene Frenkle
    20. March 2020 at 11:39

    Instead of bailing out the oil industry why not have the government contract with oil companies to buy oil for 10 years at $30 barrel and then sign another contract with airlines and UPS and FedEx to sell oil at $40 barrel? Give the oil companies the money in a lump sum or big installments. Oil intensive American companies can be very profitable at $40 a barrel.

  2. Gravatar of Michael Sandifer Michael Sandifer
    20. March 2020 at 18:17


    Why are you taking those getting markets seriously? Some betting markets might be taken seriously, but why these?

  3. Gravatar of P Burgos P Burgos
    20. March 2020 at 18:27

    I want to second Mike Sandifer’s take on US presidential election betting markets, especially if they deviate much from 50/50 odds. It is really a coin flip, because around 99% of voters already know who they are voting for, and it would take something astounding to change their minds.

  4. Gravatar of rwperu34 rwperu34
    20. March 2020 at 21:59

    I would argue something astounding is happening and many minds are going to change in the next few months. I’m thinking those markets might not be as forward looking as Scott thinks. For most of the country, this is just now starting to hit home…over a week later (emphasis on most…not all). And even then it’s hitting hardest in “blue” states that aren’t going to have much of an impact on the election for POTUS. Give it another few weeks when 25% of the population won’t be working and the death toll is in measured in thousands. Then give it a few more weeks to start to pound Republican areas. IMO, we’ve already reached the point of no return for Trump winning an election.

  5. Gravatar of Michael Sandifer Michael Sandifer
    21. March 2020 at 10:31

    The stock market has seemed to slow its downward price trajectory over the past few days. This strikes me as a wait and see moment. It indicates there is still hope for greatly limiting potential damage, depending on responses to the ongoing crisis.

    Currently, the roughly 32% fall in the S&P 500 index indicates a roughly 1.5% drop in the long-run expected NGDP growth path. Normally, such a drop would predict a roughly similar drop in the path of employment, but it’s pretty clear a priori and from other initial indicators that the change in employment is likely already significantly greater. Hence, this unusual, but not unprecedented disconnect indicates to me that the real phase of this crisis is still expected to be quite short, though historically severe, with a presumed unusually rapid decline in unemployment, to a level modestly higher than the 3.5% pre-crisis level. That is, predicted unemployment after the real crisis is no greater than 4.5-5%.

    Hopefully, prospects will only improve from here, but the still historically high VIX levels indicate significant possible cliff diving to come.

    To the extent we lack proper testing capacity going forward, I hope we just shut down the non-essential economy to “flatten the curve” and limit the short and longer-term damage.

  6. Gravatar of LC LC
    22. March 2020 at 09:29

    Very good video interview. The example of Zimbabwe finance minster in charge of Japanese Yen was very informative. I did have 2 questions:
    1. In the current crisis, US dollar hasn’t strengthened as much as the 2008 crisis yet. Is this a sign the Fed is doing slightly better than 2008 or something else?
    2. Is this a time for a coordinated devaluation of all currencies?

    Regarding the off topic point, I will stick my neck out and predict that Xi will be gone after 2022. I believe Covid-19 failure will stick to him and he can’t wiggle out of this one failure.

  7. Gravatar of ssumner ssumner
    22. March 2020 at 10:38

    Michael, What source provides a better prediction?

    LC, No, there’s no need to coordinate monetary policies.

    I’m not sure if we are doing any better, the early returns don’t look all that good. But I’d prefer to defer a final judgment until we see what more the Fed will do. This is a very different type of shock, and since we can’t predict the path of the epidemic, monetary policy itself is hard to predict.

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