What if monetary policymakers lack credibility?

Trevor Chow sent me the following questions, as a follow up to my recent post:

I was wondering what your thoughts are regarding the following:

1. I agree that the thought experiment shows monetary policy can set nominal aggregates as high as they would like. But I’m not entirely sure this solves the machete-scalpel problem.

2. What I mean is the following. Suppose we start in a world where we’re on some nGDP growth path. Suddenly, there’s a recession (V falls/k rises) and expected nGDP falls. The central bank tells everyone about this helicopter thought experiment and persuades them that it can credibly maintain the nGDP growth path. Consequently, it needs to do very little actual money creation in order to keep nGDP futures on the nGDP growth path. And so expected nGDP doesn’t actually fall. This is basically what you were saying.

3. However, suppose instead that for some reason it screws up. And for some reason, people no longer believe that the thought experiment is enough i.e. they believe in the machete-scalpel problem. Perhaps this is because they mess up for a period of time or because everyone misdiagnoses what tight and loose policy are. Regardless, it is no longer credible. Then it can’t just say it wants an nGDP path and hope that people will respond accordingly, and in fact might have to do a lot just to get close.

4. This may be particularly difficult because people’s belief in a central bank depends on whether they think other people find the central bank to be credible. And in that sense, it would seem likely that while what you’re saying is true most of the time, it is possible to get stuck in bad equilibria where you need a lot more than the usual show of force to even begin regaining control of the scalpel?

5. What I’m trying to say, albeit somewhat poorly, is that the machete-scalpel problem seems to be true if everyone believes it to be true, and to be false if everyone believes it to be false.

I’m going to disagree with this:

This may be particularly difficult because people’s belief in a central bank depends on whether they think other people find the central bank to be credible.

In my view, people tend to doubt central bank commitments mostly when central banks are not in fact committed to doing whatever it takes. Yes, you can imagine a hypothetical case where a central bank was committed to do whatever it takes to boost inflation, but the public for some reason still did not believe the central bank. But I suspect that that’s pretty rare. It is most likely to happen in a case where a central bank had previously made a commitment that was not sincere, reneged on its promise, and then subsequently made a commitment that was sincere, but not credible.

For instance, Volcker backed off on his first attempt to reduce inflation in late 1980, and then in late 1981 adopted a “whatever it takes” approach that was ultimately successful. Note, however, that it didn’t take all that long to convince people that the Fed was serious, and NGDP growth rates plunged sharply in late 1981 and 1982. And when it comes to stimulus, the central bank’s job is actually much easier in a political sense. Volcker faced doubts because a contractionary monetary policy hurts workers, businesses and borrowers. There was intense pressure on him to back off on the tight money policy. In contrast, a policy aimed at raising inflation from zero to 2% tends to make the economy better in the short run, and thus is less politically controversial.

Central banks are not completely transparent, but they are also not particularly secretive. Top Fed officials frequently describe their policy preferences to people in the media. Thus I doubt that a sincere and publicly announced policy to do whatever it takes to hit an NGDP level target (or price level target) would be non-credible. On the other hand, I could easily imagine such a policy not being sincere.

Consider the following example. Suppose that in 2003, BOJ policymakers announced that they were going to adopt Lars Svensson’s “foolproof” plan to escape from a liquidity trap. They say that they will do “whatever it takes” to hit the target amount of yen depreciation. But privately, BOJ officials decide that if the US complains too strongly about a weak yen, and threatens trade sanctions, they will back off. That’s not a sincere “whatever it takes” policy decision, and the markets would (correctly) find the promise non-credible. They’d see right through it.

In the vast majority of cases, promises are seen as non-credible because they are not in fact sincere, and when sincere they are seen as credible. For that reason, I’m not very worried about the hypothetical raised by Trevor. Nonetheless, let’s consider the outcome of a sincere promise that was seen as being non-credible, no matter how remote that possibility. Suppose the BOJ made the sincere decision to implement Svensson’s recommendation regardless of how much flack they received from the US, but the decision was not credible. What then?

I’d still say the policy was a scalpel, not a machete. Yes, the BOJ would probably have to increase the monetary base dramatically, as speculators would anticipate big profits if and when the BOJ caved in and let the yen appreciate. But in the longer term, the central bank that abandons its stimulus is actually forced to do more money creation than the sincere central bank.

Thus in early 2015, both the Swiss and Danish central banks were under pressure from speculators who anticipated a break in their currency’s euro exchange rate peg. The Swiss did cave in, a decision that in retrospect was clearly a mistake, whereas the Danish central bank refused to give in to speculators. Indeed I’d even go further. I suspect that speculators attacked the Swiss franc in early 2015 partly because they anticipated that the SNB was not sincere, and would soon let the franc appreciate as a result of the false belief that Switzerland was threatened with spillover inflation from the eurozone. Speculators didn’t so much force the SNB’s hand as they anticipated a bad decision that was already in the works.

Denmark got the last laugh, however, as once speculators saw the Danes would not let the krone appreciate, they stopped speculating in their currency. Thus, in the long run, the SNB had to increase their monetary base far more than the Danish central bank, as speculators assumed that the Swiss franc would continue to appreciate over time.

Given the fact that a non-credible central bank might have to dramatically boost the monetary base, why do I insist that this policy is a scalpel and not a machete? Because in this case it is more useful to think of the policy instrument as the exchange rate, not the base. The monetary base might change dramatically, but only in service of a central bank policy aimed at targeting the exchange rate (the scalpel) at a precise level.

Here’s an analogy. Consider a Taylor Rule-type policy in 1991, which sets the fed funds rate at 3%. Then assume a sudden collapse of the Soviet bloc, which leads to massive hoarding of US currency. To keep the fed funds rate at 3%, the Fed must accommodate that demand by printing enough base money to meet the growing demand for US currency in the former Soviet Union. From the perspective of the rapidly growing monetary base, policy looks like a blunt instrument, a machete. But from the perspective of the fed funds target, policy looks like a scalpel, a very precise instrument that keeps the fed funds rate exactly where the Fed wants it.

I favor a policy where the Fed adjusts the base as much as needed to keep its policy indicator right on target. That indicator might be an exchange rate, an NGDP futures price, or a TIPS spread. More likely it would be a hybrid market/internal forecast of something like NGDP or core inflation. But I don’t want the Fed to actually target the monetary base, or to use it as an indicator of the stance of policy.

The base is like the steering wheel for the nominal economy. A steering wheel controls the path of the car, but I don’t “target” the position of the steering wheel. Rather I move it as needed so that my GPS says I’m moving to the place I’d like to reach in the most efficient way possible.

When monetary policymakers are sincere but not believed by the public, the central bank may have to move the base by more than otherwise, until the public becomes convinced that it is sincere. But, in general, when a central bank is truly sincere it won’t take the public long to figure that out. They are like 5-year old children, whose intentions can easily be read in their face. Speculators that are slow to realize the central bank’s sincerity will lose money on their investments.

The key is that the central bank must be sincere. Everything works so much better if you tell the truth.


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89 Responses to “What if monetary policymakers lack credibility?”

  1. Gravatar of Carl Carl
    22. September 2021 at 09:30

    Or Congress strips the Fed of credibility by creating conditions of fiscal dominance.

  2. Gravatar of bill bill
    22. September 2021 at 10:09

    I would enjoy hearing a debate on this between you and Ben Bernanke (moderated by David Beckworth).

  3. Gravatar of Effem Effem
    22. September 2021 at 10:29

    Speaking of credibility, hasn’t the Fed already abandoned its AIT framework? We are in the midst of an overshoot and nowhwere in today’s inflation forecast is a period of <2% inflation to bring us back to the price level trend. How do we reconcile this?

  4. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    22. September 2021 at 11:25

    Whatever it takes? AD equals money times transactions’ velocity. Our means-of-payment money supply has increased by over 200 percent since Covid-19. That’s destructive capitalism.

    Inflation is not priced to the market, to Maslow’s 7 basic human needs.

    And the FED is running the economy diametrically in reverse. Lending by the banks is inflationary, whereas lending by the nonbanks is noninflationary. The way to increase Vt, decrease the demand for money, is to drive the banks out of the savings business, reinstate Reg Q ceilings on bank deposits.

    This won’t reduce the size of the payment’s system. Funds which are activated, funds driven through the nonbanks, never leaves the commercial banking system. There is just an exchange of preexisting deposit liabilities between counterparties in the banking system. I.e., the NBFIs are some of the DFI’s best customers.

  5. Gravatar of Kester Pembroke Kester Pembroke
    22. September 2021 at 12:32

    That’s because they don’t understand the difference between semi-inflation and true-inflation. Remember that their theory is that inflation will accelerate to hyperinflation, therefore any semblance of it must be snuffed out as soon as it appears by increasing the amount of unemployment.
    Yet they still want markets, where price changes determine allocation of resources – which means prices have to go up to eliminate excess demand if there is a supply shortage.

  6. Gravatar of ssumner ssumner
    22. September 2021 at 13:11

    Effem, Too soon to say. The Fed has a “flexible AIT” which allows a bit of wiggle room for supply shocks.

    But I do think there is some risk that they might lose credibility—it will take a few years to know for sure.

  7. Gravatar of David S David S
    22. September 2021 at 13:25

    No one remembers the lumber riots of 2020 or the fistfights in used car lots.

    Scott, unless I’m misunderstanding FAIT, we don’t “need” an extended period of inflation at sub 2% to achieve some sort of aesthetic balance relative to price levels right now. The real goal is NGDP growth that returns to an average range of 4-6% and optimistically, an unemployment rate of less than 4%.

    The government agency that lacks credibility right now is the FDA, not the Fed.

  8. Gravatar of Jeff Jeff
    22. September 2021 at 14:07

    “I favor a policy where the Fed adjusts the base as much as needed to keep its policy indicator right on target.”

    What if no stable state in which the policy indicator is right on target exists?

  9. Gravatar of Effem Effem
    22. September 2021 at 14:43

    @DavidS

    I disagree. The Fed went to great lengths to design & unveil its AIT framework. The framework very clearly states that past under/over-shoots will be corrected to keep the price level on a 2% path. Of course they left themselves some wiggle room, but using that room almost immediately to essentially ignore an inflation overshoot hardly invokes confidence that any mandate could ever be truly credible.

    As for supply shocks, would the Fed also ignore temporary positive supply shocks? My guess is no, which makes AIT asymmetric in practice. At the very least the Fed could be honest about this.

  10. Gravatar of ssumner ssumner
    22. September 2021 at 15:01

    David, You said:

    “The real goal is NGDP growth that returns to an average range of 4-6%”

    If NGDP growth averages 6%, then they won’t be anywhere near their inflation target.

    Effem, You said:

    “The framework very clearly states”

    That’s a bit of an overstatement. The “flexible” part is unclear, and it’s also unclear as to the timeframe over which they are averaging. That’s not to say that you are completely wrong, just that the policy is somewhat vague, and less clear than I would have liked.

  11. Gravatar of Rajat Rajat
    22. September 2021 at 15:12

    I think you nailed the machete-scalpel perception issue – it arises due to the lack of a clear instrument, like the short term interest rate or exchange rate. In the absence of such an instrument, asset purchases or the base because the focus. Hence the importance of NGDP futures or else an exchange rate or TIPS spread target, etc. The risk at the moment is that many on the left want it to be things like government spending or transfers.

    On sincerity and credibility, I’ve often thought that the expressed former views of a central bank chief can make a big difference to whether the market views their statements as credible. A regime change at the top (eg from Shirakawa to Kuroda or Trichet to Draghi) can significantly reduce the outward moves the central bank needs to make to be taken seriously on the flipside of their reputation.

    In the Australian context, it comes as no surprise that our current chair, Philip Lowe, who is ex-BIS and has authored papers about ‘leaning against the wind’ to prevent asset price bubbles, and has kept inflation below target for his entire term to date, is doubted by markets when he says there will be no increase in the policy rate (currently at the ZLB) until 2024. They all know his inner anti-BIS is itching to raise. For example:

    Giving an address to the Anika Foundation on Tuesday, Reserve Bank of Australia (RBA) Governor Philip Lowe said that the market was wrong to expect any rate hikes before 2024.

    “I find it difficult to understand why rate rises are being priced in next year or early 2023,” Lowe said.

    “Our judgement is that it will take some time for wage increases to lift to a rate that is consistent with achieving the inflation target. There is a lot of inertia… and the experience of the past decade is unlikely to be reversed quickly.”

    https://www.businessinsider.com.au/rba-house-prices-rate-hikes-recovery

  12. Gravatar of ssumner ssumner
    22. September 2021 at 15:20

    Rajat, Good points, but let me reiterate that the main problem is not to convince the markets that central banks will do X, it’s to convince central bankers to do X.

    On the RBA, I don’t find promises of interest rate paths to be very useful; a level targeting promise of some sort would be much more helpful.

  13. Gravatar of bb bb
    22. September 2021 at 17:41

    Scott,
    You said: “Good points, but let me reiterate that the main problem is not to convince the markets that central banks will do X, it’s to convince central bankers to do X.”

    That seems like the key insight to all of this. Great post.

  14. Gravatar of Philo Philo
    22. September 2021 at 19:23

    The membership of the Fed and the FOMC changes over time. The Fed or FOMC may make a sincere commitment at a certain time, and later renege because new members with different priorities have come in. In general, it is harder for a group with changing membership to make a credible commitment than it is for an individual person, the comparative difficulty increasing with the term of the commitment.

  15. Gravatar of Philippe Bélanger Philippe Bélanger
    22. September 2021 at 19:26

    If the markets are incorrect about the future supply of base money, then indeed it seems like the central bank will not have to change its balance sheet very much; it only needs to buy/sell Treasuries until it its instrument is back on target.

    But what if there is a permanent increase in the demand for money? Then it seems like the level of base money will have to increase permanently if the central bank wants to maintain its inflation target.

    I ask this because if the low inflation that we see in the developed world is a result of an increase in the demand for money that is itself caused by changing demographics, then central banks will have to permanently increase their balance sheets in order to hit their inflation target.

  16. Gravatar of ssumner ssumner
    22. September 2021 at 19:41

    Thanks bb.

    Philo, Yes, but central banks generally stick with policy regimes for fairly long periods of time. Nonetheless, you are correct that if central banks are inconsistent then they will have more trouble hitting their targets. There is no substitute for competence.

    Even without credibility they can hit their NGDP target, but it may require a larger and/or more volatile balance sheet.

    Philippe, The larger the demand for (base) money, the larger the central bank balance sheet. And the demand for money mostly depends on the trend rate of NGDP growth (assuming no IOR.) So if a central bank wants a smaller balance sheet, then they should aim for a higher trend NGDP growth rate. If they have slow nominal growth (Japan, Switzerland, etc.) they will end up with a large balance sheet.

  17. Gravatar of postkey postkey
    23. September 2021 at 01:57

    “The base is like the steering wheel for the nominal economy.”

    “ . . . some people claim there’s a relationship
    08:19 between the base and the quantity of
    08:21 money
    08:22 in the last 10 20 years there hasn’t
    08:25 been one
    08:27 we can cut out the base by itself it’s
    08:30 not relevant . . . “

    https://www.youtube.com/watch?v=-NbuaG8rPz4

    Once a ‘steering wheel’, always a ‘steering wheel’?

  18. Gravatar of Michael Rulle Michael Rulle
    23. September 2021 at 04:36

    I have similar concern as Philo. As far as Powell is concerned, I see no evidence that Powell is changing his philosophy. The noise makers (which is not the market) seem happy to emphasize he now agrees inflation is more of a problem than he has previously stated. That might be true——projections have moved higher——not welcome—-but markets, those who buy and sell securities, seem to believe he is has credibility.

    I also think we have a better sense of what AIT will look like in action. One does not have a forecast over the next 2+ years—-each in excess of 2%—-unless he believes it can be followed by 2+ years at less than 2%.

    Scott has said before, that if inflation for the next 10 years (as a hypothetical) were to be 2.3% then the Fed (assuming 2% remained the target) would have failed.

    So presumably the market fears that, as he did undershoot on his current projections. I think the market voted yesterday and still gives him credibility.

    (Sidebar—-5 year breakeven has remained in the 2.40-2.60 range for several months—-hovering near 2.50 mostly—-yes Tips are not solidly anchored due to some minor illiquidity——but it does make me wonder if market would be fine with that)

    My bottom line on Powell is he knows what he is trying to do, he is transparent about it, he his willing to change his actions based on evidence, and we can all keep score.

  19. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    23. September 2021 at 05:00

    The FED is targeting interest rates, not N-gDp.

    “The Federal Reserve doubled the counterparty limit for its overnight reverse repurchase agreement on Wednesday to underpin short-term rates amid a cash glut that’s helped drive record demand for the facility. Policy makers directed the New York Fed to adjust its per-counterparty limit in the facility to $160 billion a day from $80 billion.”

    What’s important is the money multiplier, or the percentage of the trading desk’s purchases between the banks and the nonbanks. Only insofar as the division is predictable is the manipulation of the base a usable factor.

  20. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    23. September 2021 at 05:49

    re: “There was intense pressure on Volcker to back off on the tight money policy”

    Paul Volcker was directly responsible for two back-to-back recessions. The first one came due to tightening, limited to Feb, Mar, & Apr of 1980, at the same time the distributed lag effect of money flows hit. The second one was imposing reserve requirements on NOW accounts (after their regulatory release, their time bomb), in April 1981.

  21. Gravatar of henry henry
    23. September 2021 at 12:20

    Nice post. Good comments.

    But I still have to point out Sumner’s political quackery.

    Do you remember when he told us that Biden was not corrupt, and that he was an angel with unquestioned integrity? Remember when he told us that the four Ferrari’s in his drive way, and his son’s foreign jobs were all legal? Nothing to look at he said.

    Remember when he said Giuliani, one of the most tenacious and incorruptible lawyers was in fact “corrupt” and “lying” about the “emails”.

    Well, here is business insider today:

    https://www.businessinsider.com/new-emails-reveal-that-hunter-biden-wanted-2-million-for-libya-deal-2021-9

    2M plus a “success fee” to release 15B in funds in Libya. Sounds pretty corrupt to me.

    I can assure you that if this was Trumps son, Sumner would be absolutely hysterical right now! Post after post would be damning Trump for his corruption, while praising the incorruptible Biden. Of course, we know that is not true. We knew it before, but it is indisputable now.

    Someday I hope he realizes that the majority of media organizations in this country have a socialist/communist agenda, and that they omit information to obtain their agenda. I can assure you that CNN and MSNBC will not touch this story. It will receive 0 minutes of air time.

    But that won’t stop them from trying to tarnish the name of an attorney who took down the mob in the 1980’s. And it won’t stop Sumner’s quackery. He’ll still go after Trump and his family, without any evidence.

  22. Gravatar of Ray Lopez Ray Lopez
    23. September 2021 at 17:59

    Trevor Chow implicitly is saying what I’ve said all along: money is neutral short term and long term, and what really matters is AD based on animal spirits (Keynes central point). As for Switzerland and Denmark, their monetarist mishaps or successes that Sumner mentions are barely blips on the GDP per capita curves: Switzerland today is at $85K/person and Denmark at $65k/person (about the same as the USA).

  23. Gravatar of Philippe Bélanger Philippe Bélanger
    23. September 2021 at 18:20

    “So if a central bank wants a smaller balance sheet, then they should aim for a higher trend NGDP growth rate.”

    I can see how, if a central bank successfully convinced financial markets that it would, in the future, permanently increase the monetary base, then this would lower the demand for money today and the central bank could temporarily operate with a smaller balance sheet. But this situation could not last. Eventually, the central bank would have to deliver on its promise by increasing the monetary base.

    Also, I don’t see how we can use this story to make sense of, say, Japan’s low inflation. You would have to believe that the demand for money rose because the Japanese public became convinced that the BOJ would eventually reduce the rate of growth of the monetary base. But the BOJ never took any action suggesting it would do this. (Quite the opposite.)

    The only explanation I can think of is that some other factor led to an increase in the demand for money, and that the BOJ ended up with a large balance sheet because it attempted to fight the resulting deflation.

  24. Gravatar of rinat rinat
    23. September 2021 at 18:24

    Americans were better off before the Fed.

    Remove that corrupt institution, and losers like Sumner won’t be trying to control your money supply anymore.

    It would simultaneously remove the surplus of humanitarian majors who graduate with no real world skills.

    And then maybe the surplus of diploma mills, of which Bentley is surely one, will cease to exist.

    A Win/Win and Win again for the hardworking blue collar class, constantly being pulverized by mega losers in academia.

  25. Gravatar of ssumner ssumner
    23. September 2021 at 19:48

    Philippe, You said:

    “Eventually, the central bank would have to deliver on its promise by increasing the monetary base.”

    Sure, but the point is that the size of the base as a share of GDP would be permanently reduced, quite sharply in fact.

    The rest of your comment is confusing cause and effect. The large increase in the Japanese base is a response to the high demand for base money at near zero interest rates, and these very low rates were generated by an earlier tight money policy.

    You said:

    “But the BOJ never took any action suggesting it would do this”

    Never? Not in 2006?

  26. Gravatar of jayne jayne
    23. September 2021 at 23:15

    “When monetary policymakers are sincere but not believed by the public”

    Do you mean like the Economist Taylor Lee, at the FDA, who wants to use “blow darts” on unvaccinated black people because they “refuse to get with his program”.

    He’s very sincere, so according to Sumner we should all just blindly follow his idiocy.

    Let’s all jump off a cliff and destroy our lives, economy, and nation because a blowhard economist says its a good idea.

  27. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. September 2021 at 09:48

    re: “The large increase in the Japanese base is a response to the high demand for base money at near zero interest rates, and these very low rates were generated by an earlier tight money policy.”

    Determinations of base money is at the option of the Central Bank. Economists are vacuous. Banks are not intermediaries. The Japanese deposit insurance is higher, their savings are higher, and more of their savings are impounded in their banks – all of which destroys velocity, destroys AD.

    Banks don’t lend deposits. That is the single biggest error in human history. Deposits are the result of lending/investing.

    Sumner has money illusion.

  28. Gravatar of Philippe Bélanger Philippe Bélanger
    24. September 2021 at 19:01

    “Never? Not in 2006?”

    The BOJ did reduce the monetary base in 2006, but I don’t see how this could explain the deflation that began around 2000. Even if the markets had somehow foreseen that the central bank would eventually abandon its QE policies, there was never any indication that the monetary base would end up on a lower trend path. The BOJ’s actions in 2006 only brought back the base to the level where it would have been if QE had never been tried.

    “The large increase in the Japanese base is a response to the high demand for base money at near zero interest rates, and these very low rates were generated by an earlier tight money policy.”

    This explanation seems circular. If I understand correctly, the idea is that money demand rose because money was tight. But why was monetary policy tight? Whether we measure the “tightness” of money using NGDP or inflation, it is determined by the interaction of money demand and supply. But Japan’s money supply has been on a stable path since around 1994. Therefore money must have been tight because the demand for money increased, which is what we are trying to explain in the first place. We have no explanation of why money demand rose in the first place.

    As I see it, what’s missing from this story is an exogenous variable that could have caused money demand to rise. You said that money demand in Japan is high because interest rates are low. As I see it, a plausible hypothesis that Japan’s demographics are pushing down these rates and that this is the underlying reason why money demand has risen.

  29. Gravatar of ssumner ssumner
    24. September 2021 at 19:25

    Philippe, You said:

    “The BOJ did reduce the monetary base in 2006, but I don’t see how this could explain the deflation that began around 2000.”

    In 1998, Krugman wrote a paper offering exactly this explanation for Japanese deflation. When it actually happened in 2006 he took a (well-deserved) victory lap. Check out his 2018 paper, which looks back at the 1998 paper.

    It is possible that demographics play an indirect role here. Suppose demographics have reduced the natural rate of interest in Japan. If the BOJ fails to offset that with higher inflation, then nominal rates fall to zero and money demand increases, making monetary policy effectively tighter. But the BOJ didn’t have to let that happen.

    And don’t focus on the money supply. Rates have been trending lower for decades, and that reduces velocity.

  30. Gravatar of Philippe Bélanger Philippe Bélanger
    24. September 2021 at 20:55

    If I recall correctly, Krugman was vindicated because he argued that an increase in the monetary base wouldn’t succeed in increasing the price level if the increase was expected to be temporary, which is precisely what happened. But that only tells us why the BOJ failed to raise prices, not why prices fell to begin with. I still don’t understand why raising and then bringing back the monetary base to its previous level would increase the demand for money. Presumably, the BOJ’s policies only confirmed market expectations that the monetary base would continue to rise on the same path it had been on before QE.

    I didn’t know about that 2018 Krugman paper. I will definitely read it. And I completely agree that BOJ should be held responsible for Japan’s low inflation.

  31. Gravatar of postkey postkey
    25. September 2021 at 00:26

    Philippe Bélanger

    From an ‘expert’ on Japan?
    “so the Bank of
    10:01 Japan was creating this massive asset
    10:03 bubble and then it was tightening and
    10:06 creating this massive recession why the
    10:08 goal was as they had declared actually
    10:11 before all this happened and that’s you
    10:14 know I used that as sub tablet of the
    10:16 book the structural transformation of
    10:18 the economy which was essentially a US
    10:22 plan and the Bank of Japan was their
    10:24 agent in Japan and to implement this
    10:27 because they the Bank of Japan plan was
    10:29 almost verbatim the same as what the
    10:32 Americans have been demanding in the
    10:33 negotiation with Japan structural
    10:35 impairment initiative Japan has to
    10:36 change”
    https://www.youtube.com/watch?v=OdYmdKUiQNw&t=2326s

    “And so with Princes of the Yen, that cover was blown. And I think people were not happy about it. Also, the other thing, particularly in America, they didn’t like is that the original edition, 2001, I don’t think you’ve read this. Because it came out first in Japanese, 2001. And it had a chapter about my meeting with Alan Greenspan, when I met Alan Greenspan, and we discussed my paper that he had read four years earlier, which he remembered extremely well. And from the somewhat surprising things he said, I concluded certain things. And it’s written up in this chapter. And this was predicting the conclusion was– well, the Federal Reserve is going to do the same thing as the Bank of Japan, which is intentionally create a massive asset market bubble driven by bank credit creation, which is going to create, when it blows, the biggest financial crisis, a global financial crisis. And that’s, of course, the 2008 crisis, which Alan Greenspan did create.”
    https://www.realvision.com/rv/media/Video/9086e3c7668e479ebebbd0f5396e70f7/transcript

    “Michael Oswald’s film “Princes of the Yen: Central Banks and the Transformation of the Economy” 『円の支配者』reveals how Japanese society was transformed to suit the agenda and desire of powerful interest groups, and how citizens were kept entirely in the dark about this. Based on the book of the same title by Professor Richard Werner, a visiting researcher at the Bank of Japan during the 90s crash, during which the stock market dropped by 80% and house prices by up to 84%. The film uncovers the real cause of this extraordinary period in recent Japanese history. ”
    https://www.youtube.com/watch?v=p5Ac7ap_MAY

  32. Gravatar of ssumner ssumner
    25. September 2021 at 06:27

    Philippe, I don’t think we are far apart, just talking past each other. Just to be clear, I am not saying that you can explain Japanese deflation merely by looking at the monetary base. Consider this example:

    After the 1990 bubble in Japan, the hawks at the BOJ hold the upper hand. Let’s say that post-bubble conditions plus demographics reduce velocity by 4%/year. The BOJ offsets this with say 4%/year growth in the base. That keeps NGDP flat, and prices fall at 1% while RGDP rises at 1%. So those numbers check out, but how do we interpret them?

    If you just looked at the base growth, everything seemed fine. But if you look at base growth relative to velocity then policy was contractionary. Some would say the tight money caused the deflation. That’s my preferred way of describing the situation. Others would say the underlying factors that caused the fall in velocity caused the deflation. That might be demographics plus banking distress.

  33. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. September 2021 at 06:35

    Rates have been trending lower for decades, and that reduces velocity.
    and
    We have no explanation of why money demand rose in the first place.

    Look at JAPAN — “Twenty-eight years in between, and nearly 10% shrunk. That’s not demographics; it cannot be population factors that account for all of the facts.” – Jeffrey Snider

    The accounting is straight forward. From a system’s perspective, commercial banks (DFIs), as contrasted to financial intermediaries (non-banks, NBFIs): never loan out, & can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or time “savings” deposits, or the owner’s equity, or any liability item.

    When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) – somewhere in the payment’s system. I.e., commercial bank deposits are the result of lending, not the other way around.

    The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, & other Governmental Jurisdictions, & every person, etc., except the commercial & the Reserve banks.

    see: MODERN MONEY MECHANICS
    A Workbook on Bank Reserves and Deposit Expansion
    https://www.community-exchange.org/docs/ModernMoneyMechanics.pdf

  34. Gravatar of Kester Pembroke Kester Pembroke
    25. September 2021 at 09:02

    MMT shows that bonds are *converted* into money. Mainstreamers and monetarist believe they are *exchanged* into money. The difference in interpretation boils down to that simple point.

  35. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. September 2021 at 09:32

    re: “We have no explanation of why money demand rose in the first place”

    Just look at Japan’s deposit insurance. “a special arrangement for the blanket guarantee of deposit insurance was taken in 1996, taking into account the financial environment that financial institutions were saddled with a huge amount of non-performing loans and credit
    creating functions of the banking system were paralyzed.

    Subsequently, as Japan’s financial system became more stabilized, some types of deposits, such as time deposits, were shifted to the limited coverage in April 2002.”

  36. Gravatar of Philippe Bélanger Philippe Bélanger
    25. September 2021 at 17:27

    Yes, I think we mostly agree. You can’t tell if money is tight by only looking at the monetary base; you have to assess whether changes in the monetary base are large enough to offset changes in money demand. In this sense, tight money really did cause Japan’s deflation.

    The point I initially wanted to stress was that if money demand rises because markets mistakenly believe that the rate of growth of the monetary base will fall, then the central bank will not, in the long run, end up with a higher monetary base. It only needs to be willing to buy enough financial assets until market expectations have been corrected.

    On the other hand, if the rise in money demand is exogenous (that is, if it is not caused by a change in the expected future level of the monetary base) and permanent, then the central bank will end up with a higher monetary base. A permanent fall in velocity must be offset by a permanent rise in the monetary base if NGDP is to be kept on a stable level path.

    As I have argued, I think it is more plausible that the rise in the demand for money that we see in Japan is exogenous, which means that if Japan wants to put an end to its low inflation, it needs to permanently increase rate of growth of the monetary base.

    Just to clarify: I don’t think central banks should actually be trying to determine whether changes in the demand for money are permanent or temporary, or what the ultimate causes of those changes are. They should announce a target like inflation or NGDP and be willing to buy and sell assets until they have reached their objective. It’s just that in the process of doing so, central banks may discover that a given increase in the monetary base turned out, in retrospect, to be permanent.

  37. Gravatar of ssumner ssumner
    25. September 2021 at 19:18

    Philippe. Perhaps this numerical example would illustrate my point. Japan’s base is currently about 140% of GDP. If inflation were to rise enough to push Japanese nominal interest rates to even 2%, and if no IOR were paid, then the Japanese base would likely fall to about 10% of GDP.

  38. Gravatar of James Alexander James Alexander
    25. September 2021 at 22:30

    “Do whatever it takes.” Draghi was sincere. But the markets spent the whole time worrying whether he could bring the ECB Board with him. He stopped the Trichet rot and ended the European recession but would the ECB allow nominal room for real growth?

  39. Gravatar of ssumner ssumner
    26. September 2021 at 08:10

    James, Yes, the central bank as a whole needs to be sincere.

  40. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. September 2021 at 08:12

    re: “A permanent fall in velocity must be offset by a permanent rise in the monetary base if NGDP is to be kept on a stable level path”

    Won’t work. An increase in money products is ultimately contractionary. Adding infinite, artificial, and misdirected money products (LSAPs on sovereigns) while remunerating IBDDs (inducing nonbank disintermediation, synonymous with secular stagnation), results in an excess of savings over real investment outlets, generating negative real rates of interest; eventually has a negative economic multiplier; stokes asset bubbles, exacerbates mal-investment; aggravates income inequality, produces social unrest, and depreciates the exchange value of the U.S. $.

  41. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. September 2021 at 08:21

    It’s raw accounting — stock vs. flow. You have to retain cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability:

    to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”.

    Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

    I.e., banks pay for their earning assets with new money not existing deposits. The banks could continue to lend even if the nonbank public ceased to save altogether.

    The U.S. Golden Era in Capitalism was financed in 2/3 by velocity, by putting monetary savings back to work through the nonbanks.

  42. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. September 2021 at 08:28

    Lending by the Reserve and commercial banks is inflationary, whereas lending by the nonbanks is noninflationary.

    (A) The commercial banks create new money (in the form of demand deposits) when making loans to, or buying securities from the non-bank public; whereas lending by financial intermediaries simply activates existing money.

    (B) Bank lending expands the volume of money and directly affects the velocity of money, while intermediary, non-bank lending, directly affects only the velocity.

    (C) The lending capacity of the commercial banks is determined by monetary policy, not the savings practices of the public.

    (D) The lending capacity of non-banks, financial intermediaries, is almost exclusively dependent on the volume of monetary savings placed at their disposal. The commercial banks, on the other hand, could continue to lend if the public should cease to save altogether.

    (E) Financial intermediaries, NBFIs, lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the commercial banks lend no existing deposits or savings: they always, create new money in the lending and investing process.

    (F) Whereas monetary savings received by financial intermediaries originate outside the intermediaries, monetary savings held in the commercial banks (time deposits and the saved portion of demand deposits) originate, with immaterial exceptions, within the commercial banking system. That is demand deposits, non-interest bearing deposits, constitute almost the exclusive net source of time deposits, or interest bearing deposits.

    (G) The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to several times the initial excess reserves held.

    (H) Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries. The funds do not leave the payment’s system.

  43. Gravatar of Kester Pembroke Kester Pembroke
    26. September 2021 at 09:05

    It really is about time that commentators learnt about the difference between semi-inflation and true inflation.

    If there is a shortage of supply how else is a market based economy supposed to ration that supply other than by price changes?

    There’s almost an air of the witch doctor about how the Bank of England is supposed to magically eliminate pressure on the demand side by changing interest rates. Which as MMTers know is at best just a front for causing more unemployment and at worst just pours fuel on the fire.

  44. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. September 2021 at 12:42

    Only price increases generated by demand, irrespective of changes in supply, provide evidence of inflation. There must be an increase in aggregate monetary purchasing power, AD, which can come about only as a consequence of an increase in the volume and/or transactions’ velocity of money.

    The volume of money flows must expand sufficiently to push prices, up, irrespective of the volume of financial transactions consummated, the exchange value of the U.S. $ (reflected in FX indexes and currency pairs), and the flow of goods and services into the market economy.

    Inflation cannot destroy real property nor the equities in these properties. But it can and does capriciously transfer the ownership of vast amounts of these equities thus unnecessarily accelerating the process by which wealth is concentrated among a smaller and smaller proportion of people. The concentration of wealth ownership among the few is inimical both to the capitalistic system and to democratic forms of government.

  45. Gravatar of ssumner ssumner
    26. September 2021 at 20:41

    Kester, You said:

    There’s almost an air of the witch doctor about how the Bank of England is supposed to magically eliminate pressure on the demand side by changing interest rates. Which as MMTers know is at best just a front for causing more unemployment and at worst just pours fuel on the fire.”

    LOL. Don’t you know that MMTers deny that monetary policy impacts aggregate demand?

  46. Gravatar of Philippe Bélanger Philippe Bélanger
    26. September 2021 at 22:49

    I assume that in this scenario where the base/GDP ratio goes from 140% to 10%, the level of the base actually falls. (Otherwise the rate of NGDP growth would have to be at least 1300% for that entire period, which doesn’t seem realistic if nominal rates are at 2%.) No matter what would happen to GDP, the fall in the monetary base would be pretty steep. I’m not saying it couldn’t happen, but the BOJ would have to take some other action in order to raise inflation, since the reduction in the monetary base would not, on its own, be inflationary. It could try to convince financial markets that the monetary base will be permanently increased in the future. Or it could buy a portion of the stock market, in order to increase the amount of liquid assets relative to risky ones. Or the fiscal authorities could do helicopter drops. But something would have to be done, otherwise I don’t see why inflation would rise at the same time as the monetary base is contracting.

  47. Gravatar of Mike D Mike D
    27. September 2021 at 05:02

    Scott, wondering what your thoughts are on this recent Fed paper by Jeremy Rudd which seems to argue that all macroeconomics is nonsense and implies that the “Primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.”

    https://t.co/8xQ59pdPCT?amp=1

    How does something like this get published??

  48. Gravatar of ssumner ssumner
    27. September 2021 at 05:48

    Philippe. Lars Svensson has a paper from 2003 which provides a roadmap. Japan could immediately depreciate the yen from 110/dollar to 120/dollar, and then commit to further depreciate it by another 2%/year. Because of interest parity, nominal rates in Japan would rise to 2% above US nominal rates. With no IOR, this would sharply reduce base demand.

  49. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. September 2021 at 07:32

    Commercial and Reserve bank credit is inflationary, whereas lending by the nonbanks is noninflationary. In the circular flow of income, if savings aren’t expeditiously activated, then a dampening economic impact is generated. Secular stagnation is none other than the impoundment of monetary savings in payment systems. Correlation in this case is causation.

    “Japanese households have 52% of their money in currency & deposits, vs 35% for people in the Eurozone and 14% for the US.”

  50. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. September 2021 at 07:40

    If time deposit banking is to add to the aggregate profits of commercial banks as a system, it is necessary to assume that the expansion of time deposits per se induces the Federal Reserve to alter monetary policy toward greater ease (or less restraint) to the extent necessary to supply the banking system with an added volume of excess reserves adequate enough to enable the banks to expand their earning assets, and thereby their net earnings, by an amount sufficient to more than offset the overall increase in costs associated with the growth of time deposits.

    The growth of time deposits in commercial banks denies savings to intermediaries, reduces lending opportunities for all institutions (including the commercial banks), and slows down the tempo of business activity; since in their time deposit function, the commercial banks are neither intermediaries nor creators of loan-funds but are simply custodians of stagnant money.

    The growth of financial intermediaries has no effect per se on the aggregate assets, earnings assets, gross income, or net profits of the commercial banks as a system; but their growth does activate monetary savings and tends, therefore, to increase the lending opportunities of the commercial banks. The growth of financial intermediaries should, therefore, enhance commercial bank earning and profits, if the Federal Reserve permits the commercial banking system to exploit their expanded lending opportunities.

  51. Gravatar of postkey postkey
    27. September 2021 at 09:29

    “There’s almost an air of the witch doctor about how the Bank of England is supposed to magically eliminate pressure on the demand side by changing interest rates.”

    “Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.

    Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan”
    https://www.sciencedirect.com/science/article/pii/S0921800916307510ing interest rates.”

  52. Gravatar of postkey postkey
    27. September 2021 at 09:36

    https://www.sciencedirect.com/science/article/pii/S0921800916307510

  53. Gravatar of ssumner ssumner
    27. September 2021 at 15:43

    Postkey, I agree.

  54. Gravatar of postkey postkey
    28. September 2021 at 00:22

    🙂
    ” the quantity variables that cause growth.”?
    “6. Bank credit creation for transactions that are part of GDP has been identified as the main determinant of nominal GDP growth.24 Hence an increase in bank credit is required to boost nominal GDP. By borrowing from banks, governments can pump-prime bank credit creation.
    This boosts nominal GDP growth and hence domestic demand, resulting in greater employment, lower expenditure on unemployment benefits, greater tax revenues and hence lower deficits and also larger GDP, lowering the deficit/GDP and debt/GDP ratios by lowering the numerator and increasing the denominator.”
    And
    “The deficit to GDP ratio will approach zero, as credit creation for GDP transactions boosts the denominator and increased tax revenues and reduced government expenditure reduce the deficit. In contrast to the unsustainable (explosive) deficit situation with bond issuance for government funding in case A, the new policy of not issuing bonds and borrowing from banks is sustainable and delivers the desired policy outcomes.”
    https://www.sciencedirect.com/science/article/pii/S0261560614001132

  55. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. September 2021 at 06:10

    re: “Bank credit creation for transactions that are part of GDP has been identified as the main determinant of nominal GDP growth”

    Sure, since the Keynesian economists achieved their objective, that there’s no difference between money and liquid assets. But the main determinant for nominal GDP growth that financed the U.S. Golden Era in Capitalism was velocity, not money.

    Economists simply don’t know a debit from a credit.

  56. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. September 2021 at 06:47

    Real Median Household Income in the United States is up 17 percent since the bottom in 2012. The S&P/Case-Shiller U.S. National Home Price Index (CSUSHPINSA)is up 95 percent during the same period.

    That’s money illusion.

  57. Gravatar of d w d w
    28. September 2021 at 08:20

    i think we are over looking the politics in the US. when one of the 2 parties is actually pushing for a bad economy as long as the other is in charge. even the Fed cant really change that. not it seems can a pandemic, that has killed more than 1/2 million of people.

  58. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. September 2021 at 11:11

    Latest gDpnow estimate: 3.2 percent — September 27, 2021

    That’s stagflation.

    Solutions to these problems are not even a remote possibility (workers given a financial stake in increased productivity, profits, etc.). It would require adequate knowledge combined with an unquenchable desire to foster the common good, the power of which would transcend, indeed conquer, all special interest greed.

  59. Gravatar of postkey postkey
    29. September 2021 at 00:31

    “But the main determinant for nominal GDP growth that financed the U.S. Golden Era in Capitalism was velocity, not money.”

    Then there will be peer reviewed econometric evidence that supports this?

  60. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. September 2021 at 10:22

    re: “Then there will be peer reviewed econometric evidence that supports this?”

    Of course there was. It’s very old news. I’ll have to dig it out because it’s not on the web.

    re: “Bank credit creation for transactions that are part of GDP has been identified as the main determinant of nominal GDP growth”

    An increase in the money stock was subsequently followed by an increase in the transaction’s velocity of money. After 1981, after the monetization of time deposits, it took increasing infusions of Reserve Bank credit to generate the same inflation adjusted dollar amounts of gDp. Now that’s become an exponential increase.

  61. Gravatar of postkey postkey
    29. September 2021 at 10:42

    “Of course there was. It’s very old news. ”

    It may be ‘very old news’. Then why isn’t the peer reviewed work excepted by mainstream economists or the research updated?

  62. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. September 2021 at 12:39

    LOL. We live in a predatory society. The ABA actually paid $3,000 to those economists that debated the issue to cease-and-desist.

  63. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. September 2021 at 13:40

    It’s diabolical. Cambridge University Economist John O’Donnell said of the U.S. Golden Era in Economics: “increased money velocity financed about two-thirds of a growing GNP, while the increase in the actual quantity of money has finance only one-third. In other words, the ratio of the money supply to GNP has fallen”

    Validated by Princeton Professor Dr. Lester V. Chandler, Ph.D., Economics Yale.

    Corwin D. Edwards, professor of economics. [Edwards attended Oxford University in England on a Rhodes scholarship and earned a doctorate in economics at Cornell University. He spent a year teaching at Cambridge University in England in 1932. He taught at New York University in 1954, the Chicago School from 1955-1963, the University of Virginia, and the University of Oregon from 1963-1971.]

    What’s the controversy? You can figure this out yourself.

  64. Gravatar of postkey postkey
    29. September 2021 at 23:15

    Econometric results?

  65. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. September 2021 at 05:46

    I can calculate it myself. Why can’t you?

    “peer reviewed” You mean by the douchebags that are running the economy diametrically in reverse?

    How the Hell did we get a repo crisis in 2019? That’s the answer. “Disintermediation is Made in Washington”

  66. Gravatar of postkey postkey
    30. September 2021 at 06:35

    Lets have the regression equation and R” value.

  67. Gravatar of postkey postkey
    30. September 2021 at 06:37

    Lets have the regression equation and R2 value.

  68. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. September 2021 at 10:38

    Of what? I have no idea what you’re asking. I know the GOSPEL. There’ not another economist that does. And nothing’s for free.

  69. Gravatar of postkey postkey
    30. September 2021 at 12:28

    “re: “Then there will be peer reviewed econometric evidence that supports this?”

    Of course there was.”

    Then where is the ‘peer reviewed econometric evidence that supports this?’?

  70. Gravatar of Justin Irving Justin Irving
    30. September 2021 at 13:41

    The FOMC today is certainly sincere. I just generated plausible trend lines from each quarter of 2019’s NGDP, advancing at an annualized 4.5% through Q2 2021. We’ve already hit the mildly depressed Q4 2019 trend line, and plausibly will be right on track this quarter.

    Can’t believe it. We’ve known for a year that the Fed more or less had convinced the market we’d be heading back to trend NGDP, but I assumed the Fed would get cold feet once the price indexes inevitably came in hot. Just incredible nerves from Powell and the others.

    Can still have major problems in the labor market from the vaccine mandates, but that’s not the Fed’s fault. They’ve give us the best possible outcome.

  71. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. October 2021 at 05:31

    re: “Lets have the regression equation and R2 value”

    You must not know much about statistics. “There are three kinds of lies: lies, damned lies, and statistics.”

    As Dr. Stephen A. DeLurgio, a Ph.D. in statistics, a university math professor, taught me in 1979, See his book:

    “Forecasting Principles and Applications”, correlation sometimes depends upon other factors. I hired him to marry two time series. At first there was no correlation, but based on other parameters, they synched up.

    You’ll have to go to the FED’s library to dig up the information.

    “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

    “Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386

  72. Gravatar of postkey postkey
    1. October 2021 at 07:09

    “re: “Then there will be peer reviewed econometric evidence that supports this?”

    Of course there was.”

    Then where is the ‘peer reviewed econometric evidence that supports this?’?

  73. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. October 2021 at 08:07

    It’s the Money Supply, Stupid!
    Steve-H-HankeSteve H. Hanke – June 21, 2012

    “In fact, if the money supply had been measured correctly by a Divisia metric, Chairman Volcker would have realized that the Fed was slamming on the brakes from 1978 until early 1982.”

    Economists just aren’t smart enough to understand their own discipline. Hanke is way off base.

    As I posted, it’s in the paperwork. Go Fish!

  74. Gravatar of ssumner ssumner
    1. October 2021 at 08:09

    Justin, I agree that the Fed’s done a good job.

  75. Gravatar of postkey postkey
    1. October 2021 at 08:34

    So no evidence just your usual B.S..

  76. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. October 2021 at 10:33

    If you keep asking the same question, then maybe you’ll realize your stupid error (but you were born too soon, so I doubt it).

  77. Gravatar of postkey postkey
    1. October 2021 at 11:38

    What I do realize that YOU are squirming!

    “re: “Then there will be peer reviewed econometric evidence that supports this?”

    Of course there was.”

    YOU agreed that there was ‘peer reviewed econometric evidence’.

    It is up to YOU to provide it!

    Of course you cannot.

    Hence your attempted diversions and B.S.!

  78. Gravatar of Ray Lopez Ray Lopez
    1. October 2021 at 20:16

    Dead board, bored commentators. Following a Pied Piper who by his own admission was an obscure econ professor until brought to prominence by one Tyler Cowen, the popular blogger of Marginal Revolution. Said Piper contributing nothing to society except forcing students to memorize the “toy” model of IS-LM, based on sus priors like money illusion and sticky prices, which have very little empirical evidence. Said Piper refusing to acknowledge (much to my surprise) the Fed had any affect on turning around the US economy, or even the US stock market, in March 2020 with their “QE-infinity” announcement (even I, who thinks money is everywhere and always neutral, would give Sumner that one, but to date, to my knowledge, he’s not acknowledged the Fed played any role in the U-turn in the stock market / economy with that announcement).

    Said Piper stating there’s no such thing as a bubble, and, strangely, despite little or no science background, firmly believing the Covid-19 virus did not originate in a lab in Wuhan.

    Anybody following such a person deserves their fate: ignorance.

  79. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. October 2021 at 03:59

    re: “What I do realize that YOU are squirming!”

    Cullen, the thrifts grew much faster than the banks, case closed.

    And what “econometric evidence” predicted the GFC?

  80. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. October 2021 at 04:20

    Latest Atlanta GDPnow estimate for the 3rd qtr: 2.3 percent — October 1, 2021

    That’s stagflation. So, unlike savings products, money products have a negative economic multiplier.

    In my application of this theory, the release of savings, was as I commented on 12-16-12, 01:50 PM #1 when the FDIC’s unlimited transaction deposit insurance was reduced to $250,000:

    “We’re close to seeing the real power of OMOs. R-gDp is likely to accelerate earlier and faster than anyone now expects. The roc in M*Vt before any new stimulus is already above average.

    With low inflation (given some deficit resolution), Jan-Apr could be a zinger”

    Zinger – a surprise, shock, or piece of electrifying news.
    So we had a “taper tantrum” and a temporary rise in gDp:

    “Fact Check: Was 2013’s ‘Taper Tantrum’ Actually So Tumultuous?”
    https://www.fisherinvestments.com/en-us/marketminder/fact-check-was-2013s-taper-tantrum-actually-so-tumultuou

    I.e., we didn’t get high inflation accompanying the “taper tantrum”.

    You see, the economists are running the economy in reverse

  81. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. October 2021 at 05:27

    All monetary savings originate within the system. The source of interest bearing deposits is demand deposits. As time deposits grow, demand deposits are depleted dollar for dollar.

    That’s why Dr. Phillip George’s equations work in his “The Riddle of Money Finally Solved”. There becomes a shifting of liabilities.

    “When interest rates go up, flows into savings and time deposits increase” ( the ratio of M1 to the sum of 12 months savings ).

    It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.

    This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.

    This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent, lost to both consumption and investment). In a twinkling, the economy begins to suffer. 2018 is prima facie evidence.

  82. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. October 2021 at 06:06

    FAIT is folly. There’s no subsequent increase in Vt.

  83. Gravatar of Todd Ramsey Todd Ramsey
    2. October 2021 at 07:38

    Scott-

    I am loving your book. You’re a good writer.

    Any chance you could sponsor something of a book club? We read a chapter or two a week, and you have a post each week responding to questions we have?

    Just an idea. I figure it can’t hurt to ask. Thanks.

    Maybe Stephanie Kelton will join!

  84. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    2. October 2021 at 11:59

    Powell: “But they will abate, and as they do, inflation is expected to drop back toward the Fed’s goal of 2%.”

    The FOMC controls AD. But inflation is not on track to drop back to 2% until 2023.

  85. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    3. October 2021 at 06:06

    Totally agree with The Nattering Naybob re: “Any taper should coincide with a tightly controlled rise in rates via reduction in IOER, IBDD remuneration and O/N RRP balances”

    Paradoxical. R-gDp has fallen due to the O/N RRP uptake.

    Money flows, volume times transactions’ velocity.

    01/1/2021 ,,,,, 0.65
    02/1/2021 ,,,,, 0.66
    03/1/2021 ,,,,, 0.70 6.3% R-gDp
    04/1/2021 ,,,,, 0.70
    05/1/2021 ,,,,, 0.77
    06/1/2021 ,,,,, 0.80 6.6% R-gDp
    07/1/2021 ,,,,, 0.82
    08/1/2021 ,,,,, 0.63
    09/1/2021 ,,,,, 0.37 2.3% R-gDp
    10/1/2021 ,,,,, 0.39
    11/1/2021 ,,,,, 0.36
    12/1/2021 ,,,,, 0.30

  86. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    3. October 2021 at 08:43

    Stephanie Kelton doesn’t know a debit from a credit. We now have a socialist party, not a democratic party. Biden appointed a communist, Saule Omarova, to Comptroller of the Currency.

    You can’t target “base money”:
    https://fred.stlouisfed.org/series/TOTRESNS

    1/1/2021 ,,,,, 3153.8 ,,,,, 18.8
    2/1/2021 ,,,,, 3345.9 ,,,,, 192.1
    3/1/2021 ,,,,, 3721.3 ,,,,, 375.4
    4/1/2021 ,,,,, 3887.3 ,,,,, 166
    5/1/2021 ,,,,, 3872.4 ,,,,, -14.9
    6/1/2021 ,,,,, 3848.1 ,,,,, -24.3
    7/1/2021 ,,,,, 3943.9 ,,,,, 95.8
    8/1/2021 ,,,,, 4140.1 ,,,,, 196.2

    The FED is operating without a rudder or an anchor.

    You can’t target Reserve Bank credit, there’s no connection to the growth of the money stock:
    https://fred.stlouisfed.org/series/RSBKCRNS

    1/1/2021 ,,,,, 7336.278 ,,,,, 72.848
    2/1/2021 ,,,,, 7454.673 ,,,,, 118.395
    3/1/2021 ,,,,, 7600.246 ,,,,, 145.573
    4/1/2021 ,,,,, 7720.223 ,,,,, 119.977
    5/1/2021 ,,,,, 7825.110 ,,,,, 104.887
    6/1/2021 ,,,,, 7968.106 ,,,,, 142.996
    7/1/2021 ,,,,, 8125.314 ,,,,, 157.208
    8/1/2021 ,,,,, 8253.908 ,,,,, 128.594
    9/1/2021 ,,,,, 8367.931 ,,,,, 114.023

    1/1/2021 ,,,,, 3367.9 ,,,,, 11.6
    2/1/2021 ,,,,, 3527.5 ,,,,, 159.6
    3/1/2021 ,,,,, 3762.3 ,,,,, 234.8
    4/1/2021 ,,,,, 3846.6 ,,,,, 84.3
    5/1/2021 ,,,,, 4032.7 ,,,,, 186.1
    6/1/2021 ,,,,, 4290.4 ,,,,, 257.7
    7/1/2021 ,,,,, 4422.7 ,,,,, 132.3
    8/1/2021 ,,,,, 4495.8 ,,,,, 73.1

    Unfortunately, the only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. Powell eliminated legal reserves in March 2020.

  87. Gravatar of David S David S
    3. October 2021 at 09:12

    x2 on Todd’s request. No on Kelton.

    Chapter 12 is especially good.

  88. Gravatar of ssumner ssumner
    3. October 2021 at 13:16

    Ray, I hate IS-LM, and don’t “firmly believe” anything about the origin of Covid. Otherwise, nice try.

    Todd, Maybe if there is enough interest. In the meantime, feel free to ask questions about the book.

    Thanks David.

  89. Gravatar of Kester Pembroke Kester Pembroke
    8. October 2021 at 08:49

    MMT looks at money neutrality in a different way – because we take into account the excess financial savings that stops money being neutral.

    Understanding that government can set the price level alters the game.

    The state should determine the price it is prepared to pay for things and let the market price come to them. When some government supplier says “we’re putting the price up because of the cost of living”, the state should always say no. There should never be wage increases on government salaries. If the private sector is poaching too many staff, then that is an indication that productivity has risen and taxes need to be increased to release the resources government requires. Taxes are therefore a way of making sure people will work for the amount the government is paying, and by doing that the price of goods and services is forced to decline over time as productivity improves.

    That means MMT can achieve the same systemic position mainstream proposes – wages stay static and prices decrease over time as productivity improves due to the effect of competition, thereby increasing the real wage. Except that the MMT approach actually works and doesn’t require millions of people unemployed.

    So which is the better ‘money neutral’ stabilisation system?

    – one where unelected wonks in a central bank try to manipulate credit expansion and contraction indirectly to generate the 5% unemployment necessary to stop wages rising, using an interest rate steering process that doesn’t work, and which actually drives up prices due to the forward pricing effect.

    – or one where government makes ‘offers of last resort’ for most of its spending and leaves the fiscal drag generated by taxation to force both firms and individuals to take those offers. Since one of those offers is ’employer of last resort’ nobody ever needs to be unemployed.

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