Welcome to Woolsey world

Back in 2009, Bill Woolsey suggested that central banks target NGDP growth at 3%. Over the previous few decades, NGDP growth had averaged 5% in the US and closer to zero in Japan (at least since 1993.)  There was no reason to think that Woolsey’s suggestion would be taken seriously.  But now Woolsey may get his way.

The Economist reports that NGDP in Japan has risen by 3.1% over the past year.  What makes this especially impressive is that the growth rate of the working age population in Japan suddenly plunged sharply right as Abe was elected.  I.e., he faced “headwinds”. If Abe had continued the monetary policy regime of the previous few decades, NGDP growth would have fallen to negative 1%.  Matt Yglesias has a great post on Japan–pay particular attention to the working age population graph (falling fast), and the labor force participation rate graph (rising fast).

Meanwhile in the US, trend NGDP growth is falling close to 3%.  The Hypermind market predicts 3.2%, but that’s during an expansion year with falling unemployment. When the dust settles, I expect Europe to also average about 3%, or perhaps a bit lower.  And I think it’s likely that Japan will slip back below 3%.  Australia and Canada will be a bit above 3%.  These are the sorts of trend growth rates we saw under the gold standard, but in those days it was all real GDP growth. Now it’s mostly inflation.

So three percent is the new normal for NGDP growth, and also for 30-year bond yields in the US.  You might say, “5% is so 20th century.”

PS.  Of course that’s the developed world.  In the India/Indonesia/China triangle, where most people live, 6% real GDP growth is the new normal, while NGDP growth depends on inflation.

PPS.  Good to see the Peronists lose in Argentina—one down, two to go (i.e. Brazil and Venezuela.)

PPPS. I wrote this before the Venezuelan elections; it seems the socialists are on the way out there as well. As Vox recently pointed out, a country with Saudi-type oil reserves can’t provide its citizens with toilet paper.  Poverty levels are skyrocketing.  I hope the Brazilians don’t impeach their President; change should occur through elections.  Still it’s good to see Latin America moving away from the views of people like Jeremy Corbyn.



38 Responses to “Welcome to Woolsey world”

  1. Gravatar of marcus nunes marcus nunes
    11. December 2015 at 09:12

    Scott, the Woolsey world, at present NGDP levels, is just the Great Stagnation/New Normal world. In a few years time, when the “New” prefix is dropped, it will become, once again a “Great Moderation”!

  2. Gravatar of Gary Anderson Gary Anderson
    11. December 2015 at 09:24

    Scott, besides rooting for Argentina over Paul Singer I have a question. How will this collateral shortage in the derivatives markets impact the NGDP in the future or will it have any effect? I posted this on a public forum:

    There are many OTC swaps that are not subject to collateral requirements. That was caused by the watering down of Dodd-Frank. But many interest rate swaps require collateral:

    “As the largest OTC derivatives market in the world, the US is further down the path in implementing the G-20 recommendations than any other jurisdiction. Under the auspices of the Dodd Frank Act, 2013 saw the introduction of reporting requirements, central clearing (in three tranches) and the launch of new trading platforms – swap execution facilities (SEFs) – use of which for certain highly liquid swaps became mandatory in Q1 2014. Europe is slightly more than a year behind. In February, reporting requirements came into force for virtually all market participants (in the US, only brokers have reporting obligations) while clearing is expected to start by the end of this year or early next. The requirement to trade on new platforms – organised trading facilities (OTFs) – is scheduled to kick in by 2016.”

    “Centrally clearing swaps reduces counterparty risk and is a step towards the development of standardised swaps contracts, but the migration to the new environment, and especially the different pace of reform across jurisdictions, can have negative implications for liquidity. “There has been some regional liquidity fragmentation due to a bifurcation of cleared and bilateral swaps and a grouping of participants as US person and non-US person, as region-based rules are applied to the global OTC derivatives market. SEF trading will further fragment liquidity by distributing it across multiple platforms. We have prepared for this and will continue to enhance our ability to aggregate this fragmented liquidity,” explains VedBrat. One of the challenges that US investment managers are facing up to is whether to connect directly to all the new SEFs – there are almost 20 at present – or use some kind of liquidity aggregation capability, either from a broker or a third party. Even if aggregation tools are used, the changes required to investment managers’ processes and technology should not be under-estimated.”


    *******************Here is where it gets interesting Iwog. I don’t know if collateral is based on margin, seems like it is. But as I said before, bonds are in massive demand because collateral SHORTAGES are expected.


    “Concerns over a possible collateral shortage have been rising across the financial markets for most of the last five years. Over the past 18 months or so these concerns have been kicked down the road by the combined actions of the European Central Bank, the Bank of England and the Federal Reserve. Ongoing injections of cash into the financial markets in support of macro-economic objectives have meant market participants have not yet faced the expected squeeze from post-crash regulation, specifically Basel III and OTC derivatives reform.

    But sooner or later the tap will be turned off by the central bankers and the increased cost and lower availability of funding will raise familiar questions. Basel III hikes demand for high-quality, liquid securities via the introduction of the liquidity coverage ratio and the net stable funding ratio as well as the levying of new credit valuation adjustment risk capital charge against counterparty credit risks. This charge is widely considered to be so onerous as to drive market participants to centrally clear OTC derivatives rather than trade them bilaterally, thereby contributing to the increasing demand for collateral considered eligible for margin payments by central counterparties.

    All this coincides with the migration of OTC derivatives to central clearing in both US and Europe, making calls on collateral to support margin payments by investment managers and other derivatives users to clearing houses that much more urgent.”

    That is why I wrote this, Iwog:


  3. Gravatar of Gary Anderson Gary Anderson
    11. December 2015 at 09:26

    Sorry, here was the original article I quoted: https://www.sibos.com/media/news/are-you-ready-collateral-crunch

  4. Gravatar of Don Don
    11. December 2015 at 10:57

    Arrg. 3% NGDP is disappointing. That means they are giving up on hitting 2% inflation. And speaking of bad Fed, did everyone see that Bernanke gave the Fed a letter grade? He seems generous!

    DUBNER: Alright, so if you’re going to give yourself a letter grade for before and after [fall 2007], what are your letter grades?

    BERNANKE: C- and A-, something like that. But I don’t — it’s really not up to me. I think that, you know, others have to make those judgments. In the end, we did stabilize the system and the economy has recovered. And the U.S. recovery, while not everything we would like, has been pretty good compared to other industrial countries.

  5. Gravatar of ssumner ssumner
    11. December 2015 at 11:02

    Marcus, Yes, I think the Great Moderation may be back, but it’s too soon to tell at this point. In 10 years we’ll have a much better idea.

    Gary, Just go away.

    Don, I’d reverse those grades, at least vis-a-vis monetary policy

  6. Gravatar of Matt McOsker Matt McOsker
    11. December 2015 at 13:07

    Why can’t the target be 5%? Why just pick 3%?

  7. Gravatar of James Alexander James Alexander
    11. December 2015 at 13:56

    Factually, 3% is clearly too low to prevent the rise of some very nasty populist parties of right and/or left. It just can’t be the right number. Economies need more intra-company, intra region, intra-sector relative real price flexibility to grow.

    But, in the here now, if it really is 3% then why oh why is the Fed about to raise rates?

  8. Gravatar of Gary Anderson Gary Anderson
    11. December 2015 at 14:43

    There was nothing wrong with that question above. But I will go away and write about you. 🙂

  9. Gravatar of TravisV TravisV
    11. December 2015 at 14:44

    China’s Central Bank Signals Intention to Loosen Yuan’s Peg to Dollar


  10. Gravatar of marcus nunes marcus nunes
    11. December 2015 at 16:43

    Scott, I believe thge economy is already stuck in a “poor man´s great moderation”. For now it´s called GS/NN. In a few years those monikers will be forgotten:

  11. Gravatar of TravisV TravisV
    11. December 2015 at 17:48

    New paper by Robert Hetzel (via Josh Hendrickson):


  12. Gravatar of Benjamin Cole Benjamin Cole
    11. December 2015 at 18:23

    I agree with Scott Alexander, that in the real world 3% in NGDP growth translates into economic stagnation. If you suffocate capitalism, do not be surprised if voters choose socialism.

    It is appalling to consider central bankers rhapsodizing about 0% inflation, while suffocating economic opportunity for millions of their fellow citizens.

  13. Gravatar of Ray Lopez Ray Lopez
    11. December 2015 at 18:53

    As MF might say, why pick 3% or 5%? Be bold, go for 10%, even 15%. LOL.

    Sumner: ” Matt Yglesias has a great post on Japan–pay particular attention to the working age population graph (falling fast), and the labor force participation rate graph (rising fast).” – and why is old people working even more hours than workaholic Japan already works is a good thing?

    Sumner: “PPS. Good to see the Peronists lose in Argentina—one down, two to go (i.e. Brazil and Venezuela.)” – assuming Brazil is a democracy (Venezuela is more difficult to say), why should we Gringos care about what people elect to do in their country? White man’s burden?

  14. Gravatar of Don Geddis Don Geddis
    11. December 2015 at 19:11

    @Ray Lopez: “As MF might say, why pick 3% or 5%? Be bold, go for 10%, even 15%.

    If only there were some blog with thousands of posts on Market Monetarist theory, where you might be able to learn something about the pros and cons of different target choices.

    Oh well. I’m sure you tried your best to research and answer your own question.

  15. Gravatar of Andrew_M_Garland Andrew_M_Garland
    11. December 2015 at 19:27

    Supposedly, directed inflation of 2-3% will cause people to buy more stuff before their cash loses value, creating multiples of GDP increase.

    One reaction would be to buy corporate stock at up to 30% above its economic value, to avoid the yearly real inflation. The stock price could be even more if the stock is expected to increase in price along with net inflation.

    I don’t see how that improves real output.

    Or, people are to be encouraged to consume more and buy more non-investment assets, such as nicer cars and houses. They would be encouraged to lower their savings in favor or tangible, current enjoyments.

    That might temporarily increase GDP. But, would it do so over 5 or 10 years? Plus, how does anyone know that people have too much savings, so that we know they will be better off spending down those savings?

    In short, is NGDP targeting just a fancy way to nudge people to go against their natural feelings, in order to increase an abstract accounting measure called GDP?

  16. Gravatar of Scott Sumner Scott Sumner
    11. December 2015 at 19:57

    Matt, It can be 5%, or 15%, whatever they choose. I’d recommend about 3% or 4% per capita, if they do level targeting, a bit more with growth rate targeting.

    Travis, Thanks, the Hetzel paper looks great. I’ll take a look.

    Ben, You mean James.

    Ray, Why should we gringos care about what you say? Seriously. Why should we care? Does that answer your question?

    Andrew, If I knew what you are talking about I could answer your question. As stated it seems to have no bearing on anything being discussed over here. Saving? Consumption? What does that have to do with this post? Do you think I’m trying to tell people what to do with their money?

  17. Gravatar of Postkey Postkey
    12. December 2015 at 02:18

    Corbyn is not ‘all bad’?

    “But Corbyn’s notion of a “People’s QE” does fulfil a useful purpose, of alerting the commentariat to the role of certain financial structures and institutions in maintaining long-run economic success. ”

  18. Gravatar of Mattias Mattias
    12. December 2015 at 02:35

    Maybe we have the inflation rates the central banks really want. Whenever there’s a threat of deflation they take action, and when the risks fade they pull back.

    With low inflation the central banks don’t suffer any losses on their QE bonds, the states can service their (high) debt at a low cost, and the economy moves along at a steady and slow pace with relatively low unemployment. They’re simply being risk averse, as I see it. Things could be a lot worse.

  19. Gravatar of Bill Woolsey Bill Woolsey
    12. December 2015 at 05:25

    I would rather that the Fed stop confusing the issue by claiming they want 2% inflation to go with their 3% nominal GDP growth.

  20. Gravatar of James Alexander James Alexander
    12. December 2015 at 09:10

    Your post on PK and the events of August/September 2008 showed things move really quickly. As Ben Cole and others ask, how quickly are things moving (down) right now? And what is the Fed doing? Is it again ignoring the obvious market signals? Rates, fx, credit markets?

  21. Gravatar of TravisV TravisV
    12. December 2015 at 09:12

    I can’t link to Arnold Kling’s blog in this comment section. However, he’s halfway through the Midas Paradox and he’s provided a quick take on it.

  22. Gravatar of marcus nunes marcus nunes
    12. December 2015 at 09:53

    The Fed does not feel they have been “spit in the face”!

  23. Gravatar of collin collin
    12. December 2015 at 12:28

    The best part of Corbyn is his non-interference foreign policy. It is unfortunate that Great Britain has the global coalition to keep the Syrian Civil War on-going. (The only way the Syrian Civil War ends is if the entire globe agrees to stay out and the war burns itself out of soldiers and supplies.)

    Otherwise, I do wonder why socialism is growing in South America. All I come up with is:
    1) With commodity down cycle, everybody has to take pay cuts that makes all citizens really pissed off. (Just think how pissed off the US is with 5% today!)
    2) We have cycled out of generation that lived through the constant Cold War Civil Wars.
    3) In 2015, It appears South America is on their version of the Gold Standard but now is the Dollar Standard. (At this point, it does appear the globe has a shortage of dollars and greenback has replaced Gold for a lot of economies.)

  24. Gravatar of Alexander Hamilton Alexander Hamilton
    12. December 2015 at 21:23

    Hi Scott. Long time fan of this blog. Had to comment for the first time in case no one responded to his idiocy:

    @collin That is just fantasy. Even if this were true allowing IS to continue unabated in anticipation that they burn themselves out isn’t palatable. Suppose the war does “burns itself out” and IS still control a large portion of Iraq and Syria? This isn’t just a civil war about changing government or some lines on a map. IS are commiting genocide.

    On the subject of Corbyn, his position isn’t non-interference in any meaningful sense. His Stop the War coalition are fine with military intervention as long as it’s Russia that is responsible. If he remains leader of the Labour party the Conservatives will govern for a generation.

  25. Gravatar of ssumner ssumner
    13. December 2015 at 05:59

    Postkey, “People’s QE” certainly got Venezuela out of the zero rate trap.

    Mattias, Yes, there are far worse things, as we saw in 2008.

    Bill, Yes, I agree.

    James, I don’t anticipate a recession now, but then again I never anticipate one until it’s started.

    Thanks Travis, I left a comment.

    Collin, Don’t you mean “socialism was growing” not is growing?

  26. Gravatar of Engineer Engineer
    13. December 2015 at 06:20

    “why should we Gringos care about what people elect to do in their country? White man’s burden?”

    The 21st century version is the “wealthy, advanced world burden”…and since we are all “one world” now…one country’s collapse (e.g. Syria) can create huge problems for the first world. There would be no talk of building walls if every country in Latin America had governments like Chile and Costa Rica.

  27. Gravatar of Ray Lopez Ray Lopez
    13. December 2015 at 06:51

    @Engineer – ‘The 21st century version is the “wealthy, advanced world burden”…and since we are all “one world” now’ – really? Every heard of the Monroe Doctrine? It’s 19th century and it still applies to Latin America. The ignorance that Americans show about US history is astonishing.

    OT-the Netflick TV series “Narcos” is factually pretty accurate, though they do take some liberties in the name of artistic license. For example, Escobar’s Colombia bombing campaign came after his cousin was killed by police, not before as in the TV show, but it’s a small detail.

  28. Gravatar of Ray Lopez Ray Lopez
    13. December 2015 at 06:54

    @Don Geddis – look at what your master says (Sumner): “Matt, It can be 5%, or 15%, whatever they choose. I’d recommend about 3% or 4% per capita, if they do level targeting, a bit more with growth rate targeting.”

    Oops! Time to start reading those thousands of pages of archive posts for thhemoneyillusion and see where you went wrong…lol.

  29. Gravatar of Engineer Engineer
    13. December 2015 at 08:00

    Yes…yes..the Monroe Doctrine..hasn’t this been the propaganda from every Latin demagogue like Chavez for that last 100 years. Lets turn the question around…why should Latins care about what Americans think. Why would you not pick the best candidate to run your country?

    BTW…in terms of knowing history..the original Monroe Doctrine was meant to support Latin America in there battles against European colonialism. From Wiki…. “Simón Bolívar himself, still in the midst of his last campaign against the Spaniards, Santander in Colombia, Rivadavia in Argentina, Victoria in Mexico—leaders of the emancipation movement everywhere—received Monroe’s words with sincerest gratitude”

  30. Gravatar of Postkey Postkey
    13. December 2015 at 15:03

    “Postkey, “People’s QE” certainly got Venezuela out of the zero rate trap.”

    Tell Tim Congdon that?

  31. Gravatar of Don Geddis Don Geddis
    13. December 2015 at 18:52

    @Ray Lopez: I know reading comprehension isn’t your strong suit (and neither is economics). But nothing I said is in conflict with what Sumner said. Since you don’t really understand what other people are talking about, you might want to hold off on celebrating what you seem to think is some kind of “gotcha”. You’re just embarrassing yourself.

  32. Gravatar of Bonnie Bonnie
    14. December 2015 at 05:49

    Wouldn’t the present situation be a “Woolsey World” only if the 3% NGDP growth were the result of a stable and credible Fed policy? Absent said stable and credible policy, the present state is quite arbitrary and accidental, which couldn’t possibly produce optimum results given the volatility that comes with it.

  33. Gravatar of ssumner ssumner
    14. December 2015 at 12:15

    Bonnie, Yes, I was just referring to the trend rate of NGDP growth.

  34. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    16. December 2015 at 07:59

    I was in Argentina las couple of days, the relief on people’s faces was something to think about. Brazilian president has committed accounting and fiscal fraud. A lot of people believe those were criminal acts, if done in a company people would go to jail. If we don’t oust the president, goodbye rule of law in Brazil…

  35. Gravatar of Derivs Derivs
    16. December 2015 at 09:25

    “If we don’t oust the president, goodbye rule of law in Brazil…”

    Saying goodbye to a boat that sailed decades ago….

  36. Gravatar of ssumner ssumner
    16. December 2015 at 13:51

    Jose, These things are better handled through elections.

  37. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    17. December 2015 at 04:24

    @Prof. Sumner
    I agree, some people believe she should go just because she is incompetent. I don’t support that view. But Brazilian institutions are incomplete, we don’t have good checks and balances. The accusations are very compelling. The government has used public banks to finance expenses that were hidden from the public until after the elections. And they were huge. Summing up, there was a “fiscal surprise” of -130 billion BRL. These actions, if confirmed true, directly brake Brazilian fiscal law, in addition to being plain accounting fraud. That is a lot. I am not even mentioning Petrobras scandal, which are very grave, but could be attributed to just incompetence. Besides, in Brazil, the government concentrates a lot of power. This is a good opportunity for the House to confirm its legitimacy in representing the public opinion, now largely supporting the ousting of the president, just because she lied in the campaign so obviously that even simple people can see it. It is not a good position, but I see the impeachment process as an opportunity for the institutions to reafirm themselves. Including the Supreme Court. This has been the norm under PT (worker’s party) rule. They attack the institutions without regret whenever they see a short term gain for them. Their rule has not been a good thing for Democracy in Brazil. It is counter intuitive, I know, but this is how I see it …

  38. Gravatar of ssumner ssumner
    17. December 2015 at 16:51

    Jose, Thanks for that info.

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