Thinking out loud

Always dangerous to speculate when the market is changing minute by minute, but a few observations:

1.  Over at Econlog I did a post earlier this morning, suggesting that the China slowdown is reducing the Wicksellian equilibrium global interest rate.  Since central banks foolishly target interest rates rather than NGDP, this makes monetary policy more contractionary.

2.  Why does this seem to affect foreign markets more than the US market?  One possibility that that economies like Germany and Japan are more exposed to a global slowdown, as manufacturing exports are a bigger part of their economies. But that suggests the yen and euro should be falling against the dollar, whereas they are actually appreciating strongly.  Indeed the appreciation is so strong that one could easily attribute much of the recent stock market decline in Europe and Japan to their strengthening currencies.  Now of course I always say “never reason from a price change,” so let me emphasize that I am implicitly assuming the stronger yen and euro reflect tighter money, not surging growth expectations in Europe and Japan.  I don’t think anyone in their right mind believes global growth prospects have been rapidly improving in the last week, especially when you look at commodity and stock prices.

3.  The falling TIPS spreads and real interest rates suggest that AD expectations are falling in the US, but not anywhere near to recession levels.  After all, did anyone expect a recession last time the S&P was at this level?  Obviously not.  The tighter money in Europe and Japan suggests those economies will be hit harder than the US.

4.  If Europe and Japan are facing tighter money than the US, why would that be? Probably because markets think it would be easier for the Fed to at least partially offset this shock, via a delay in the interest rate increase.  Areas already at the zero bound would have to be more creative, and history has shown that central banks tend to be slower to react at the zero bound, especially when there are sudden and unanticipated shocks like this.  (It’s easier to offset anticipated shocks, like 2013’s fiscal austerity.)

This is all very speculative, and I don’t have a lot of confidence on my analysis. And as always, I don’t forecast asset prices, I merely try to ascertain what the market is forecasting.  Unfortunately the Hypermind market is still not very efficient.  It opened this morning at 3.6%, which was actually up slightly in the past few days.  I don’t think that reflects actual NGDP expectations.  Last I looked it was down to 3.4%, but of course efficient markets respond immediately to shocks.  This tells me that while the market is a nice demonstration project, there is no substitute for a very deep and liquid NGDP prediction market subsidized by Uncle Sam.  If it’s not the biggest $100 bill on the sidewalk, it’s right up there.

One other point.  I’m much more concerned by falling TIPS spreads and falling 30-year bond yields, than I am by falling equity prices.  Stocks often show large price breaks, without there being any change in the business cycle.

PS.  I agree with Lars Christensen’s analysis (except the part about China not becoming the biggest economy.  We face this problem because they already are the biggest.)  I think Lars is right about the two key mistakes being the Chinese yuan/dollar peg and Yellen’s tight money policy.



44 Responses to “Thinking out loud”

  1. Gravatar of Liberal Roman Liberal Roman
    24. August 2015 at 11:20

    Is it too late to want a do over on putting Yellen in over Summers? Summers is out there warning how dangerous a rate hike would be now. On the other side, we hear crickets from the Fed. Pretty sure a Summers Fed would have leaked something by now saying no rate increases planned for at least the rest of this year.

    Another thing I find interesting is pop-econ pundits like Suzy Orman and Jim Cramer are getting the problem the Fed is causing much more than the “serious” financial pundits commenting from the trading pits. Here is financial manager Barry Ritholz ridiculing Suzy Orman’s tweets in which she pleads for Yellen to come out and commit to no rate hikes:

  2. Gravatar of Charlie Jamieson Charlie Jamieson
    24. August 2015 at 11:34

    Key drivers, imo — falling oil prices (reflect the higher possibility of a recession), Chinese confusion (maybe the wizards over there don’t know what they’re doing, normal market fatigue after five years of gains, group think trading strategies, the realization that a rate hike of .25 or no hike are equally meaningless.

  3. Gravatar of Kenneth Duda Kenneth Duda
    24. August 2015 at 11:38

    Scott, I see USD appreciation as a sign that markets understand both (1) that further monetary loosening is needed to restore AD, and (2) that the Fed is more likely to do this than ECB or BOJ.

    It really looks like inflation targeting through interest rate targeting is a dead idea. How many more years do we need to spend at or near the ZLB until enough people will figure this out to get monetary policymakers to move to something that works in low-inflation-low-interest-rate environments, like NGDPLT?


  4. Gravatar of ssumner ssumner
    24. August 2015 at 11:53

    Agree with all the comments here.

    Ken, your comment at Econlog was quite similar to my reaction–this really exposes flaws in the current policy regime.

    On the other hand it’s too soon to make any judgements about the macroeconomic impact, we need to see where markets go over the next few weeks. My hunch is that the US will avoid recession, as we did in 1998. But I feel increasingly confident about my low rates as far as the eye can see forecast.

  5. Gravatar of Chuck Chuck
    24. August 2015 at 12:18

    Why is the Fed paying interest on reserves? To incentivize banks to hold onto their reserves and also perhaps to give them guaranteed profits to recapitalize their balance sheets.

    The Fed created huge amounts of new base money, but does not want that money to circulate. If it did, they would end interest on reserves or even start charging a fee (negative interest).

    I think the Fed is waiting for growth to “catch up” to the reserves. In their view, allowing the reserves to circulate would expand the money supply beyond what the economy is demanding. In Sumner’s view, the tight money is exactly what is restricting growth.

    It seems the Fed has a “real business cycle” view and thinks money supply growth would simply lead to excess inflation.

  6. Gravatar of TomP TomP
    24. August 2015 at 12:50

    Does the dollar-yuan peg ever cause conditions in China to affect the US? If real economic growth is deflationary and the currencies are pegged that would mean real growth in China has had a tightening impact on monetary conditions in the US (assuming no offset from the Fed of course). So if China were to end the US dollar peg and let the yuan free float it would somewhat loosen monetary conditions in the US. This wouldn’t matter in a world where the Fed targeted NGDP, but in the current world where the Fed is unlikely to loosen could it have an impact?

  7. Gravatar of Steve Steve
    24. August 2015 at 13:31

    The EUR and JPY are both funding currencies, so when people undergo forced deleveraging the investment assets (e.g., USD) get sold and the funding currency (EUR, JPY) get bought. This was margin calls. There was probably a tad bit of lessened US growth expectations on top, too.

    Also, regarding TIPs, there is a serious game of brinkmanship going on in oil right now, which will inevitably spill into TIPs. Iran said today it will “raise production AT ANY COST”, which is negative for TIPs breakevens. Meanwhile Saudi feels that its old security arrangements were betrayed and is no longer willing to play a stabilizing role for global markets. Instead Saudi is accelerating production figuring that he who hath the biggest currency reserves can win a bankrupting war of attrition forcing other countries to accept Saudi security demands.

  8. Gravatar of jaap de Vries jaap de Vries
    24. August 2015 at 14:45

    Implied probabilities for a rate (in sep and dec) hike have fallen rapidly over the last week. In these times it is indeed hard to judge. Swinging the pendulum to a new equilibrium takes some time.

    As Steve mentions, there are some short term mismatches between supply and demand. Look at the Eurostoxx, where everybody was levered at the 3000 level. Just quick reactions to market inefficiencies.

  9. Gravatar of benjamin cole benjamin cole
    24. August 2015 at 16:18

    Excellent blogging, but I am not sure about the reference to Japan and tight money. The Bank of Japan has been pursuing QE, and the yen has gone from about 80 to the dollar to 120 in recent years.

    Certainly the interest rate targeting or inflation targeting regimes of central banks are poor strategies. But the MM community has not been clear about how to pursue NGDPLT in present environment.

    I find there is still a squeamish prissiness about advocating QE, or saying that moderate inflation is just something that likely coincides with prosperity.

    Say it out loud: Gun the money presses and pass the ammo.

  10. Gravatar of dtoh dtoh
    24. August 2015 at 16:36

    @Scott – I think your analysis is mostly right, but if you understand and stick to fundamentals, it’s even simpler.

    1. At any point in time, after tax real risk adjusted returns are the same for ALL assets. It’s convenient to think of this as the “price” or “real price” of financial assets.

    2. A negative supply shock is caused when there is a marginal reduction in the exchange (by the non-banking sector) of financial assets for real goods and services.

    3. A change in the amount of financial assets exchanged for goods and services is caused by either a) change in the price of financial assets relative to goods and services, and/or b) a change in NGDP expectations.

    So here’s what’s happening.

    4. The market is expecting lower NGDP.

    5. Lower NGDP results in a reduction in the exchange of financial assets for goods and services, i.e. (less supply of assets) resulting in higher asset prices. Higher bond prices (lower yields) reflect those expectations.

    6. Nominal equity prices have fallen. However if we return to the definition of “asset prices” in 1), we know real equity prices have not changed with respect to bond prices. In fact, since we know that bond prices have risen, we know that the “real price” of equities has also risen. The “nominal” price drop simply reflects an expectation of lower corporate profits.

    7. Higher U.S. assets prices relative to foreign asset prices results in a marginal decrease in the exchange of foreign assets for U.S. assets (or an increased exchange of U.S. assets for foreign assets.) That change results in a change in the foreign exchange rate (i.e. a weaker dollar.)

    * An “exchange of financial assets” by the non-banking sector broadly includes sales of securities out of portfolio, increased credit card, balances, draw down of a working capital line of credits, new car loans, commercial paper issuance, etc., etc.

  11. Gravatar of Matt McOsker Matt McOsker
    24. August 2015 at 18:04

    Chuck, read this:

    Banks are not reserve constrained.

  12. Gravatar of ssumner ssumner
    24. August 2015 at 18:37

    Chuck, Good questions. And ignore Matt’s suggestion. Whenever someone says “banks don’t lend out reserves” you should immediately stop reading. That’s one of those statements that does not even rise to the level of being wrong. As Paul Krugman keeps saying “it’s a simultaneous system.”

    TomP, I’d put it this way. The peg causes conditions in China. And conditions in China cause conditions in the US, because the Fed targets interest rates.

    Steve, The US dollar rose sharply between July and December 2008.

    Ben, I agree that money has gotten easier in recent years in Japan, but it’s also true that it’s gotten significantly tighter in recent days.

    dtoh, Real equity prices have risen? That’s a strange way to define “real”.

  13. Gravatar of Kevin Erdmann Kevin Erdmann
    24. August 2015 at 20:32

    Chuck, I don’t think ior is a subsidy to banks. Banks pay interest on deposits. The level of interest reflects the given competitive landscape. If ior raises bank revenues, won’t deposit interest rates rise roughly in parity to bring profits back down to the competitive level? I suppose there could be a zero lower bound issue on deposits that prevents banks from lowering interest on deposits to the market clearing price.
    But, to the extent that ior raises deposit rates isn’t it mostly a transfer from the treasury to depositors? And if it does go to bank profits, isn’t it solving a disequilibrium caused by the ZLB and creating a transfer from the treasury to the banks that is reasonable? I mean, banks are locked into a relationship with the Fed where it is the Fed’s job to prevent that sort of disequilibrium from happening. Right?

  14. Gravatar of Kenneth Duda Kenneth Duda
    24. August 2015 at 21:30

    LOL Kevin. I wish more people were able to think about markets the way you do.

    Thanks, Scott. I sure hope we don’t actually fall into another AD hole.

    Why can’t more people see that Fed policy is just broken? While I can see room for debate as to what the fix should be, I am shocked by the lack of calls to do *something* on the monetary side. It’s so annoying that the Keynesians see the ZLB as an excuse to finally fund all of their favorite progressive projects, rather than seeing it as a bug in monetary policy that can be easily fixed. And then, just when you thought the Keynesians couldn’t be any more wrong, the Austrians show you just how much wronger you can get. And then the neo-fisherians! Sure, raise the interest rate target, suck the money out of the economy to force up short-term rates, and magically inflation will just increase too, because, you know, with less money floating around, there will be much more spending because …

    So much craziness.


  15. Gravatar of Chuck Chuck
    24. August 2015 at 21:41

    Kevin, yes I suppose IOR is no more a source of profit than the Fed Funds Rate is.

    Okay, here’s the official explanation for interest on reserves:

    They want to be able to set the Fed Funds Rate without withdrawing/adding reserves.

  16. Gravatar of dtoh dtoh
    24. August 2015 at 21:43

    If I tell you one Treasury note is is trading a 103 and another of the same maturity is trading at 98, does that tell you which one is the better buy.

    No or course not, which is why you need a standardize metric to measure “real price”…. so real risk adjusted annualized expected irr or 1/(1-IRR) if that’s easier for you to follow.

    Same reasons yield is used as the measure for prices for fixed income, volatility for options, etc. If you don’t get this market movements don’t make any sense. If you get it, they are trivial to understand.

  17. Gravatar of dtoh dtoh
    24. August 2015 at 22:11

    Or… if you don’t get the concept of using a standardized measure of “real price,” just stop using the word price in the context of financial assets, because the way you use it is meaningless and irrelevant. From henceforward you should only refer to “real expected risk adjusted returns.”

  18. Gravatar of Steve Steve
    25. August 2015 at 04:42

    “Steve, The US dollar rose sharply between July and December 2008”

    In 2008, the US was the weak sister. ROW was ‘decoupling’ to the upside. (At least that’s what they said). Deleveraging meant selling everything and buying USD.

    Today, EUR is a funding currency. USA is ‘decoupling’ to the upside (Again, their view, not mine). Deleveraging means selling assets and buying EUR.

    Yesterday’s AM market crash was the result of broken exchange structure. Fragmentation, with lack of price communication, and conflicts of interest in order routing rules.

    It’s criminal how bad it is, but the financial media won’t report on it because 1) they don’t want to upset broker advertisers 2) it’s esoteric 3) they don’t want to upset broker advertisers. Did I mention conflicts of interest?

    The exchanges all want to use circuit breakers, but circuit breakers don’t help when most market participants are kept in the dark regarding what the prices are; all circuit breakers do is keep the theft down to levels where it stays off the front pages. Did I mention conflicts of interest?

    As someone (Vivian?) said yesterday, before applying EMH, make sure you are actually dealing with a market. Yesterday morning was not a market.

  19. Gravatar of ssumner ssumner
    25. August 2015 at 05:34

    Kevin, In my view the real problem with IOR is not that it subsidizes banks (you are right that that claim is debatable) but rather that it’s a contractionary monetary policy.

    Ken, I think that people find it really hard to discard the intellectual framework they’ve used for monetary policy their entire lives. I’m heartened by all the emails I get from young grad students, asking what they should focus on. They still have open minds.

    dtoh, In that case it probably makes more sense to talk about rate of returns. The term ‘real’ is used by economists in a very different way, corrected for price level changes.

    Steve, I’m not convinced that yesterday morning was not a market. Was I free to buy or sell stock at 10am? If not I agree with you. If I was, then it was a market in my view. Whether it’s an efficient market is quite another thing. Perhaps at 10am we had an inefficient market.

    My sense is that when macro shocks move various markets for macro reasons, the finance community develops its own folk wisdom on what’s going on using the language of finance. I don’t know enough finance to know if any of that folk wisdom is useful.

    You have provided two examples of where the currency of the weaker economy appreciates. I could add two more, Argentina 2000 and the US 1931. But historically it’s usually the opposite. I think I have a good macro explanation for all four exceptions.

  20. Gravatar of Tom Brown Tom Brown
    25. August 2015 at 07:04

    Scott, is the tight money problem being caused by anchor babies from Mexico or China? Who should Obama stop talking to to fix this?

  21. Gravatar of Tom Brown Tom Brown
    25. August 2015 at 07:10

    … or is it going to take repealing amendments? [Sigh]… OK, how many amendments do we need to repeal approximately? Does it matter which ones? Can we just go through them in order to make it easier to keep track of?

  22. Gravatar of Steve Steve
    25. August 2015 at 09:33

    “I’m not convinced that yesterday morning was not a market. Was I free to buy or sell stock at 10am?”

    Do you have a brokerage account? Many people had buy limit orders, watched the price plunge below the limit, but never got filled on the order.

    So, if you were retail, you were free to sell, but you were NOT free to buy. Common problem yesterday.

  23. Gravatar of Ed Ed
    25. August 2015 at 09:46

    ‘Tight money’ in Europe? Come on, Scott. You say this while the ECB is pursuing a massive QE programme. I generally agree with your analysis, but I feel you’re losing touch with what ‘tight’ money is. It seems that everything bad is just due to ‘tight’ money now under MM models.

  24. Gravatar of ssumner ssumner
    25. August 2015 at 09:55

    Steve, Thanks for that info.

    Ed, You say you generally agree with my analysis. I appreciate that. But my analysis is “generally” that INTEREST RATES AND QE ARE UTTERLY AND TOTALLY MEANINGLESS AS INDICATORS OF THE STANCE OF MONETARY POLICY.

    Do you still generally agree with my analysis? And if so, why do you disagree that ECB policy has gotten a bit tighter over the past few days?

    Both regions have policies that are tight relative to the stance that would be necessary to hit their target. That’s my criterion.

  25. Gravatar of Vivian Darkbloom Vivian Darkbloom
    25. August 2015 at 09:56


    Your point on trading restrictions, etc., is valid; but, I think my problem is even more fundamental. As noted in Vox, there is a pretty impressive correlation between the Chinese market surge and the change in margin rules. Sure, it’s just correlation, but does anyone doubt these sorts of things don’t drive equity prices up from their prior levels? But, does that sort of change in law or policy affecting, in this case, stock prices, tell us anything, really, about the market’s (“efficient”) views of the future path of the economy? I think that one needs to often think deeper about what is driving market reactions, particularly in the short run. Did the estimate of future corporate profits suddenly increase as a result of such a change? Not all “markets” are equal in this respect and the Chinese market seems less equal than many others given the degree of government involvement and intervention. As Russ Roberts says, sometimes it’s very often “other stuff”. Wise words, indeed. Lot’s to ponder here regarding QE, etc., I think.

  26. Gravatar of ssumner ssumner
    25. August 2015 at 09:57

    Tom, Repeal them all, and start over? 🙂

  27. Gravatar of Steve Steve
    25. August 2015 at 10:12

    “correlation between the Chinese market surge and the change in margin rules.”

    Vivian, that’s a legit point.

    I have made the same argument with cap gains tax; many people are reluctant to incur a tax bill on a stock that is rising. Instead, they prefer to wait for a “top” and then book the gain. The retort is that prices are set at the margin, but in practice I have not seen an arbitrageur with a large enough capital base to smooth out the tax collection of Uncle Sam.

    That said I believe EMH is quite a useful tool, but there are distortions if you look closely enough.

  28. Gravatar of Charlie Jamieson Charlie Jamieson
    25. August 2015 at 10:24

    Matt, thanks for posting that link.
    That idea is slowly gaining traction.
    Chuck, it sounds as if you want banks to ‘lend out’ there reserves. The questions are: a) how can they do that, and b) would that be helpful.
    The answers as I see them:
    a) reduce interest rates even further and relax their lending standards, bearing in mind this is a business risk for them and would require explicit Fed backstopping, such as the Fed promising to buy bad debt.
    b) more lending would stimulate the real economy, although the bang for the buck has been reduced in recent years, as more lending goes for financial assets and less for consumption and investments. More lending could lead to financial asset booms and busts, as we saw in the MBS boondoggle, which required Fed intervention.
    I think the ben cole’s idea of ‘turning on the printing presses’ is an interesting one, but we have to figure out a way around the reality that you turn on the printing press by increasing lending, so a) how do you get those loans to the right people and b) who backs those loans. Or do we find another way to helicopter money to people without creating loans. In our current system, we can’t do that.

  29. Gravatar of Ed Ed
    25. August 2015 at 10:42

    So WHAT does indicate the stance of monetary policy? If an historic expansion of the money supply is ‘tight’, then I don’t know what is.
    As for my agreement with your analysis, I agree with the concept of NGDPFT and the your version of QTM, with inflation defined as the difference in the changes of the money supply and money demand. But as for the 2008 Recession, I’m not sure I agree with you. You have to agree that money in the economy in the run-up to the crash was generally very loose – lending requirements were very low, with subprime lending, over-zealous mortgage brokers, etc.

  30. Gravatar of Ed Ed
    25. August 2015 at 10:45

    Furthermore, I’m getting slightly confused about your view of interest rates. You just said that interest rates are meaningless monetary policy stance indicators. But in discussion to Fed funds rate hikes, you say the Fed is ‘tightening policy’. You also attribute a lot of the Eurozone crisis to ECB monetary ‘tightness’, as seen by consistent interest rate hikes. So are interest rates indicators of monetary policy stance or not?

  31. Gravatar of Sean Sean
    25. August 2015 at 11:22

    Daily moves represent margin calls. Short yen short euro, long stocks were popular trades. I’d never consider a massive one day move as a market prediction. Sometimes they are fundamentals sometimes they are just positioning.

  32. Gravatar of ssumner ssumner
    25. August 2015 at 12:54

    Ed, Your first comment confuses money and credit, they are totally unrelated. The recession was not caused by easy credit, it was caused by tight money. As to the second, I have always said interest rates are a lousy indicator of the stance of money policy. But it’s also the case that many central banks use the interbank rate as a target, and a way of signaling their intention to ease or tighten monetary policy.

    I have no idea what NGDPFT is.

  33. Gravatar of Ed Ed
    25. August 2015 at 13:36

    Easy credit certainly played a role, though, which you must admit. Subprime loans (lent during the boom of easy credit) were defaulted, meaning that assets were wiped off banks’ balance sheets. They called in loans to finance short-term liabilities, there was a collapse in lending and credit seized. This caused a massive decrease in investment and aggregate demand and NGDP that contributed to the recession.
    What’s wrong with that argument?
    BTW, it means NGDP futures targeting.
    And can you please provide a rigid definition of tight money. I genuinely am puzzled by MM perception of monetary tightness.

  34. Gravatar of Ed Ed
    25. August 2015 at 13:48

    And you still didn’t address the issue of QE. Whilst it’s obvious that interest rates are not a good indicator of policy stance, it seems pretty obvious to me that QE is. A massive increase in the money supply is the embodiment of expansionary policy.

  35. Gravatar of ssumner ssumner
    26. August 2015 at 05:30

    Ed, Tight money is a policy stance producing lower than target expected NGDP growth, and easy money is a policy stance producing higher than target NGDP growth.

    The monetary base rose sharply in the 1930s—are you arguing that was easy money too?

  36. Gravatar of Ed Ed
    26. August 2015 at 06:42

    So that’s the definition – lower than target NGDP growth. But what if a contraction in NGDP to sub-target levels has absolutely nothing to do with monetary policy? Imagine that the government declares immediate conscription for all men and women aged 21-60. NGDP would obviously fall because the labour force would shrink uncontrollably. But this NGDP contraction patently has nothing to do with money. Would you attribute that example to monetary tightness?

    In the run-up to the crash, money was extremely tight. That was the whole point of Friedman and Schwartz – bad monetary policy caused the money supply to collapse, triggering the Depression. During the period when the base grew sharply, NGDP was increasingly sharply too. So wasn’t this easy money?

  37. Gravatar of dtoh dtoh
    26. August 2015 at 07:01

    I think you might more accurately say that recessions are caused by sticky wages and prices and a failure of monetary policy to adjust to that stickiness. Or at least you would say, that if wages and prices were not sticky then in general we would not have recessions. You might even go one step further and say that if wage and prices were not sticky relative to asset prices, then we would not have recessions.

  38. Gravatar of ssumner ssumner
    27. August 2015 at 06:13

    Ed, Elsewhere I’ve argued that the government might want to target NGDP/person, or per labor force member. But your basic mistake is to confuse real and nominal GDP. NGDP can rise fast when employment and output are plunging. Remember Zimbabwe?

    I’m afraid you are completely wrong about the base prior to and after the crash. Time to reread Friedman and Schwartz? It was flat in the 1920s, fell in the first year after the crash and then rose sharply. No, NGDP did not track the base.

    dtoh, No, the problem is not stickiness relative to asset prices, it’s wage stickiness relative to NGDP. We’d have the same problem in an economy with no assets, but sticky wages and NGDP shocks.

  39. Gravatar of Ed Ed
    27. August 2015 at 09:53

    You obviously didn’t understand my point. What if NGDP decreases with no change in monetary policy, with central bank policy completely fixed. If NGDP decreases to below target levels (due to some kind of shock, maybe a sharp increase in consumption and income taxes), then you would pin this on tight money by your definition. But as I’ve just established, monetary policy did not change – so your definition of tight money just doesn’t make sense.

    And as for the Great Contraction… Just look at the data. Maybe the base may have stagnated, but I used my words carefully – ‘money supply’. From 1929 onwards M2 decreased sharply. And, by the way, NGNP did track the base very closely from 1934 onwards. Click on the link and look at the second graph, and note the quote underneath: ‘Again we see that nominal GNP closely tracks the surge in the monetary base’.

  40. Gravatar of Ed Ed
    27. August 2015 at 09:55

    And in my example of the conscription, both inflation and RGDP would decrease, with less demand-pull inflation etc.. And contrary to your reference to Zimbabwe, there wouldn’t suddenly be hyperinflation.

  41. Gravatar of Ed Ed
    27. August 2015 at 09:57

    And when did I ever dispute the path of the monetary base? I don’t really understand why you had to clarify that for me.

    What you were disputing is what happened to nominal income, which did (contrary to your assertion) increase with the base.

  42. Gravatar of ssumner ssumner
    27. August 2015 at 10:09

    Ed, Conscription is a supply shock not a demand shock. You are confusing the two. It would raise the price level.

    You first claim that monetary policy is changes in the base, then claim it’s changes in M2. It’s neither.

    Between 1929 and 1933 NGDP fell in half, and the base rose sharply. Are you going to call that “easy money?”

  43. Gravatar of Ed Ed
    27. August 2015 at 10:22

    it would be both, actually, because people would be in the army and so not be spending money on consumer goods. Monetary policy affects the money supply – it can affect some measures of the money supply more than others, because they have different constituents.

    Come on – monetary policy is ‘neither’ changes in the base or M2? So when the central bank increases its printing rate by 200% to increase the currency stock and the money supply that’s not ‘monetary policy’. Okay, Scott, okay…

    But when the asset purchase programme by FDR picked up from 1934 onwards, and NGDP increased quickly, under your definition that would be easy, because NGDP increased sharply. And according to the graph, the monetary base did not rise sharply from 1929 to 1933.

  44. Gravatar of Francois Oustry Francois Oustry
    28. August 2015 at 01:07

    @scott & @steve

    1) Anticipations of a dovish #Fed vs contractionary #Ecb: waiting is easier than acting – this creates probably an asymmetry for EURUSD in a stressed regime

    2) EURUSD is now a hedge for equity: EURUSD/SP500 correlation continue to go further in negative territories where as flows of unwinding of euro-funded carry trades have decreased see the picture here

    Could these two facts be related?

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