The seen and the unseen
In response to yesterday’s post, commenter “Purple Mutt” asked:
Scott, in all the scenarios you describe here, QE has an inflationary effect versus the counterfactual of no-QE. The fact that QE is associated with exogenous deflation in one of your scenarios is irrelevant.
I’m really confused by your argument here. Are you really claiming that QE is not reliably inflationary or disinflationary versus the counterfactual, across different scenarios? If so you might need a longer blog post, I think.
Or are you arguing that engaging in QE is not really a voluntary action taken by the central bank, and as such the whole idea of the “counterfactual” is meaningless?
He or she is right; I need a longer post. Indeed I’m writing a long paper on this issue, which I hope to finish by this summer. Here’s how I responded:
This is a subtle point. Consider this analogy. Monetary policy initiative “X”causes the equilibrium interest rate to fall by 30 basis points, while the target rate falls by 18 basis points. Policy X is contractionary. Now one might argue that the 18 basis point fall in the target rate, considered in isolation, is expansionary. But people tend to look at initiative X and only see the target rate change. They wrongly believe “X” as a whole is expansionary.
Switzerland cut its target rate in January 2015, and at the same time cut the equilibrium interest rate even more (by revaluing its currency higher in the forex market). The overall effect was contractionary.
Now suppose policy initiative X increases the monetary base by $1 trillion but increases money demand by $2 trillion. The overall effect is contractionary, even though QE is expansionary (considered in isolation), as you say.
More likely, policy X does not directly increase money demand, except in the sense of “errors of omission”. It merely fails to respond to a “shock” with proper forward guidance.
Nonetheless, I worry about people getting the wrong idea when QE programs are positively correlated with economic distress. There’s a tendency to assume that “QE doesn’t work”. It’s like assuming hospitals don’t work because death rates in hospitals are high.
The counterargument is that there’s nothing wrong with mainstream economics. I hear people say, “economists understand that what matters is changes in the policy rate relative to the equilibrium rate.” Or they say, “economists understand that what matters is changes in M relative to V.”
But I can’t accept that complacent view. If there’s nothing wrong, why did perhaps 99% of economists believe the Fed was easing in 2008, while only a few lonely voices like Bob Hetzel and Tim Congdon noticed they were tightening? Why is it that even today almost all discussion of monetary policy seems to miss the point, confusing concrete steps with overall policy stances? Why do economists (with a few exceptions such as Nick Rowe and David Beckworth) fail to understand that policy is 99% signaling future intentions and 1% current concrete steps? Why do so few economists recognize that central banks can powerfully change the equilibrium interest rate through both errors of comission and errors of omission?
Macroeconomics is not about whether MV=PY is true, or whether C+I+G+NX = PY is true. It’s not about whether new Keynesian models of the natural rate are true or whether NeoFisherians are right about the long run correlation between inflation and nominal rates. These are just analytical tools. It’s a question of how the tools are used.
Similarly, central banks have also sorts of tools such as QE and negative rates on reserves. Whether these tools are effective depends entirely on how they are utilized. Because 99% of policy is forward guidance, the question of whether the other 1% “works” is close to meaningless.
Japan could create hyperinflation with enough QE. But if they really, really, actually did plan to create hyperinflation then they wouldn’t even need to use any QE. There’s already more than enough base money in Japan to create hyperinflation, if the desire to do so were sincere.
PS. Speaking of the unseen; this recent story relates to my earlier post about sniffing out phony data:
MOSCOW — Ever since the coronavirus took hold globally, researchers have been puzzled by Russia’s mortality rate of only about 13 deaths per million, far below the world average of 36 in a country with a underfunded health system.
With the arrival of data for April, however, the mystery appears to be clearing up.
Data released by Moscow’s city government on Friday shows that the number of overall registered deaths in the Russian capital in April exceeded the five-year average for the same period by more than 1,700. That total is far higher than the official Covid-19 death count of 642 — an indication of significant underreporting by the authorities.
No real surprise, as there were also undercounts in China, New York, France, and many other places.
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11. May 2020 at 11:54
Thank you for the response! I think this makes sense to me. Here are the main points of your argument, as I understand them. (I apologize if I’m putting words in your mouth, obviously any corrections would be much appreciated.)
(1) If the Fed could credibly say, “We are going to fiddle with the economy until we get inflation, come Hell or high water,” then we would see both short and medium-term inflation, in almost all scenarios.
(2) Same thing if they could commit to targeting disinflation – we would see short and medium-term disinflation in almost all scenarios.
(3) Therefore the intention of the Fed has an overwhelming effect on both short- and medium-term inflation rates, compared to “actual policy”.
(4) Therefore the effect of a short-term QE policy is primarily determined by how it affects the perception of the Fed’s intentions.
(5) Since this perception is not necessarily the same across all scenarios, it makes no sense to say that QE is reliably inflationary or disinflationary.
If this is indeed the argument, I mostly buy it (and I think I also find it enlightening, although I will have to keep mulling it over).
However, consider the following question:
“Suppose the Fed were to credibly commit to maintaining a 0% interest rate via open-market operations for the next 20 years; and further suppose they were to commit to taking no other actions whatsoever (e.g. QE). Would this produce higher or lower short term inflation compared to the counterfactual where the Fed makes exactly the same commitment, except targeting a 2% interest rate?”
Since such commitments are unrealistic, this question may not be *important*, but I don’t think it’s *meaningless*. It seems to me your answer would be, “The 0% policy would almost certainly produce higher inflation.” However you might go on to say, “It’s nevertheless dangerous to consider the 0% policy ‘inflationary,’ since in many scenarios it could produce extremely low rates of inflation, if more action were called for.”
Is that accurate? And if so, it would mean you agree with the Keynesians more than NeoFisherians, even if you think their debate is largely beside the point — right?
11. May 2020 at 12:11
Hi Scott – I would like your take on Jim Bianco’s view that the Fed has embarked on MMT version 1.0. He was interviewed on Barry Ritholtz’s podcast and was listening to it on my walk on Saturday. The written transcript is here: https://ritholtz.com/2020/05/transcript-jim-bianco/ there is an amazing comment, “It’s the equivalent of four years of income tax receipts when all is said and done. If the federal government and the Federal Reserve can either borrow or print four years of tax returns and not have a problem, not produce inflation, I’ve jokingly said can we get rid of the IRS? Can they just print up our taxes every year and just send them to the Treasury at that point? Because if you can do this without having any problems, then why do we even pay taxes in the first place? And isn’t that one of the arguments that the MMTers have been saying is that MMT believes that the — you don’t adjust monetary policy with interest rates, you adjust it with taxes.”
There is much more in the interview and Bianco is a pretty sound bond analyst who I regularly read. My prejudice is to put more faith in those who have an investment track record than academics who don’t have “skin in the game” but that’s just me as a fiduciary manager of a couple of trust funds and a board member of a non-profit investment committee.
11. May 2020 at 12:31
Purple, If I was told to expect 20 years of zero interest rates then I’d expect an inflation outcome like Japan. If it were truly expansionary, then the price level would explode well before 20 years, which would be politically unacceptable. Hence the Japan scenario seems like the only plausible 20 year scenario.
The longer the time frame, the more likely that the NeoFisherian perspective beats the Keynesian perspective
Having said that, if we take your “holding other things constant” assumption seriously, it’s not obvious that a central bank would even be able to deliver 20 years of zero rates. How would this be done?
I’ve never understood what people mean when they say a particular monetary policy is “MMT” . Japan did massive fiscal deficits and monetary base creation during 1993-2012, was that MMT? What does it mean to say something is MMT? I thought MMT was a model of the economy, not money financed deficits.
In any case, buying debt with interest bearing reserves is not money financed deficits.
11. May 2020 at 13:19
Do we have this data on “Übersterblichkeit” (=excess mortality)
also from Wuhan??? Can I make a wild guess?
But no, of course the CCP has no transparency problem, they just miscount a tiny bit now and then by accident.
11. May 2020 at 15:14
Scott,
I don’t have the expertise to follow many of your economic ideas. However, I think you are saying the Fed can fix everything with the right policy.
Maybe this is true. However, when I see the government spending money above the amount they are collecting in taxes and it looks like this will continue for quite some time and then I see the government spend trillions to fight the virus, I get very concerned for the financial stability of the country.
My fear is that we are headed for much higher inflation which will increase government spending (on interest expenses) even more. My guess is that a log of folks have this same fear.
11. May 2020 at 17:41
purple mutt and all ye who struggle to understand sumner and his ilk, pretenders, critics and like minded sophists, its really just voodoo: he and they state it what works is what the fed does and more importantly what the fed says it intends to do, SUBJECT HOWEVER, that this may not be enough or adequate based on the circumstances. this of course creates a recursive mobius strip of the reaction is the function of the result which is a function of the reaction. its at bottom a conceit: that a system can be planned or managed.
11. May 2020 at 19:02
Scott Sumner: So, as part of “forward guidance,” should a central bank indicate whether additions to the central bank balance are permanent?
Also, David Beckworth contends there is a difference between less-effective conventional QE that is “helicopter drops on Wall Street,” and a more-effective form of QE, that is “helicopter drops on Main Street.”
Please expand on Beckworth’s reasoning.
11. May 2020 at 19:27
Christian, Your Ahab-like obsession with China is getting tiresome. Why don’t you attack India? Russia? Saudi Arabia? Anyone else? Just for a change of pace.
Your comment doesn’t even relate to this post.
BTW, China and India just got into a fist fight. Which side are you on?
Bob, You said:
“I don’t have the expertise to follow many of your economic ideas. However, I think you are saying the Fed can fix everything with the right policy.”
Based on the second sentence above, I can say without any doubt that the first sentence is 100% correct. I don’t think the Fed can fix my toothaches, for instance. Indeed I don’t think the Fed can fix much of anything. I’d just be happy if the Fed fixed nothing, but refrained from causing problems.
11. May 2020 at 21:12
Scott said:
“I don’t think the Fed can fix my toothaches, for instance. Indeed I don’t think the Fed can fix much of anything. I’d just be happy if the Fed fixed nothing, but refrained from causing problems.”
I guess this means we have to rely on the people via elected politicians to fix the runaway spending. What a scary thought!!
12. May 2020 at 05:11
Question: Was the recent fiscal stimulus (we are talking trillions) intended mainly to (a) induce higher consumer spending or (b) maintain V. As for (b), with everyone staying home, it’s not easy to spend. Indeed, where has all the money gone? An answer is that the fiscal stimulus wasn’t actually intended to affect (a) or (b) but to help landlords and holders of home mortgages (who no doubt received much of the money put in the hands of individuals). I appreciate Sumner’s idea (or whatever one wishes to call it) that actions taken by the Fed are mostly signaling, in the hopes that investors and consumers will correctly read the tea leaves. But in the middle of a pandemic crisis with 20% to 25% unemployment and businesses failing in droves, I’m not so sure signaling counts for much, other than the signaling from unemployment and failing businesses, which I suspect is highly contractionary – I have not purchased anything other than groceries, and nothing from Amazon, the vendor of choice. My view, often expressed, is that the primary task of the Fed is maintaining financial asset prices, and by doing so promoting investment and thus economic growth (and some consumer spending via the wealth effect). My judgment is that the Fed has performed its primary task very well under the circumstances; indeed, how many articles have I read in which the authors suggest that the Fed must have magic powers given the magnitude of the economic disaster.
12. May 2020 at 09:25
You’ve mentioned before that monetary stimulus is far less costly than fiscal stimulus. What do you see as the channels of monetary stimulus during this pandemic? I understand how the Fed can keep financial institutions liquid by buying up financial instruments. I understand how that in turn allows the financial institutions to restructure payments from their debtors allowing those debtors to restructure payments from their debtors(e.g. renters ) and so on. That only takes care, however, of restructuring debt. I’m not clear how monetary stimulus is expected to provide credit for asset-poor laid off workers to buy goods. Who takes on debt to provide them with the credit they need to shop?
12. May 2020 at 10:18
https://finance.yahoo.com/amphtml/news/fed-buying-etfs-mostly-still-145232900.html
Scott could you comment on this piece re “placebos/light touches” Thanks
12. May 2020 at 11:17
Scott,
As always, I said nothing against China, I criticized the CCP.
By the way, this is example #42, which proves that you are incapable of distinguishing between CCP and China, even though you like to demand this from others, which is all the more amusing.
And then your constant red herrings at the level of a toodler. Excuse me, but YOU gave the examples which were by the way: Russia, China, New York, France. So yeah, it relates to the post, you even gave the examples.
And then you freak out when I ask which of those places doesn’t publish transparent excess mortality figures. Just a simple question, Scott, I wonder why you are so mad about it?
Even the Russian regime has released the data now, can’t one expect the CCP to do the same? After all, you like to claim that the CCP does no longer hide data about the deadly plague in Wuhan.
I doubt that two countries can get into a fistfight. Shall I link to your post where you make fun of using language like that?
I think I’m Moby Dick, and you’re Ahab, and I just crushed you.
12. May 2020 at 12:33
–“Question: Was the recent fiscal stimulus (we are talking trillions) intended mainly to (a) induce higher consumer spending or (b) maintain V. As for (b), with everyone staying home, it’s not easy to spend. Indeed, where has all the money gone? An answer is that the fiscal stimulus wasn’t actually intended to affect (a) or (b) but to help landlords and holders of home mortgages (who no doubt received much of the money put in the hands of individuals).”–
To channel Arnold Kling, I think the answer is (c) maintaining sustainable patterns of specialization and trade.
The economy was in really good shape at the start of 2020. With the lockdowns and voluntary social distancing, trade patterns (of goods, services and labor) were severely disrupted – but those aren’t inherently bad trade patterns, just bad for a pandemic.
The fiscal stimulus helps try to keep those patterns in place – supercharged unemployment insurance helps people not only stay fed but pay all of their bills, the payment protection lending helps keep people attached to their employers so that when the pandemic lifts, those employees can go back to their jobs rather than having those businesses fail and the associated jobs disappear.
Ideally, the stimulus is very temporary and is mostly no longer needed when we can:
a) Deploying more testing (at least an order of magnitude more)
b) Contract tracing of those who are confirmed infected
c) Mandatory mask wearing until a better treatment/vaccine exists
Some businesses (cruise lines, movie theaters) might stay very light for a while, but if mask wearing and testing can keep the infected down to isolated outbreaks, most previous economic activity can roar back.
12. May 2020 at 18:24
The discussions about China in the comment sections of this blog are so disappointing, especially since many of the actual blog posts are good and there are presumably many intelligent readers.
There are so many more interesting things to talk about regarding China than non-issues such as conspiracy theories, IP theft, etc. I think it’s safe to say that a generation from now, no one will be talking about these non-issues.
What’s interesting to me is that China is employing AI technology on a scale that would not even be legal in democratic republics, with all of the dangers and potential benefits that can offer. On the one hand, there’s the prospect of the most terrifying police state imaginable. On the other, there are probably vast benefits that we can’t anticipate. Having a tremendous amount of data on a population can cut both ways.
Of course, with this wide deployment of AI, by collecting more data than any other entity in some ways to improve their models, their AI technology can advance more quickly.
Couple that, with the fact that China already has a larger economy and is still growing much more rapidly than the US, and it’s interesting to think about not only how this will change balances of power around the world, but also cultural influences. While a country like China, with such a top-heavy government may never have the pound-for-pound cultural influence that western civilization has had, it will nonetheless grow relatively more powerful.
The biggest problem I see with all of the anti-China trade rhetoric is that it always ignores the fact that China not only already has the largest consumer market in the world, but that it will only grow larger over time, and hence they are really the ones with the leverage. We are an extremely stupid country if we decide to let our cultural and political prejudices stand in the way of selling into that market. And by the way, we can have a much greater influence on Chinese economic, cultural, and even foreign policy development by selling into that market.
Scott puts up a lot of good, counter-intuitive posts about how “malinvestment” in China has not come close to a scale to threaten its high economic growth rate, though the rate would be higher without such mistakes. He has also correctly pointed out that there are real limits to how much data can be fudged there, especially concerning economic growth. As someone who started learning to quantify the relationship between economic growth and liquid asset prices in recent years, significant lying about GDP growth would be pretty immediately obvious. That’s why Venezuela, for example, simply refuses to publish some economic data now, like inflation rates, because they know they can’t credibly lie about the numbers.
I wish we would turn our focus to the real challenges around the world, such as the threat to democratic republican government that Putin represents, the increasingly irratic behavior of petro states in general as their core industry dies, and striking the right balance of cooperation and competition with China.
Our relationship with China should be one of mutual respect, with unrestrained commerce, but also with the firm enforcement of international law, particularly regarding shipping lanes and respecting the sovereignty of other countries. We should also counter their promotion of their brand of authoritarian, limited capitalism, with our more free-wheeling, freer market democratic republicanism.
13. May 2020 at 00:12
“No, they didn’t “seize a sovereign territory.” . . . The Ukrainian Constitution gave Crimeans the legal and constitutional right to determine their own future, and whether they wanted to be a part of Ukraine or Russia, the determination to be made by referendum. The Ukrainian government wrote this in 1992. Not Russia.
Crimea did not exercise that legal and constitutional right until March 2014. Putin subsequently met with the Duma in an all-night meeting to vote on the matter after Crimea had already voted to become a part of Russia.
Only Reuters and USA Today reported this accurately at the time–and it was only the day after the vote–and then it was dropped from all US and British news accounts when Obama claimed that Putin “invaded” Crimea, and used it as justification to impose sanctions. “
“President Vladimir Putin in February turned down an offer from his Ukrainian counterpart Petro Poroshenko to “take the Donbass” — the area in the country’s east that is currently partly controlled by pro-Russian insurgents — and asked Poroshenko whether he was “out of his mind,” Forbes magazine reported Monday.
Putin reportedly told a closed-door meeting with senior board members of the Russian Union of Industrialists and Entrepreneurs on March 19 that Poroshenko had offered him eastern Ukraine’s Donbass region — which includes the war-torn Donetsk and Luhansk regions — at peace talks in Minsk at which a cease-fire was agreed in February, according to an unidentified source cited byForbes who participated in the meeting.
According to the source, Putin recounted the overnight Minsk negotiations, saying: “[Poroshenko] told me directly: ‘Take the Donbass.’ I replied: ‘Are you out of your mind? I don’t need the Donbass. If you don’t need it, declare it independent,’” Forbes reported.”
13. May 2020 at 03:35
OT
https://www.bis.org/publ/work862.htm
They say financial intermediaries increase financial instability.
Interesting. Should developed nations rely more on central bank money-printing and less on commercial banks to create money?
John Cochrane says banks should only be allowed to lend equity. 100% reserves.
13. May 2020 at 05:19
@Postkey
This sounds like a lie. Bending the truth to fit your agenda, in other words, lying. None of my sources confirm your statements and I googled for quite some time. Of course things happened back then, just not what you claim. But if it’s not a lie, then you can certainly give a reputable source for your claims.
Oh, yes, the anonymous sources. Why don’t we just take what Putin himself said. He seems to think that Russians and Ukrainians are one people, one nation. To him Ukrainians are basically Russians, so Russia and Ukraine should integrate. Now what does he mean by that? I guess he means that little Russia “integrates” into Ukraine, under Ukrainian rule, or could this benevolent overlord possible mean something else?
13. May 2020 at 06:21
Purple Mutt says that “QE has an inflationary effect versus the counterfactual of no-QE.” Note that this and every other counterfactual has a *ceteris paribus* clause. We are to compare two scenarios: (1) the Fed’s doing QE and everything else’s being a certain way, and (2) the Fed’s not doing QE and everything else’s being the same way as in the first scenario. But this “everything else’s being the same” clause is problematical. Obviously not literally everything else is going to be the same between the two scenarios: FOMC members will not vote the same, Fed traders will not make the same trades, market expectations about Fed behavior will or will not be satisfied, journalists will not make the same reports about Fed actions, etc., etc. So what, exactly, will be held the same as between the two scenarios, and what will be allowed to be different? The answer is usually not specified explicitly, leaving the very meaning of the counterfactual doubtful.
(On the face of it, there is another doubtful aspect, of most counterfactuals and of this one in particular. It seems there are *many different ways* in which the Fed could do QE, and *many different ways* in which it could not do QE; so that there are not really just two scenarios, but many different ones–not just two outcomes for comparison, but many. But this will not be problematic if the explanation about what we are holding constant ensures that there is just one way for the Fed to do QE and one way not to do it, consistent with the factors that are being held constant.)
13. May 2020 at 14:00
@Ben Cole
“Should developed nations rely more on central bank money-printing and less on commercial banks to create money?
John Cochrane says banks should only be allowed to lend equity. 100% reserves.”
Only allowed to lend equity? Even if we went to 100% reserves couldn’t banks still sell bonds as well as stock?
13. May 2020 at 14:02
Carl, In my view, monetary policy works through the “hot potato effect”. Inject excess cash balances into the economy and the public will try to get rid of those excess balances by spending them. Credit is not the essential point, it’s about spending.
Cove77, Good example of the importance of the expectations channel.
Christian, No, it does not relate to this post. I mentioned that China undercounted the deaths, and you had no response to that claim. Instead you went off on your usual tirade.
You said:
“After all, you like to claim that the CCP does no longer hide data about the deadly plague in Wuhan”
Another lie.
Philo, Yes. The basic problem is that people think you can judge the impact of QE by looking at what happens after QE is implemented.
13. May 2020 at 14:21
Scott,
oh, so they do hide the data now, but they don’t miscount on purpose, they just do it by accident. Okay, I gotta make note of this, your positions change too often and are too conflicting.
Call again when the CCP has reached the already extremely low transparency level of Putin’s henchmen.
13. May 2020 at 19:12
Michael Sandifer said:
“And by the way, we can have a much greater influence on Chinese economic, cultural, and even foreign policy development by selling into that market.”
I suggest that you read H. R. McMaster in the Atlantic at:
https://www.theatlantic.com/magazine/archive/2020/05/mcmaster-china-strategy/609088/
Your comment above is a bit dated I think.
13. May 2020 at 23:01
Bob OBrien,
Thanks for the suggestion, but there was nothing new in that McMaster article and nothing that contradicts what I wrote.
You may not have read comments I’ve made in the past, but I actually think China is a bigger security threat in Asia than Scott seems to think, and I favor much more active cooperation with Japan, India, and other countries to counter their aggression. I think we should consider Japan becoming a nuclear power to help it defend itself as China’s conventional military becomes more difficult to contain over time. We also must do more to counter China’s intervention in the politics of other countries. They helped Duterte get elected in the Philippines, for example. He quickly showed himself to be a Chinese stooge.
My approach is to have the US impose no trading restrictions on China or any other country, except as demanded by national security. Obviously there are military secrets we should protect, but free trade only makes the US stronger.
We should also open our borders to immigration. We should only try to keep out individuals who can be shown to be criminally dangerous. We need a higher population growth rate. Toward that end, we should also adopt policies to increase the domestic birthrate.
I could go on, but my point is that we should always have plenty of carrots in one hand, and a big stick in the other. We should constantly denounce the CCP and Xi, in particular, for human rights abuses, and we should pass some laws that disallow actions by our firms that uniquely, directly facilitate oppressive policies overseas. But, we should also cooperate wherever it makes sense.
We cannot continue down this amazingly stupid path of increased nationalism, because nationalist countries have historically not cooperated well, even when in alliance. Think of the Axis powers, for example. Suicidally selfish, insular, nationalist approaches are an anathema to the kind of alliances we need to counter China as it grows more powerful over time. We have to face the reality that we won’t be able to counter China on our own.
13. May 2020 at 23:17
I should also add that, for those unfamiliar with my views, I’m a neo-realist. I see foreign policy through the lense of balances of power with the goal of affecting those balances in pursuit of national interests and values.
“Neo” means I see a role for international institutions and a growing role for international law, to hopefully continuously, if not consistently, replace the role of militaries in the resolution of international disputes.
What I don’t see Americans and Europeans coming to terms with is the obvious fact that America is going to be eclipsed as a world power and will play a role internationally that increasingly resembles that of Britain regarding continental Europe from the 17th to the 20th century. We will be the most important spoiler, not the central power.
14. May 2020 at 00:51
“Should developed nations rely more on central bank money-printing and less on commercial banks to create money?”
According to R.A. Werner, No?
“Economies that manage to focus credit creation on productive and sustainable use – i.e. not for consumption and asset transactions – are likely to achieve superior economic performance (high nominal GDP growth and comparatively low inflation, without asset price cycles and with financial system stability). As the World Bank (1993) indicated, and others have also found (Patrick, 1962; Wade, 1990; Werner, 2000a, b; Werner, 2003), at the heart of the East Asian economic miracle has been a process of guiding credit towards productive use and suppressing unproductive and unsustainable (hence systemically risky) use of credit. . . .
Werner (1992, 1997, 2005, 2011b), using Japanese data, shows that credit for GDP transactions explains nominal GDP well over several decades, while alternative explanatory variables (including interest rates and money supply) are eliminated in a reduction from a general to the parsimonious specific model.” P23.
https://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf
14. May 2020 at 06:49
Mike, do you agree with the following:
From McMaster:
“Since the heady days of Deng Xiaoping, in the late 1970s, the assumptions that had governed the American approach to our relationship with China were these: After being welcomed into the international political and economic order, China would play by the rules, open its markets, and privatize its economy. As the country became more prosperous, the Chinese government would respect the rights of its people and liberalize politically. But those assumptions were proving to be wrong.”
14. May 2020 at 07:40
Bill OBrien,
I’m agnostic on that conclusion.
Much of the world has trended toward authoritarian nationalism, so I’m not sure China is a unique case.
Either way, I think the interdependence of trading relationships makes escalated conflict more costly, and hence is a welcome moderating influence. It also makes us richer.
If China wants to try to manage trade toward foolish goals such as those McMaster describes, they do so at their expense. We should counter them when it makes sense and make such policies even more expensive.
Instead of withdrawing from the world, I favor containing China and Russia militarily with increased pressure. We should be killing as many Russians in Syria and Ukraine as possible, for example, through proxies, at least. We should be openly condemning China’s human rights abuses and offering stepped-up alternative aid programs in the developing world
14. May 2020 at 09:40
@Scott Sumner
I went back and read https://www.themoneyillusion.com/the-hot-potato-effect-explained/ but I’m still not sure how monetary stimulus deals with the asset poor supply shock victim, let’s say a waiter laid off due to the coronavirus pandemic, in the short run. The Fed pumps potatoes into the banks and the banks pass the potatoes along to their customers. But who gives the potato to the poor waiter who is out of work and has nothing of value to offer in exchange? It seems to me that that waiter has to be reached either through charity or fiscal stimulus. Doesn’t somebody have to offer a potato to him while asking for nothing in exchange? Doesn’t somebody, either a private entity or the government, have to shrink its own potato stash or take out a potato loan to help the waiter?
14. May 2020 at 10:50
Christian, You said:
“your positions change too often and are too conflicting.”
What doesn’t change is your inability to read. That’s why you can NEVER find quotes to back up your claims.
Carl, The point is to stimulate spending so that restaurants wish to rehire waiters, not to give money to waiters (except of course unemployment comp.)
14. May 2020 at 12:50
The CARES act is just a giant unemployment compensation check. Even before CARES most of the fiscal activity of our government was transfer payments and you could argue that transfer payments are just a form of unemployment or underemployment compensation (welfare is for people who can’t find employment, medicare is for people who didn’t make enough from their employment to pay for their own healthcare, social security is for people who didn’t make enough to save for their retirement and so on…).
I guess where I get confused is figuring the point at which these transfer payments switch from being considered ordinary spending to being considered fiscal stimulus spending. Is the CARES package considered ordinary spending because it simply tried to maintain spending levels or is it stimulus spending because it was designed to offset a massive drop in demand?
14. May 2020 at 16:25
Negation of Ideology:
Well, I should not really speak for John Cochrane, a really smart guy who I do not always understand.
As I understood it, in his blog a couple of years back he supported 100% reserves, or equity-only lending. Banks could not “leverage up” to make loans.
Regardless of one’s political persuasions, the system of borrowing short to leverage up and lend long on illiquid assets is inherently fragile. Would getting rid of depositor insurance solve this? I doubt it.
But, perhaps it makes sense of have a system of “postal banks” for ordinary depositors (invested only in US Treasuries), and let everyone else, those who want to, take their chances in banks not insured by the government.
But remember, AIG was the private-sector’s idea of financial insurance, and they insured sophisticated institutional investors against loss on large credit-rated corporate bond issues, and they collapsed in the first zephyr of the Great Recession.
I think in financial circles there will always be the temptation to leverage up to amplify gains. And in the US we do not have debtor’s prisons, or sell people’s family into slavery for unpaid losses. Give me $1 mil, and I will borrow $10 million and make a bet. If I win then it is Fat City. If I lose, then I declare bankruptcy (or, if I was a manager, just move on. See Long-Term Capita Management).
In fact, the whole idea of a corporation shields investors to equity losses only, and encourages leveraging up. Through a corporation, you can borrow 100 times your equity and let it roll.
Moral hazard is for thee, not fo me!
Would you like to go to recourse lending on property?
Interesting questions.
14. May 2020 at 17:55
OT but good news:
Wisconsin Bars Packed After State Supreme Court Lifts Stay-At-Home Orders
Alexandra SternlichtForbes Staff
Business
Updated May 14, 2020, 02:42pm EDT
TOPLINE Wisconsin bars welcomed patrons without masks, social distancing or capacity restrictions on Thursday night immediately after the state Supreme Court overturned the governor’s latest stay-at-home order, leading to busy crowds and warnings from the governor that lack of restrictions could lead to more deaths.
—30—
This is good news and shows that consumers want to get out in the public again. The lockdowns were always dubious, and probably should end.
14. May 2020 at 23:42
” Give me $1 mil, and I will borrow $10 million and make a bet. If I win then it is Fat City. If I lose, then I declare bankruptcy (or, if I was a manager, just move on. See Long-Term Capita Management).”
“Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.
The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.
It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.
Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen.’
https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/
“We conclude that the likeliest assumption concerning the determination of the credit market is that it is supply-determined.” {Following Stiglitz and Weiss: Credit rationing in markets with imperfect information, American Economic Review, vol 71, no 3, pp. 393-410}.
Werner, Richard (2005), ‘New Paradigm in Macroeconomics’, Basingstoke: Palgrave Macmillan P197 ‘
This was pointed out in 1930?
‘”There is normally a fringe of unsatisfied borrowers to whom a bank would be quite ready to lend if it were to find itself in a position to lend more. The existence of this unsatisfied fringe allows the Banking System a means of influencing the rate of investment supplementary to the mere changes in the short-term rate of interest.” Keynes, Treatise on Money, 1930.’
http://home.uchicago.edu/~rmyerson/research/mhazmacro.pdf
17. May 2020 at 13:01
Scott, what quote would you like? Am I your quotemaster?
I give you feedback on your statements. In other words, I tell you what the reader receives. Consider it a service. I try to remain relatively neutral in my approach and I certainly don’t intentionally put things in your mouth that you haven’t said.
As far as I see it, your position so far has been something like this: Yes, there are CCP miscounts, but this is no biggie, because miscounts are everywhere. You then like to use Western states as “evidence”.
From my point of view, this is an extremely propagandistic message, because by arguing like that you deny that the CCP deliberately miscounts (besides the unintentional miscounts that always happen), which is of course a completely different quality.
I sometimes wonder whether you are so propagandistic intentionally or unintentionally (out of ignorance), and what case would be worse — moral corruption or intellectual ignorance?