The less lofty your goals, the harder you have to work

Central banking is not like other fields; the less ambitious your goals, the harder you have to work to achieve them.  Stephen Kirchner sent me an article suggesting that the Riksbank has not yet learned the lesson that the Swiss National Bank is now learning so painfully:

There’s growing speculation Sweden’s central bank will reintroduce an interval for its inflation target as well as change its price index, paving the way for it to start rolling back the record stimulus unleashed over the past two years as it battled deflation.

“Stefan Ingves began talking about this in spring,” said Torbjoern Isaksson, chief analyst at Nordea Bank. “That a central bank governor again and again talks about a reintroduced tolerance band is a clear signal that it could happen.”

Central bankers think low interest rates are easy money.  In fact, over any extended period of time, low rates are a sign that money has been tight. The same is true of big balance sheets.  Central bankers think a higher ratio of base money to GDP is easy money, whereas over any extended period of time it is usually a sign that money has been tight (although it might also reflect interest on reserves.)

The Riksbank is getting tired of buying all those assets, in an attempt to push inflation up to its 2% target.  But if they widen the band, it will be seen as a drop in the inflation target.  This will lower nominal interest rates in the long run, and increase the ratio of base money to GDP in Sweden.  It will have exactly the opposite effect that the Riksbank hopes for.

If they want a smaller balance sheet they’d be better off emulating the Reserve Bank of Australia, which has a 2% to 3% inflation band, higher than the Riksbank’s 2%.  Australia has a base/GDP ratio of only 4%, one of the lowest in the developed world.  As I keep saying, in the modern world it’s a choice between inflation and socialism.  Conservatives don’t want either and in trying to avoid both they end up as accidental socialists, with the central bank owning a massive quantity of assets. In Japan they are even buying stocks.  Where will it all end?

PS.  After months of moronic posts on Trump, I finally got some positive feedback on my previous post on the international fight for rents.  I need to stop talking about Trump.

So I’ll use pictures instead:

Screen Shot 2016-08-30 at 4.52.40 PM


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30 Responses to “The less lofty your goals, the harder you have to work”

  1. Gravatar of Benjamin Cole Benjamin Cole
    31. August 2016 at 06:07

    My take on the recent presentation in China by Fed regional bankers Evans and Rosengren is that defeat has been declared. Life is easy for central bankers who throw in the towel.

    Evans says low inflation and low growth and low interest rates for as far as the eye can see and little to be done. Rosengren says it’s a good time to raise interest rates.

    I do not know how Rosengren plans to raise rates on, say, 10-year Treasuries. The last rate hike seem to have the opposite effect.

    Hey, why worry? It’s secular stagnation.

  2. Gravatar of Majromax Majromax
    31. August 2016 at 06:44

    It seems remarkable to me that central banks in the developed world have collectively forgotten that monetary policy can generate inflation.

    With the German 30-year bund yielding 0.43% as of this writing, the markets are clearly expecting the ECB to fail at what should ordinarily be the simplest possible task. This really should not happen, and it wouldn’t happen even with a 2% target if the policy were a price level target rather than an inflation rate target.

    Some of it might be a ‘Chuck Norris Effect’, where investors feel that what CB accommodation there is will be withdrawn as soon as inflation shows signs of life. Certainly the US Fed seems extremely eager to raise rates.

    > As I keep saying, in the modern world it’s a choice between inflation and socialism.

    How close is the Eurozone to socialism? I tried playing around with FRED to look at Euro-Area central bank assets versus government debt, but there was no good series for the latter. (I couldn’t even find Euro-area MB, so perhaps I just fail at FRED.)

  3. Gravatar of LK Beland LK Beland
    31. August 2016 at 07:43

    South Korea will likely have another year of 3% rGDP growth. Per capita (PPP), it will likely overtake New Zealand, Japan and the EU in the next few years. Low inflation (1% or so). Unemployment near 3%. Rates that might soon reach zero. It will be an interesting story to follow.

  4. Gravatar of Federico Federico
    31. August 2016 at 08:27

    Scott — on quick clarification. You refer to “base money” but then you also refer to “interest on reserves”. When you’re saying that high ratios of base money to GDP can reflect interest on reserves are you assuming that this base money receives interest? Put differently, I thought that the ratio of “non-interest bearing money” to GDP wouldn’t be affected by the level of interest on reserves but perhaps I’m wrong. Thanks!

  5. Gravatar of Carl Carl
    31. August 2016 at 09:00

    Scott:

    Re: Inflation or Socialism. I just finished reading Friedman’s Money Mischief. And in it he described how the central bank’s purchase of government bonds leads to larger government.

    I think your position is that government tends to grow dramatically during periods of NGDP decline (FDR’s expansion of government during the Great Depression, Obama and Bush’s expansion of government during the Great Recession and so on…). And, I interpret that as a strong argument for trying to prevent NGDP drops. But I don’t see how the steady purchase of government bonds by another branch (or quasi-branch) of government doesn’t also lead to more socialism, albeit at a slower pace. Perhaps I’m misunderstanding some part of the Fed purchasing process where bond purchases are sterilized by some action that tends to reduce the size of government. Or is there no need to sterilize them?

  6. Gravatar of Gary Anderson Gary Anderson
    31. August 2016 at 09:13

    Nice article, especially that low interest rates imply tight money, due to lack of lending and lack of prosperity in the real economy.

    Just one thing. Socialism is ownership by the government. The Fed, according to Lewis VS the USA, 1982, is a private bank. So it holds assets ultimately to benefit the banks and not the rest of us.

  7. Gravatar of Gary Anderson Gary Anderson
    31. August 2016 at 09:44

    However, I think Kevin’s second chart would say that money supply is pretty high at least compared to GDP. http://idiosyncraticwhisk.blogspot.com/2016/08/there-has-not-been-increased-demand-for.html

    So, the money supply is not being injected into the real economy.

  8. Gravatar of E. Harding E. Harding
    31. August 2016 at 10:41

    I’m impressed by your 70-point IQ drop when talking about American politics.

    In any case, NGDP growth probably matters less today than it did even three years ago. Just look at the unemployment rate.

  9. Gravatar of Sean Sean
    31. August 2016 at 12:14

    Is there good evidence that the natural rate of employment is far lower than history and the FED thinks.

    5% just doesn’t seem that low to me when anyone can go get a job with uber in 24 hours. I don’t think those are preferred jobs or full employment jobs, but they count for purposes of how economists measure unemployment. My guess is the natural rate could be towards 3% right now. Which would imply the fed is significantly missing on a full employment effect.

  10. Gravatar of Tom Brown Tom Brown
    31. August 2016 at 12:18

    http://therightscoop.com/morning-joe-strikes-back-at-the-donald-with-amnesty-don-parody-video/

  11. Gravatar of ssumner ssumner
    31. August 2016 at 16:55

    Federico. IOR directly impacts the demand for reserves, but not cash. The base includes both cash and reserves.

    Carl, Oddly enough, the faster the pace of asset purchases by the Fed, the smaller the Fed balance sheet as a share of GDP, ceteris paribus. The Fed balance sheet was fairly small back in 1980, as a share of GDP, due to the fast growth in NGDP and prices.

    Harding, Alt-right people must have been in tears when Trump went to Mexico and said over and over agains what good, hard working people the Mexicans were. I thought Trump was a race realist. Don’t tell me he’s going to become a softie.

    Sean, It’s hard to measure the natural rate, but one indication is wage growth, which is finally picking up a bit.

  12. Gravatar of E. Harding E. Harding
    31. August 2016 at 21:51

    “Alt-right people must have been in tears when Trump went to Mexico and said over and over agains what good, hard working people the Mexicans were.”

    -Nah. It’s called pandering to c*cks. Master morality for the primary; slave morality for the general. And nobody has ever denied Mexicans can work long hours; it’s just that the average Mexican IQ is below 90 and they’ve voted consistently Democrat since 1924.

    “I thought Trump was a race realist.”

    He probably is.

    https://www.washingtonpost.com/politics/trumps-courtship-of-black-voters-hampered-by-decades-of-race-controversies/2016/07/19/d9822250-4d2e-11e6-aa14-e0c1087f7583_story.html

    “Don’t tell me he’s going to become a softie.”

    -Oh; he wasn’t soft except to the families of those killed by illegals.

  13. Gravatar of ssumner ssumner
    1. September 2016 at 05:06

    Harding, So now your defense is that Trump lies, but secretly believes what you do? And this is based on what he said years ago? I’ve got news for you, years ago Trump was a Dem who said Hillary would be a great president. Do you really think that a guy so cowardly he was afraid to mention Mexico paying for the wall yesterday will have the nerve to stand up to these people? Do you think a guy who said even Obama’s detention centers are too “mean” will have the nerve to deport all these people?

    And what happened to Trump’s promise to deport 11 million illegals? Let me guess, the new Trump will balance the budget by eliminating waste fraud and abuse, as all presidents promise, and he’ll stop illegal immigration, as all presidents promise. Most of the illegal immigration today comes from tourists overstaying visas. But he’s only going to expel the gang bangers. That will sure stop foreigners from overstaying their visas!

    A few weeks ago Trump said that Obama had deported far more than previous presidents. Yesterday he said . . . Obama had done “nothing”?

    Is Trump still planning to follow Obama, and just deport the “bad guys”?

    Oh, and they will all be deported on “day one” None will be left on day two.

    Oh, and we know where all the bad guys are. We do. Seriously.

    His speech was aimed as people with a kindergarten level of understanding. Sad to see so many of my white supremacist commenters buying into the demagoguery.

    Oh, and he said that a few years down the road he’ll declare victory and consider an amnesty. You’d think that Jeb!! won the nomination. Oh wait, can’t use the term ‘amnesty’. He’ll reconsider their status in a few years.

  14. Gravatar of Massimo Heitor Massimo Heitor
    1. September 2016 at 07:04

    If Trump really is Amnesty Don, then Bryan Caplan will be ecstatic to give his full endorsement. And Ann Coulter will withdraw her Trump support and take her book off shelves.

    Don’t see that happening? Neither do I…

  15. Gravatar of E. Harding E. Harding
    1. September 2016 at 07:25

    “years ago Trump was a Dem who said Hillary would be a great president.”

    -So was I. Who cares?

    “Do you really think that a guy so cowardly he was afraid to mention Mexico paying for the wall yesterday will have the nerve to stand up to these people?”

    -There’s zero point in making bad first impressions.

    “Do you think a guy who said even Obama’s detention centers are too “mean” will have the nerve to deport all these people?”

    -Not promising to deport all the 11 million was a compromise with Trump’s Hispanic advisors.

    “Most of the illegal immigration today comes from tourists overstaying visas. But he’s only going to expel the gang bangers. That will sure stop foreigners from overstaying their visas!”

    -You didn’t listen to the speech.

    “Yesterday he said . . . Obama had done “nothing”?”

    -Except he didn’t.

    “Is Trump still planning to follow Obama, and just deport the “bad guys”?”

    -Obama had an Obamnesty by executive order. Not gonna happen in a Trump administration.

    “Oh, and we know where all the bad guys are. We do. Seriously.”

    -Trump never said that. Stop strawmanning.

    “He’ll reconsider their status in a few years.”

    -As I’ve pointed out, this was Ted Cruz’s 2013 plan. Who else would a true immigration restrictionist have voted for? Rick Santorum?

  16. Gravatar of E. Harding E. Harding
    1. September 2016 at 07:27

    And, besides, “deport-them-all-with-no-touchback” is not a candidate. Hillary Clinton is. Jill Stein is. Gary Johnson is.

  17. Gravatar of Massimo Heitor Massimo Heitor
    1. September 2016 at 08:21

    NYT headline, “Donald Trump’s Deportation Nation”

    From CATO, “Trump’s speech last night in Phoenix confirmed that his supposed softening on immigration turned out to be wishful thinking. After last night, nobody can claim that Trump’s position on immigration is too soft.”

    If Trump is Amnesty Don as Sumner says, no one believes it. Not just the “Trumpistas”, NYT, Cato, the GMU ring of pop-econ bloggers, no one believes it.

  18. Gravatar of Greg DeLassus Greg DeLassus
    1. September 2016 at 08:47

    If Trump is Amnesty Don as Sumner says, no one believes it. Not just the “Trumpistas”, NYT, Cato, the GMU ring of pop-econ bloggers, no one believes it.

    Two responses to this:

    (1) William F. Buckley once famously quipped that LBJ is “a man of his most recent word.” The jibe would be at least as apt if applied to Mr. Trump. So “everyone” can agree right now that based on his latest speech, Trump is serious about deportation. It is clearly not the case that “everyone” agreed as much this time last week, when different remarks were heard coming from Trump’s mouth, and I dare say that if you give it another week, the consensus opinion held by “everyone” about Trump’s intentions will change again as yet more contradictory evidence emerges. The man is hardly the model of constancy.

    (2) The fact that Cato, or the NYT, or various social-media talking heads say that they are convinced of x-and-so by Trump’s latest speech is hardly a meaningful data point in assessing what actions Mr. Trump would plausibly take in (God preserve us) the event that he should accede to the oval office. These voices all have an interest in sensationalism to gain attention. They suffer no adverse consequences if they are wrong, but many adverse consequences if they are boring. When those are your incentives (be interesting, accuracy be hanged), the delta tends to be rather wide between what you predict and what actually happens.

  19. Gravatar of Gary Anderson Gary Anderson
    1. September 2016 at 09:28

    When Trump was talking on Morning Joe about terrorists being sponsored by nations in the middle east he mentioned Saudi Arabia but when he spoke about Israel he said, that other country, you know who they are. He never actually mentioned Israel even though he clearly wanted to. Israel promotes or has in the past promoted ISIS as the third part of a three part Iraq envisioned by ODED YINON back in the 1980’s.

  20. Gravatar of Massimo Heitor Massimo Heitor
    1. September 2016 at 09:39

    @Greg DeLassus,

    Great points.

    (1) Great quote. It supports the idea that being manipulative and shifting positions is now new in the world of politics.

    (2) I agree: all media, academics, and public intellectuals can be completely wrong on everything. What method do you propose to establish truth from falsehood and what presidents will likely do? Wagers are one option. I’d place money on my beliefs.

    Nobel prize winner Paul Krugman said that Cruz and Rubio’s foreign policy was far more dangerous than Trump. Ex president Carter said Cruz terrified him and Trump was not worrisome. All the extreme forebodings about Trump were said in 2008 and 2012 about McCain and Romney respectively. Why should this time be different?

  21. Gravatar of Bill Ellis Bill Ellis
    1. September 2016 at 13:22

    Amnesty Don is dead!!! Police state Trump Killed him… But will he stay dead ?

  22. Gravatar of Bill Ellis Bill Ellis
    1. September 2016 at 13:39

    E harding… This must be such a relief for you… Trump forced you hold a pretty difficult position for about a week…Was it worth it ?

    you sure proved your loyalty to, and your willingness to serve to trump.. no matter how much you had to embarrass yourself publicly… twisting into compromising postures at his command… you held ready for his commands… commendable in a weird way…

    But now…Now trump is really giving you something big to work with…a really satisfying tool for you use…You are clearly very excited…

    It’s like trump is being a BULL of politician again…and he’s letting you clean up his mess… you clearly enjoy cleaning up his mess.. No judgement…

    no wonder you worship him… he gives you what you need….

  23. Gravatar of Bill Ellis Bill Ellis
    1. September 2016 at 13:48

    In case anyone is still trying to figure out what Trumps position is… as of yesterday…anyway…

    A. round up the “criminal” Unauthorized immigration..
    (2mill)immediately.. ( to do this he would have to suspend the constitution )

    B. force the other (9 million?) to self deport… ( with all the dehumanizing horror that that implies )

    Part B… seems to be lost on everyone in the media I have read….

    how long will it be before it dawns on them ?

  24. Gravatar of Bill Ellis Bill Ellis
    1. September 2016 at 13:55

    White Nationalist Media Cheers Trump’s “Almost Perfect” Immigration Speech

    Surprise !

    http://mediamatters.org/blog/2016/08/31/white-nationalist-media-cheers-trump-s-almost-perfect-immigration-speech/212803

  25. Gravatar of Bill Ellis Bill Ellis
    1. September 2016 at 14:24

    Trump says….”It’s our right as a sovereign nation to choose immigrants that we think are the likeliest to thrive and flourish and love us.”

    Trumps is not known for dog whistles… But this was a great one… The alt right dogs howled with glee…

    What did you hear. ???..Who are thoses who will… “love us” ? (Thriving and flourishing are not enuff to to get a place in our “meritocracy” Nope! you must LOVE US too !!!)

    who are “us” for that matter…? what did you hear ?

    who do you picture in your mind when trump talks about who ‘WE” are and what kind of immigrants will love us…

    Muslims ? muslims are us.. muslims can love “us”
    Asians ? asians are us… Asians can love us..
    I could go on… but you get it…

    What EVERYONE heard…was that we have the right to choose who we lwt in and those people are…white people…

    trump’s dog whistle made the alt righties feel like naturally privileged white men again…and made anyone of color feel like an outsider… or a target…

  26. Gravatar of ssumner ssumner
    1. September 2016 at 15:55

    Everyone, Trump put his amnesty proposal into the small print, you need to listen carefully:

    “Importantly, in several years when we have accomplished all of our enforcement and deportation goals and truly ended illegal immigration for good, including the construction of a great wall, which we will have built in record time. And at a reasonable cost, which you never hear from the government.
    And the establishment of our new lawful immigration system then and only then will we be in a position to consider the appropriate disposition of those individuals who remain.”

    http://www.latimes.com/politics/la-na-pol-donald-trump-immigration-speech-transcript-20160831-snap-htmlstory.html

    You don’t need to be a rocket scientist to figure out what that means.

    The “appropriate disposition” ain’t going to be deportation, otherwise he’d say he wants deportation. This is what all the GOP candidates do, try to hide their amnesty talk with a lot of tough language about getting rid of criminals. (BTW, crime rates among immigrants are lower than for the general population.) Why do you guys think Trump keeps talking about deporting criminals all the time? Because that’s Obama’s policy and he plans to copy Obama. Here’s the website 538, one of the few that sees through Trump’s silly games:

    “Farai: It’s worth noting that in 2015, nearly 60 percent of removals by U.S. Immigration and Customs Enforcement officials were of people with criminal backgrounds. That seems to indicate an ongoing enforcement priority.

    Anna: And the share of removals that are people with criminal backgrounds has increased over time.

    Ana: The Obama administration has focused its efforts on deporting immigrants with criminal convictions and those who have recently crossed the border. In the last two years, that focus on criminal convicts has actually shifted from any type of conviction to more serious crimes.

    Ben: To the extent there was any “pivot” in Trump’s speech, it was away from pledging to deport all 11 million undocumented immigrants and toward deporting those who commit crimes. But isn’t that pretty close to existing policy?

    Anna: Ben, he did talk about bringing back the Secure Communities program, which has been criticized as targeting people who had any interaction with the criminal justice system, rather than focusing on people who have committed crimes. That was a program the Obama administration discontinued in 2014.

    Ben: Let’s stay on this for a moment. The idea behind Obama’s DACA (“Deferred Action for Childhood Arrivals”) policy was basically: “Look, we can’t deport everyone, so we already set priorities. Let’s just formalize that system and grant some sort of legal status to people we probably wouldn’t have deported anyway.” Trump’s rhetoric is very, very different, of course. But policy-wise, he seems to want to go back to Obama’s first-term policy of deporting undocumented immigrants convicted of crimes (violent or otherwise) while not granting any formal status to others. So in that sense, isn’t this more or less the standard GOP line on immigration?”

    http://fivethirtyeight.com/features/the-consequences-a-look-behind-the-claims-on-immigration/

    End of quote. I just laugh at all the alt-right types that think Trump is going to do something serious about immigration. The number illegals is already falling, and will continue to fall regardless of who is elected.

  27. Gravatar of Carl Carl
    1. September 2016 at 16:09

    Scott:

    Thanks. “the faster the pace of asset purchases by the Fed, the smaller the Fed balance sheet as a share of GDP”

    Am I misreading Figure 2 of the following article? https://www.stlouisfed.org/publications/regional-economist/january-2014/the-rise-and-eventual-fall-in-the-feds-balance-sheet. It seems to show balance sheet increasing as a percentage of GDP at times of increased asset purchases at least from 2007

    That said, Figure 3, certainly doesn’t support my argument.

    I have to say that the lack of correlation between Fed Asset purchases and government growth baffles me. It just seems that artificially inflating the demand for a good–in this case, government debt–has to stimulate supply of that good unless there is some counter-balancing drop in demand for that good elsewhere in the system.

  28. Gravatar of E. Harding E. Harding
    1. September 2016 at 17:57

    “The “appropriate disposition” ain’t going to be deportation, otherwise he’d say he wants deportation.”

    -Weirdly, nobody knows -still- what Trump’s actual desires on this are. “Appropriate disposition” is sufficiently vague to console both sides, but the overall tenor of the speech only worried the pro-amnesty ones and encouraged immigration patriots. I think it was a compromise to console Trump’s Hispanic advisors, but it didn’t work. In any case, ultimately, as in 2014, David Brat will decide everything.

    “Because that’s Obama’s policy and he plans to copy Obama.”

    -In prioritizing removals in place of returns? Yes, obviously. But Bush II did that first. In any case, Trump will build a wall on the southern border and will be much tougher on illegal immigration than Obama. There will be no amnesty-via-executive-action.

  29. Gravatar of Massimo Heitor Massimo Heitor
    2. September 2016 at 14:21

    “I just laugh at all the alt-right types that think Trump is going to do something serious about immigration.”

    Again, it is not just an alt-right fringe that believes Trump will take action on immigration. Protesters think this. The New York Times thinks this. Your GMU econ co bloggers think this. Cato Institute thinks this. Most people think this. Muslims are protesting Trump because of this.

    Do you genuinely think a hypothetical Trump presidency vs a Hillary presidency will be indistinguishable regarding immigration? I bet even the anti-Trump people in this crowd would bet against you.

  30. Gravatar of ssumner ssumner
    2. September 2016 at 17:51

    Carl, I meant other things equal. In some cases the Fed does asset purchases because inflation is low.

    An exogenous increase in asset purchases, as in the 1960s and 1970s, tends to reduce the Fed’s balance sheet as a share of GDP.

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