Whom should you trust?

A few weeks back I pointed out that the Japanese yen plunged in value in response to news of negative IOR.  Much of the media and blogosphere seemed to have the opposite reaction.  A few days after the announcement, the yen appreciated strongly on news that the BOJ was backing off from further rate cuts.  The media interpreted this as evidence that negative IOR led to currency appreciation.  Who was right?  And how would we know?

In the long run, you want to rely on a worldview that allows you to make sense out of the myriad news events that are reported each day.  I believe that framework is market monetarism.  Let’s take an example, a headline from today’s FT:

Yen dives on talk of negative rates on loans

If you relied on the mainstream media, that headline would make no sense.  “Wait, weren’t we told on Twitter that Sumner was foolishly attached to the notion that negative IOR was expansionary, despite all indications to the contrary?  If so, how are we to understand this headline?”  On the other hand if you relied on market monetarism, there would be no cognitive dissonance to deal with.  It would all make perfect sense.

Do yourself a favor and start relying on MM for your worldview, it makes life much less painful.

PS.  Nick Rowe has a very good new post on some odd claims made by the Bank of Canada.  They suggested that fiscal stimulus by the new Trudeau government would have an expansionary impact.  The BOC governor suggests it will work because inflation in Canada is “low”.  But it’s not clear why that matters, as interest rates in Canada are not at the zero bound.  Just one more example of the creeping advance of old Keynesianism—something I expected to happen, but hoped would not.

HT:  Benn Steil



17 Responses to “Whom should you trust?”

  1. Gravatar of james elizondo james elizondo
    22. April 2016 at 21:27

    ETA on your book? I assume it’s about the framework of MM?

  2. Gravatar of Benjamin Cole Benjamin Cole
    22. April 2016 at 21:43

    Nice post, and I am happy to say on this topic I am totally in agreement with Scott Sumner!

    I watch the Nikkei 225 every trading day (in a professional capacity, which includes writing about it).

    The yen goes down, the Nikkei 225 goes up. However, the Nikkei 225 or stock market links a softer yen not to domestic inflation and demand, NGDP, or monetary expansionism, but to reported profits at publicly held companies.

    The market believes Japan has an export-model economy, and greater exports drive profits and economic growth.

    This sets up a curious schism between EMH, stock prices, and free trade theory.

    Or perhaps there are such large structural impediments and institutional imperfections in the Japanese economy, that the island nation actually benefits, in the short- to medium-range, from a cheaper yen and exporting more.

    Or perhaps the markets have lost faith in domestic expansionism, no matter how much the Haruhiko Kuroda and the Bank of Japan try. This may be because the the central bank has been too timid for too long, and now has no credibility.

    I suppose there may be a bias in the Japanese stock market, and listed firms are exporter-centic. Unlisted firms handle domestic trade.

    BTW, people are paying the government of Japan for the privilege of lending the nation money for 10 years, that is 10-year bonds yields are negative.

  3. Gravatar of derivs derivs
    23. April 2016 at 03:27

    “This sets up a curious schism between EMH, stock prices, and free trade theory.”

    Not really. I keep pointing out to you that you ignore balance sheet arbitrage every time you talk about equity markets that rally as their currency falls. I remember you doing the same with the DAX. To super simplify – basically that Airbus 330 on the balance sheet is worth X billion wherever it is.

    I always thought the conventional wisdom of market participants was that money flows to higher rate countries seeking higher yield, so therefore lowering your rate would result in a sell off of your currency. One of the first comments I ever made on this site was how the answer should be 0. Change in rate results in zero expected value gain of moving your currency. To which someone who trades, correctly pointed out to me that all my math silliness is just silly as they see traders in their office chase the carry trade all the time. Which is why, even knowing it shouldn’t make a difference, if a lil birdie whispered in my ear that X country was about to be raise rates I would be buying their currency before others did, because heck, it’s better to run with the dummies and win than to be too smart for your own good and lose.

  4. Gravatar of derivs derivs
    23. April 2016 at 03:29

    “basically that Airbus 330 on the balance sheet is worth X billion wherever it is.”

    That should have read “X billion US DOLLARS wherever…” I used brackets and it got deleted.

  5. Gravatar of ssumner ssumner
    23. April 2016 at 04:55

    James, I’m not sure, it will be a while.

    Ben, I’m not sure I see the “schism”

    Derivs, It seems like the problem here is reasoning from a price change. Does the exchange rate rise due to tight money, or stronger growth?

  6. Gravatar of Major.Freedom Major.Freedom
    23. April 2016 at 05:22

    Internally inconsistent doctrines such as (anti) market monetarism are not needed to explain, and actually upon close inspection cannot explain, banking concepts and phenomena.

    The “declining value of the Yen” here is not due to and is not necessaeily associated with, any consideration of aggregate spending in Yen in Japan, as Benjamin Cole (surprisingly) correctly pointed out. It is due to the introduction of an effective tax on certain institutions for holding Yen. In other words, money is being taken out of the banking system by the BOC.

    For whatever incentive there is to “getting rid of Yen”, there is an equal and opposite incentive of “not accepting Yen”. The depreciation of the Yen is with respect to other currencies, not “higher aggregate spending in Yen”. A depreciated Yen relative to the Dollar may or may not be caused by higher inflation in Yen. We are just so used to seeing the correlation that it is easy to conflate the two.

    Depreciation of Yen relative to say the Dollar in the foreign exchange market is not equivalent to inflation or NGDP increases in Japan.

    If NGDP in Japan does increase, which it always could for a number of reasons, it won’t be because banks are taxed. One bank holding less Yen requires another bank to hold more Yen. But why would any bank hold more Yen? If there is an incentive to get rid of Yen, there is an equal and opposite incentive to not hold Yen. Any Japanese bank that successfully “gets rid of Yen” does not remove Yen from the Japanese banking system.

    What negative IOR does is gradually reduce the quantity of reserve money in the banking system. The faith is that by taxing reserve Yen, there will be an incentive to “get rid of” the remaining reserve Yen, such that velocity goes up and endogenous Yen money goes up sufficiently to counteract the drop in the supply of reserve Yen, all so that NGDP in Yen goes up.

    From the BOC’s perspective and hence by the antimarket monetarist perspective, by charging a fee to hold reserves, the BOC will incentivize the banks to be less willing to deposit Yen reserves with the BOC, and instead simply lend it to businesses and consumers instead. That is a faith based jump, because if there were profitable uses in lending more Yen to businesses and consumers, the banks would already have lent that Yen instead of parking it at the BOC. The parking of Yen at the BOC is a result of no additional profitable investment for Yen given the investment/consumption ratio in Japan. Banks are not merely hoarding the Yen when they could be profitably lending it. They have already lent as much as they proriftably could. To say otherwise is to presume to know more about profitable investment opportunities than the specialists, the market, itself. Sumner is at heart a socialist.

    Banks won’t just lend more Yen to Mrs. Smith simply because Mr. Smith is no longer paying interest. Mrs. Smith has to be able to pay interest, and if she could pay more interest, the banks would have already lent Yen to her. The fact they didn’t SHOULD have been a clue that the parking of Yen at the BOC was the only profitable use of Yen at the time.

    As an analogy, imagine the value of these blog posts going down relative to other blogs, as Sumner starts charging his readers $0.01 per page view. Is this equivalent to there being more antimarket monetarism blog posts? Of course not. Now imagine there is an actual increase in blog posts. That would also, ceteris paribus, be associated with a lower value per blog post (law of declining marginal utility). In antimarket monetarism we are led to believe the former is equivalent to the latter, when they are in fact distinct. Charging readers per page view is not a certain cause for more more pages created and viewed, even though more pages would, ceteris paribus, be associated with a lower value per page.

    Sumner claims his theory is empirical, despite the fact that empiricism demands that all theories remain hypothetical and never be presented as an apodictic certainty. Where is this certainty deriving? From the a priori socialist foundation of his worldview, which is being called “pragmatism.” Sumner believes himself to know that additional (risk adjusted) profitable investment opportunities exist in Japan that even the bankers themselves don’t know about. The bankers who all day every day scour the market for profitable investment opportunities. They don’t know as much as Sumner knows.

    Well then, why doesn’t Sumner invest in those opportunities himself and front run the stupid Japanese banks? Clearly the banks are so stupid that OF COURSE they should be charged a fee to hold Yen at the BOC. They deserve it. The greedy hoarders. They ought to be taxed if they don’t invest more.

    Next step for Sumner’s “pragmatism” is to support the taxing of the Japanese citizenry for holding Yen at their banks instead of spending it.

    No end in sight for the madness of socialism.

  7. Gravatar of CitizenCoKane CitizenCoKane
    23. April 2016 at 12:38

    I am a bit confused whenever people talk about the Bank of Japan having a loose monetary policy. If you look at nominal GDP growth for Japan since 1996, it has been negative. 20 years without an increase in nominal GDP. Suuuuuure, that’s some “loose” monetary policy right there!

    Why on earth does nobody talk about this? Doesn’t Japan’s central bank have control over nominal GDP? Shouldn’t engineering a little bit of that “elusive” inflation that economists on Japan are always talking about be as easy as apple pie?

  8. Gravatar of Benjamin Cole Benjamin Cole
    23. April 2016 at 19:46


    I am not sure what I am talking about either.

    Maybe like this: Okay, we believe in sticky wages. But in purely free commerce, wages should drop to clear labor markets. So in theory, sticky wages do not exist.

    But due to institutional, legal, contractual, traditional and cultural issues, wages do not drop quickly enough in the U.S. The theory does not work as a practical guide to actual policy-making.

    Sticky wages are a structural impediment, and we sensibly adjust macroeconomic policy to accommodate this impediment. Indeed, we Market Monetarists like moderate inflation.

    I suspect something similar is going on in international trade along the lines of huge institutional imperfections and structural impediments.

    I cannot prove this.

    The Japan stock market surges on export outlook. Far East nations have boomed for generations on the export model. Germany is the strong man of Europe, and an exporter. For that matter, everybody’s favorite Singapore has been running mounting trade surpluses for two decades.

    Yes, there are exceptions. The US remains rich (though there is the structural impediment that works in our favor, and that is we have a reserve currency). Hong Kong is an importer (this may muddy upon closer examination).

    Something nags at me about the “import our way to prosperity, and run up mounting debts to foreign holders of IOUs” model.

    Maybe it is old-fashioned Puritanism, aversion to debt. Ben Franklin-ism, “Neither borrower nor debtor be.”

    Perhaps I have a misplaced moral sense one is supposed to work for the standard of living, not send pieces of paper in exchange for goods and services. It reeks of decadence!

    Perhaps I should be more internationalist (difficult,when one’s nation levies taxes by confiscation, and neighborhood crime rates and unemployment directly affect the quality of life).

    There are also some empirical observations. The US did fine under President Reagan, the most aggressive protectionist (by a country mile) of the PostWar Era.

    After President Nixon slapped on a 10% across the board tariff in August 15 1971, the US economy expanded by more than 5% in 1972 and another 5% in 1973.

    BTW, the largest one-day gain in Dow history (to that point) was the Monday after Nixon applied the tariffs.

    The Dow did fine under Reagan too. Reagan’s wide-ranging and aggressive protectionism evidently was not that harmful or dangerous.

    I keep an open mind on trade issues.

  9. Gravatar of Anthony McNease Anthony McNease
    24. April 2016 at 04:23

    “Just one more example of the creeping advance of old Keynesianism—something I expected to happen, but hoped would not.”

    Some things need to be relearned. Especially from an elite class that explicitly is antipathetic towards history.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. April 2016 at 05:44

    ‘Reagan, the most aggressive protectionist (by a country mile) of the PostWar Era.’

    Let’s hear what Senator Trent Lott had to say about that;


    ‘I found myself in a rare, head-to-head confrontation with President Reagan over proposed import tariffs on textile goods–a bill that aided industries already struggling in the US. Mass-produced goods from abroad were making a dent in an indigenous American business whose roots stretched back a century. The proposed tariffs would help protect this industry–including two textile plants in my district, which would benefit directly.

    ‘I informed the administration, which opposed the bill, that my support for the legislation prevented me from performing my whip duties. My chief deputy whip and I both recused ourselves.
    Still, the bill passed, only to be promptly vetoed by the president. I did lead the drive to override the president’s veto in an exhaustive campaign, and we managed to get 276 votes–71 Republicans and 205 Democrats. But it takes 2/3 of the votes to override a president, and our tally of 276-149 fell eight votes short.’

    Also, NAFTA originated with Reagan. He got the US-Canada Free Trade Pact passed and signed. Mexico was added during the GHW Bush presidency and signed into law by Bill Clinton (with some help from Rush Limbaugh!).

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. April 2016 at 05:55

    This might be a good time to remind of Milton Friedman’s joke;

    ‘Statistics are like lampposts. They can be used as they were intended to be used; for light. Or, they can be used the way a drunk uses a lamppost; for support.’

  12. Gravatar of ssumner ssumner
    24. April 2016 at 06:20

    CCK, Good questions.

    Ben, You are making this much too complicated. Countries that do a lot of international trade tend to be richer. Why is that surprising? That’s what free trade theory predicts.

    Patrick, Good comment.

  13. Gravatar of Benjamin Cole Benjamin Cole
    24. April 2016 at 15:47


    Patrick Sullivan–

    President Reagan’s aggressive protectionist policies are a matter of historical record, and were much larger and more pervasive than anything Donald Trump has proposed.


  14. Gravatar of derivs derivs
    25. April 2016 at 03:04

    “Derivs, It seems like the problem here is reasoning from a price change. Does the exchange rate rise due to tight money, or stronger growth?”

    I would pick “belief” of stronger growth, exactly as stated by Ben. market participants often just knee-jerk react to headline news without thinking. Then if it the move doesn’t hold they find something in the article, that comes out 5 minutes later, to explain what made the market reverse…

    “Something nags at me about the “import our way to prosperity, and run up mounting debts to foreign holders of IOUs” model….”Maybe it is old-fashioned Puritanism, aversion to debt. Ben Franklin-ism, “Neither borrower nor debtor be.”

    Of course it is difficult, it appears not in anyones political interest to give a fair accounting of what is actually happening. To ignore the fact that an asset of equalish value is being brought into the country and therefore raising the asset value of the balance sheet of the country. Nope, lets just look at the liability side of the balance sheet. Forget about that pile of steel sitting over there, ignore the 7% faster chip coming in from South Korea, for $200, that will allow some video design employee whose productivity is $600,000 a year to increase his productivity by 4% resulting in a $24,000 benefit. Nope let’s just focus on the $200.

    and as an FYI.. I hate sounding edumacated, but pretty sure the borrower lender comment was Polonius/Shakesbeer.

    One of my biggest worries is anything that would interfere with James Burkes “Connections”

  15. Gravatar of Oderus Urungus Oderus Urungus
    25. April 2016 at 05:43


    Why do believe the BoJ (or any other central bank) has control over NGDP?

  16. Gravatar of Patrick Sullivan Patrick Sullivan
    25. April 2016 at 06:13

    Benjamin, you didn’t like Friedman’s joke?

    Now this is timely;


    In recent years, that euro peg has worked well for these countries. Since 2014, the euro has fallen about 20% against the dollar on the back of a stronger U.S. economy and the expectations of higher rates that strength has brought. The euro’s weakness has made the countries’ exports more competitive.

    The franc currency zone’s biggest commodity exports, like cocoa and gold, have also fared better than oil, which is a bigger export for the African nations that are pegged to the dollar.

    Gross domestic product in CFA franc countries grew by 4.4% in 2015 and 5.5% in 2014, according to the World Bank. That compares with 3.4% in 2015 and 4.6% in 2014 for most other sub-Saharan countries, many of which benchmark their currency against the dollar.

  17. Gravatar of Patrick Sullivan Patrick Sullivan
    26. April 2016 at 07:10

    Well, what’s Texas going to do about this (California is eliminating inefficient longshore jobs with clean technology);


    ‘At Los Angeles and Long Beach, the International Longshore and Warehouse Union refused to formally accept self-driving and automated technologies until 2008. Since then, none of the ILWU’s 14,000 full-time West Coast dock members have lost jobs, but 10,000 contingent workers are called less often, said Jim McKenna, president of the Pacific Maritime Association, an employer group. He declined to say how much less. But it’s enough that ILWU leaders are no more enthusiastic about having Jerry Brown promote autonomous driving in the name of clean air today, as they were about having corporations promote containerization in the name of efficiency half a century ago.’

Leave a Reply