Why Ambrose Evans-Pritchard is essential reading
I thought Americans were supposed to be the ones with the can-do spirit, and the Brits were supposed to be the old-world sophisticates with a fatalistic view of things. But consider the title and subtitle of this article from the only reporter who really understands what’s going on with monetary policy in the US:
Dangerous Defeatism is taking hold among America’s economic elites
Goldilocks has played a trick on America. Growth is not warm enough to prevent hard-core unemployment climbing to post-war highs and sticking at levels that corrode the body politic, but not yet cold enough to overcome the fierce resistance of the Fed’s regional hawks for a fresh blast of stimulus.
Read the entire article, it’s great. He has the same views as I do, but writes far better.
In this recent post I talked about how the British seemed to understand our monetary dilemma better they we do. (I might have added that I once thought we understood the Japanese problem better than they did. Now I wonder.) In that earlier post I discussed some recent articles at The Economist Free Exchange and the Financial Times. Do you ever see any articles in the NYT or WSJ that seem to understand monetary policy? I suppose I am sounding like Brad DeLong, but on monetary economics the difference between the two countries’ press corps is so striking that it calls out for an explanation. Does anyone have one?
Remember the phrase “overpaid, over-sexed and over here?” If even the Brits are telling us Americans to get some (monetary) testosterone and snap out of our malaise, what does that tell you?
HT: David Stinson
Tags:
5. September 2010 at 20:16
The WSJ does the opposite. Frquently they open space in the oped page for a “gold bug”.
It seems the Brits learn. They botched up in 1925 and were the first to “escape the trap” in 1931. They like “tradition”, but not of that sort.
5. September 2010 at 21:15
Nice bit of writing by Ambrose.
Somehow the “conservatives” in America have become enraptured of “tight money” and a “strong dollar” and say we should not debase the currency etc etc. And once political fault lines develop, reason goes out the window (although I suspect conservatives will call for monetary easing if they get a President they like; remember Reagan and George Gilder, and Gilder’s gushing about inflationary booms, the Volcker getting edged out in favor of Greenspan).
This blah-blah about a strong dollar and firmness has to be beaten back, by repeatedly referring to Japan. Oh, they have a strong yen, they have zero inflation–they also have had 0.8 percent annual GDP growth for the last 20 years, less than statist France. And their property and equity markets are off by 75 percent.
That is the story we should be telling now.
Growth Hawks must defeat the dithering Japan Wing of the Fed: That is how the argument must be framed.
5. September 2010 at 22:17
The European policy debate seems to be in a whole different place than the US: in particular, they seem to take cross-country empirics rather more seriously.
5. September 2010 at 22:46
“This is the worst possible prescription. What is needed is fiscal austerity (slowly) before debt spirals out of control, offset by easy money or real QE for as long as it takes. This formula rescued Britain from disaster in 1931-1993, and 1992-1994.
Damn the rest of the world if they object. They have been free-loading off US demand for too long. A weaker dollar will force the mercantilists to face some hard truths. So keep those helicopters well-oiled and on standby.”
This is something that I’ve been thinking about for a while and I’m sure you could explore and explain this better.
People tend to talk as if monetary expansion that devalues currency was the same thing as devaluing currency through purchasing foreign government currency. However, I think there’s a key difference, if you think about everybody doing that. If all central banks purchase foreign currency, it just means more currency sitting in central bank vaults. However, if all banks expand monetary supply, then even if the resulting relative currency values stay the same, there is more money out in the circulation.
5. September 2010 at 23:31
“I suppose I am sounding like Brad DeLong, but on monetary economics the difference between the two countries’ press corps is so striking that it calls out for an explanation. Does anyone have one?”
Better education and a livelier public debate. Look for the American equivalent of the BBC. It doesn’t exist. Would somebody like David Attenborough, or even John Cleese, have been given a chance to shine on American TV? Conversely, would Sarah Palin have stood a chance in the House of Commons? Can you imagine George W. Bush trying to cope at Prime Minister’s question-time?
6. September 2010 at 03:17
Pity that self-same press corp is so quiet on its own country’s woefully complacent monetary policy
6. September 2010 at 04:11
First time poster, long time reader…
It seems that objections to NGDP targeting fall into two main camps.
One is that given the need for households to repair their balance sheets, any increase in NGDP will result in higher levels of P than Y, as compared to what you would expect in a non-balance sheet type recession. Because of that, NGDP targeting will have less positive impact on unemployment than what you would normally expect.
A second objection could be termed the “Dom DeLuise” effect. During his mid-Seventies heyday, Dom DeLuise could have committed to a target of losing a good amount of weight, made that commitment in as public a manner as possible, had every good intention of meeting that commitment within a set period of time (say one year), possessed the financial means of achieving that commitment through buying healthier foods, but then at the end of year weigh as much as before (if not more). Continuing with this loose analogy, Ben Bernanke could commit the Fed to an NGDP level target, but if a significant number of his fellow Board members lack the will to follow through on his commitment, and the markets don’t take the commitment seriously, then the chances could be high that the publicly announced target would not be met.
Given the conservative instincts of central bankers, markets naturally find more credible a policy regime that leads to steadily declining inflation rates (coupled with higher than optimal unemployment), than a regime of increasing prices that would result from an NGDP target. Markets would anticipate that conservative central bankers would get cold feet as the price level starts rising to the degree necessary to achieve the higher level of NGDP (given the balance sheet troubles of households). Similarly, the general public would have found it more credible to see Dom DeLuise keep or gain weight, versus successfully meeting his weight loss target.
How do you answer the above, since they’re commonly voiced objections? Does Ben Bernanke need to take to heart something akin to Nixon’s madman theory, in order to overcome the market’s skepticism of conservative Board members embracing an NGDP target?
6. September 2010 at 04:42
With today´s piece on the NYT krugman is doing a disservice. He insists 1937/38 was a FP error. No mention of MP bungling.
http://www.nytimes.com/2010/09/06/opinion/06krugman.html?_r=1
Much better piece from Robert Higgs:
http://www.independent.org/publications/tir/article.asp?a=430
6. September 2010 at 05:21
Much of the press is on the left and prefer large activists government and aggressive fiscal policy.
The WSJ seems to lack a go to expert, since the death of Milton Friedman, on monetary policy.
I do wonder what Scott thinks of Taylor’s comments on monetary policy.
“But Caroline Baum wonders whether the Fed should now just print a lot more money and buy more mortgages or other securities. That might sound like a monetarist solution, but Friedman did not believe in big discretionary changes the money supply. Rather, he advocated a constant growth rate rule for the money supply. I doubt that he would have approved of the rapid increase in the money supply last year, in part because he would have known that it would be followed by a decline in money growth this year. He always worried about monetary policy going from one extreme to the other and thereby harming the economy. That is why the Fed should be clear and careful as it brings back down the size of its balance sheet, which exploded during the crisis.”
http://johnbtaylorsblog.blogspot.com/
6. September 2010 at 06:01
Marcus, Yes, and they got out of the euro project in 1992.
Benjamin, I keep hoping someone will dig up a WSJ editorial from the 1980s, criticizing further moves to tighten, despite 4% inflation under Volcker. I vaguely recall reading them.
Lorenzo, You said;
“The European policy debate seems to be in a whole different place than the US: in particular, they seem to take cross-country empirics rather more seriously.”
Good point. I notice that all the time. The way we seem to ignore policy experiments in other countries. I don’t recall anyone in either party even talking about the Singapore health care system during the recent debate, despite that fact that it is by far the most successful in the world in cost/longevity terms.
Americans remind me of the Chinese. Anytime you suggest an economic idea to the Chinese, they say “Ah, but you don’t understand, China is different.”
I was reading an article on minimum required gasoline prices in Wisconsin. The report discussed both sides, noting that supporters warned of monopoly if fierce price competition was allowed. At no time did the reporters discuss whether monopoly had developed in the other 49 states. It makes you want to pull out your hair.
BTW, I wish I had read that article about Germany before my post on the euro a week ago. Some argued the lower euro couldn’t explain the growth because export orders come well ahead of actual production. But it appears most of the growth was investment and consumption, which obviously could rise on expectations of future export growth.
Mikko, I see your point, but it is not quite right. Countries don’t actually purchase foreign currency, they purchase foreign bonds. The news media just calls it currency. So if all countries do it, it is exactly the same as if all countries do domestic monetary stimulus.
Kevin, Yes, those are good points. By the way, I have advocated the UK parliamentary system for the US. (No queen however.)
W le B. That raises an interesting point. I assume that some in the UK think they can’t recover strongly w/o the US and eurozone doing the same. That’s where a lot of their exports go. I haven’t followed the UK situation closely. I know they had some depreciation, and also their inflation is higher than ours. Does that mean they are more expansionary? I don’t know. I’d want to look at NGDP.
Rick, You said;
“One is that given the need for households to repair their balance sheets, any increase in NGDP will result in higher levels of P than Y, as compared to what you would expect in a non-balance sheet type recession. Because of that, NGDP targeting will have less positive impact on unemployment than what you would normally expect.”
That’s a good point, but even if correct I’d still favor NGDP targeting. The reason is that inflation is a very flawed statistic, which doesn’t measure anything useful. NGDP growth better captures the variable that causes problems associated with unstable inflation. (debtor-borrower inequality, real wage distortions, Fisher effect, distortionary taxes on capital. etc.)
So I’d favor it in any case.
You said;
“Continuing with this loose analogy, Ben Bernanke could commit the Fed to an NGDP level target, but if a significant number of his fellow Board members lack the will to follow through on his commitment, and the markets don’t take the commitment seriously, then the chances could be high that the publicly announced target would not be met.”
I agree, but this is completely consistent with what I have argued. I’ve never argued that Bernanke should make a commitment that he doesn’t think the Fed will keep. I’m trying (in this blog, in my own small way) to get the Fed to want to keep those sorts of commitments. If they don’t want to (at least a majority), then I agree, there is no chance of success.
You said;
“Given the conservative instincts of central bankers, markets naturally find more credible a policy regime that leads to steadily declining inflation rates (coupled with higher than optimal unemployment), than a regime of increasing prices that would result from an NGDP target.”
I have a little bit of trouble with the term “naturally.” Between the 1950s and early 1980s inflation rose almost steadily, despite central bankers that were similar to those we have now. Since then it has fallen fairly steadily. But whose to say we can’t get them to change their minds again. Your point is a good one however, as it explains why in the short run it is so hard to get them to move. I am asking for a sharp deviation form their nearly 30 year project of opportunistic disinflation.
Thanks marcus, Krugman says the depression was caused by too much debt? In the first 14 months of Depression (already worse than this one at the low point) there had been zero banking panics in the US. How exactly did debt cause NGDP to fall off the table in 1929-30? I’d say the tight money policy adopted explicitly to kill off the stock market boom (combined with gold hoarding in France and elsewhere) was the main cause.
6. September 2010 at 06:34
Of course his fable metaphor leaves one to say “we have things just right.”
One loves a good slip.
6. September 2010 at 07:29
“Mikko, I see your point, but it is not quite right. Countries don’t actually purchase foreign currency, they purchase foreign bonds. The news media just calls it currency. So if all countries do it, it is exactly the same as if all countries do domestic monetary stimulus.”
A little light bulb flashes above my head.
“Clearly, the ‘canonical New Keynesian’ model that holds such sway on America’s elites is intellectually exhausted.”
That is the best and most important line in Ambrose’s article. It’s not the Fed’s hawks (pro-Japan) lobby that is the biggest problem; it’s the NK model, which makes “doves” impotent.
6. September 2010 at 07:38
Scott,
The article mentions a proposal to boost M3 through bond purchases from pension funds, insurers and the public. Any thoughts on its relative merits?
6. September 2010 at 07:40
Why wouldn’t Friedman’s suggestion of constant money growth work as well as Scott’s suggestion? If the velocity is constant in the long run it ought to have the same effect.
6. September 2010 at 07:47
Ambrose cites Tim Congdon’s work as justification for QEII. Nearest I can tell, Congdon believes that by raising cash levels of fund managers, the Fed would induce them to buy riskier assets. While he doesn’t spell it out clearly, it seems he believes the banks cannot be induced to take on marginal risk, while other financial intermediaries can. The result should be higher velocity, more broad money growth, more NGDP growth.
http://www.ft.com/cms/s/0/d7333976-6bef-11de-9320-00144feabdc0.html
The irony is that the first part of this is exactly what happened after the Fed’s $1.25tr in RMBS purchases from banks. Funds that wanted to (say, PIMCO) could unload now-expensive RMBS and buy corporate bonds. Presumably they did, as corporate bonds spreads collapsed, as did junk bond spreads. The collapse in bond spreads resulted from a shuffling around of paper: corporates refinanced old bonds or (with proceeds from net new issuance) raised deposit levels at banks, the funds re-allocated from RMBS to corporate bonds, the banks from RMBS to cash, and the Fed ended up with the RMBS. Effect on sustained M3 growth? Apparently zero.
What escapes proponents of Fed risk-asset QE is that risk spreads in much of the credit market (corporates, emerging markets, high yield, muni’s, RMBS and, yes, even CMBS) are already quite low; or (in the case of CMBS) they have at least fallen significantly and re-ignited a boom in issuance. Despite that, NGDP growth is falling. How do they expect a further QE-induced reduction in spreads to spark growth?
Introduce a high, credible inflation penalty and actors will likely want to hold less cash. The evidence so far: introduce just more cash through QE and they will shift portfolios around with no sustained impact on NGDP.
6. September 2010 at 09:55
Scott,
I have been convinced by those using the too much debt argument that this is a major problem. I think the average voter in the US is also convinced and that this explains why the Dems are in trouble.
When you say:
“Thanks marcus, Krugman says the depression was caused by too much debt? In the first 14 months of Depression (already worse than this one at the low point) there had been zero banking panics in the US. How exactly did debt cause NGDP to fall off the table in 1929-30? I’d say the tight money policy adopted explicitly to kill off the stock market boom (combined with gold hoarding in France and elsewhere) was the main cause.”
Could it be that the tight money policy you describe was the trigger but the high debt level amplified the problem so much that we went into depression?
6. September 2010 at 10:21
Conservatives feel that a successful policy of monetary expansion will be used to justify the fiscal expansion of the Obama administration. Of course they ignore the rent-seeking effects whereby a longer recession makes government expansion easy and likely.
6. September 2010 at 11:00
I’ve seen here and elsewhere in your site, the frequent assertion that the cause of the crisis was not capital misallocation, but tight money and a subsequent(?) fall in NGDP that caused the crisis. Or am i mischaracterizing the position?
I was wondering whether you could give a relative simple (say, B.A. level) explanation as to how this could have been avoided, given that there was a rather sharp and pervasive fear in the country (as to its immediate economic future), leading to a sharp drop in the demand for loans and presumably therefore a sharp drop in the velocity of money. Also, the uncertainty over the financial health of banks and the stigmatization of subprime lenders may have caused a tightening in lending standards, exacerbating this drop in velocity, causing the fall in NGDP.
I am given to believe that this atmosphere caused the drop in NGDP, what could the central bank have plausibly done to avoid this drop and how quickly and efficiently would it have worked?
Thanks.
6. September 2010 at 11:45
Scott
Can you see any MP suggestion in this list?
http://blogs.ft.com/economistsforum/2010/09/plan-b-for-obama-on-the-economy/
@ Nick Rowe
Great “barb” on the NK model
6. September 2010 at 11:57
Scott
This is your “opposite”. With that I recalled your post from July/09 when Bernanke started talking abou exit strategy which you named something like “When will we get an ENTRY strategy?”
http://mises.org/daily/4640
6. September 2010 at 12:46
@marcus, this is exactly why Scott’s claims of being a free market conservative are a scam.
He’s either naive or a huckster. Neither is compelling. I lean towards naive.
Scott need to spend more time hanging out with small business guys in middle America making $300K on $3M in revenue with 25 employees – living on half, building on the other half – to understand what’s going on.
6. September 2010 at 13:01
Scott:
I did a little research on the NYT archives.
By HEDRICK SMITH, Special to the New York Times (The New York Times); Financial Desk
December 13, 1984, Thursday
Late City Final Edition, Section A, Page 1, Column 5, 1503 words
[ DISPLAYING ABSTRACT ]
Treasury Secretary Donald T. Regan charged today that Paul A. Volcker’s ”remarkably tight” management of the money supply was slowing economic growth and hurting the Christmas shopping season. This was the Administration’s most extensive and pointed public criticism of the Federal Reserve chairman in months. The Federal Reserve System, the nation’s central bank, is an independent agency that is not directly answerable to the President. Mr. Regan, answering reporters’ questions, said it was ”possible but not probable” that the current economic lull would turn into a recession. He forecast slight improvement during the next six months but said it would probably be mid-1985 before the economy returned to the 4 percent growth rate that the Administration is counting on to help reduce Federal budget deficits.”
For the record, the annual rate of inflation in 1984 was 4.3 percent–double or triple the rate now.
Now, we are near deflation, but we have to listen to pettifogging by the likes of Richard Fisher, Dallas Fed President, about the perils of inflation.
BTW, I am no leftie. I am just sizing up the political fault lines here. Why are some Fed members sermonizing about inflation now?
6. September 2010 at 13:07
@marcus, this is exactly why Scott’s claims of being a free market conservative are a scam.
He’s either naive or a huckster. Neither is compelling. I lean towards naive.
Strong, self-contradicting words. If he’s naive, then the alleged claims wouldn’t be a scam. But he’s said that he isn’t a conservative:
.
(I’m sorry if I screwed up the formatting. No preview.)
6. September 2010 at 14:48
beamish, I don’t doubt that he believes it. As I said I believe he’s naive. I don’t think he’s got a clue what successful small business guys think. I think it slides all around too. First it was 5% target, then that wasn’t going to happen so 3% is ok. There’s never any discussion about simply taking the growth curve from 2000-2003 and sloping it forward at 3%.
Scott says Krugman is an idiot for wanting fiscal stimulus, instead of monetary stimulus but then two breathes later says well if we’re not going to get monetary stimulus, the best kind of fiscal stimulus is a payroll tax cut.
But he never concerns himself with: whats the best policy for a liberaltarian (I consider myself one) IF there is not going to be more QE or stimulus?
And that’s a FAR more compelling discussion, get out a couple months from now and think about what stuff the Republicans need to do after the election.
Another one: IF (without any more pumping) housing prices are likely to fall say another 10%, and Scott REALLY DOES believe in the market discovered pricing… than isn’t it far better to rip the damn band-aid off and just get it over with? And if not, why?
Eventually we have to get to ACCEPTANCE in our stage of grief and start to discuss how to accept and get through the austerity and capital formation as fast as possible.
6. September 2010 at 15:04
Tim Congdon can be quite provocative and sometimes not very polite. However, he has a talent for recognising the true problem. Here is a recent article about Bernanke and QE.
http://critical-reaction.co.uk/2731/19-08-2010-opening-the-black-box
A longer paper about Central Banking in a Free Society.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421288
6. September 2010 at 15:33
Not everyone buys the monetarist pseudo-religion especially those of the Keynesian faith. And those who do buy it come in many different denominations; there are the M3 people, the M2 people, the MZM people, the M1 people and the monetary base people. Pick the aggregate that fits the story you want to tell.
Some recessions are the result of macroeconomic policies that reduce aggregate demand. If the recession is not triggered by policy mismanagement in the period immediately leading up to it, then management of aggregate demand is not the key to reoovery. Our current troubles result from the sudden evaporation of $10T in paper wealth – mal-investment on a massive scale triggered by housing policy and loose monetary policy in the distant past.
There is no policy fix to cover $10T in losses. Even if you put all the losses on the federal balance sheet and people ignore the future consequences, restructuring the economy will take time. The jobs are gone. People do not have jobs to go back to when aggregate demand picks up.
AEP is right that the fed can do more and should do more. He is right that QE should be focused on assets other than T-bonds. He is wrong to think that this will significantly speed the recovery.
6. September 2010 at 16:39
“He’s either naive or a huckster. Neither is compelling. I lean towards naive.”
This is over the top and you are starting to sound like a troll.
Scott has a different point of view, one that is far superior to many others. I’m not sure that I completely agree, but Scott always demonstrates the highest character and thoughtful responses.
If you are unable to respond in a thoughtful manner, without name calling, why do you bother?
I admit that my knowledge of Macro is limited, but Scott’s posts make think about alternative paths. If you aren’t interested in exploring those alternatives, again, why bother?
6. September 2010 at 19:55
DanC
Man, I was right where you are a couple months ago. Scott was preaching some new thing… he reflexively claims to be a free market guy, he calls himself a utilitarian, there’s a bunch of stuff that made me really stop and take a look.
I asked a ton of questions, and I still do (now I’m just angrier) just trying to get my bearings on it – and its hard with him, because he has a very odd way of standing for a thing and then against it.
He does it routinely. He says stimulus doesn’t work. That sounds like a rock solid thing you can hold on to. BUT, if we’re not going to get QE2, well then let’s talk about what a good stimulus will be.
When I was first here, I went nuts trying to understand EXACTLY what kind of QE he wanted… I’d say WHO GETS THE MONEY? And I heard, the Fed will buy T-Bills, and then it was they’ll buy other stuff (I assume MBS), and then also it was quit paying IOR, and then it was negative interest rates on reserves.
Then suddenly we’re not going to target 5% NGDP it’s 3%, but he really WANTS 5%.
And all the while, he really NEVER gets down in the dirt and says why the other guys are wrong. He picks fights with guys he generally agrees with… DeKrugman.
Thoughtful responses?
I keep dragging other stuff I’m reading here really heavy thought out stuff from known names – stuff that OUTRIGHT contradicts him, and he yawns says its un-interesting.
Let me ask you: How can a guy demanding a radical inflation policy not spend his time answering the points of Mish and Denninger? Tell me please.
I bring political stuff here, saying, “yo, you claim to believe in free markets, let’s wait and try your stuff after there’s a more conservative Congress and see if Obama makes like Clinton, that worked pretty well before.” no answer.
I say, “uhm dude, everybody I know with money – ALL OF THEM – just want Obama to turn around and march the other way – and they’ll come out to play…. do you know anybody who’s a big fish in some local small pond saying different?” no answer.
I say, “everything I read about real estate says prices are still going down 10% – it sure looks like they have redrawn their trend lines to get rid of the ALL the gains of the boom.” and he says I’m talking down prices?
So yeah, these days I’m just trying to play defense. Because the way I see it in two months time, if Obama suddenly behaves like Clinton, and small business guys get the sense that society learned its lesson, that now they rule the roost again, and homes prices fall 10% and guys do come out to buy the cheap hard assets…. if unemployment goes down – well then Scott will have a lot to finally answer for.
And if I’m wrong, well I’m pretty sure his targeting NGDP will work, but why would I pull that trigger until I see if all the stuff I believe happens first?
Just because I think Scott might be right, and (in the face of doom) I sure hope he is, in this environment, it doesn’t logically follow that I prefer his policies.
He’s not a free market guy… he’s a guy who wants to make it virtually impossible for people to save money in their mattress, and those aren’t the same thing.
People should save and invest out of hope, not out of fear – and I’m not giving up on that just yet.
6. September 2010 at 20:36
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6. September 2010 at 21:32
Scott,
As a follow up, I was also wondering how it was technically possible for the central bank to ‘target’ NGDP, when all QE is shoved under the mattress, as it seems it will be in a depressed economy? How can NGDP rise in this scenario?
Thanks,
Chaitanya
7. September 2010 at 06:14
Nick, Yeah, we are stuck with hawks who understand monetary stimulus is powerful, but don’t want any, and doves who want some, but don’t push it because they don’t think it will work.
Mark, I think the Fed should buy T-bonds in the open market, from whoever wants to sell them.
malavel, The problem is that velocity is not constant in the short run, if falls sharply in financial crises. Thus a constant M would lead to business cycles.
David Pearson, Those are good points. As you know, I don’t think we should focus on credit issues, but rather monetary policy.
The most important tool is higher inflation/NGDP expectations. Of course the other problem is IOR, which has sterilized past QE injections.
Bob, That’s possible, but again the mechanism had to be monetary. Once banks did start failing, that increased the hoarding of currency. At that point the Fed needed to aggressively increase the monetary base. They did some of that, but not enough. The root cause has to be monetary, when NGDP fell in half during 1929-33. Debt can’t cause that.
aajjbb, Very good point.
Chaitanya, I think you have reversed causation. The sharp fall in NGDP that began in August 2008 caused the financial crisis to get worse, and increased fear. But let’s say you are correct. The Fed needed to target NGDP growth at 5%, level targeting. This means if it fell below that level, they would aggressive try to return to trend. Then they needed to inject enough money into the economy (whatever it took) so that NGDP expectations were roughly on target. This would have prevented the sharp fall in asset prices during late 2008, which collapsed only when investors saw that the Fed wasn’t going to do anything to halt the sharp fall in NGDP (relative to trend) over the next few years.
If they had done all this, then (ironically) the monetary base today would be much lower than it is, and interest rates would be higher (as in Australia.)
Marcus, Card check for unions? That’ll boost business confidence!
Murphy has been predicting inflation for quite some time. I keep telling him it isn’t coming.
Morgan, You said;
“Scott need to spend more time hanging out with small business guys in middle America making $300K on $3M in revenue with 25 employees – living on half, building on the other half – to understand what’s going on.”
That almost perfectly describes my best friend.
Benjamin, Yes, I recall that. I’d really like to find something similar from the WSJ editorial page in the 1980s.
Richard, Thanks, Congdon’s views are a bit more monetarist than mine, but we are basically in agreement about what’s wrong with policy.
Charles, You said;
“Some recessions are the result of macroeconomic policies that reduce aggregate demand. If the recession is not triggered by policy mismanagement in the period immediately leading up to it, then management of aggregate demand is not the key to reoovery.”
You are overlooking the possibility that housing overinvestment created a very mild recession in December 2007, and tight money turned it into a severe recession in August 2008.
You said;
“AEP is right that the fed can do more and should do more. He is right that QE should be focused on assets other than T-bonds. He is wrong to think that this will significantly speed the recovery.”
Can you name one previous recovery where NGDP grew fast but RGDP grew slowly? The loss of jobs is not caused by wealth going away, it is caused by insufficient NGDP growth.
There was a massive destruction of wealth in late 1987, and there was not even a tiny, tiny slowdown in the economy–growth continued at a steady rate for nearly three more years. Sure, the recent destruction was considerably bigger, but the point is that wealth declines do not cause output declines.
Chaitanya, Last week I did a post entitled “A moderate and pragmatic proposal for monetary stimulus.” You can google it, or scroll back. It explains how it is done.
It’s no surprise people have hoarded the QE—the Fed is paying them to do so, for the explicit purpose of preventing the QE from being more stimulative. That’s not me, that’s their own explanation.
7. September 2010 at 06:48
“That almost perfectly describes my best friend.”
And let me get this straight, your best friend is refusing to hire anyone else until the Fed prints money and buy more T-Bills. He really believes THAT is what will cause his potential customers to want more of his product?
He doesn’t instead complain about new tax laws, Obamacare, cap ‘n trade, new 1099 tax laws – no he says when the the Fed get off its ass and print some damn money!
I have an idea… I’d like to interview your best friend for Big Government.
I’m serious, it’ll be fun. I’m very interested to understand the kind of anecdotal data that you are getting from Main Street.
“There was a massive destruction of wealth in late 1987, and there was not even a tiny, tiny slowdown in the economy-growth continued at a steady rate for nearly three more years. Sure, the recent destruction was considerably bigger, but the point is that wealth declines do not cause output declines.”
Scott this is true, but it amazes me that you don’t go with the simpler answer… the growth of the 1980’s was set into play because “expectations” there was a SERIOUS commitment to reducing inflation, a busting of the unions, or lowering taxes.
We now have exactly the opposite expectations – but that can change with a crushing defeat of the liberal agenda in 2010.
Do you not put any weight on the idea that what matters most is for business to feel it is ascendant, and government is on its heels? For small businessmen to feel like kings in their community?
7. September 2010 at 08:20
[…] Via Scott Sumner, Ambrose Evans-Pritchard says “dead-end defeatism” has a grip on America’s elite and monetary policy needs to step up and bypass the banking system: Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public. This would gain traction on the broad M3 money instead of letting it collapse (yes, the “monetary base” has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory. This is quite different from the Fed’s QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke’s ‘creditism’ is certainly better than nothing, it is not gaining full traction. […] […]
7. September 2010 at 10:34
Scott,
Yes, the velocity varies today in the short run. But Friedman’s proposal is basically the same as NGDP level targeting (if the long run velocity is constant), so it should reduce the short run velocity. The market knows that we will get back to the old trend line so there’s no need to be spooked by the risk of a recession. Am I missing something?
7. September 2010 at 14:56
The WSJ has a crappy archival service; one can only read but a few words of an article, before ponying up $4.95 to read it.
There is this snippet: Who’s Easy?
The Wall Street Journal, 769 words
Dec 18, 1984
As the Federal Reserve Open Market Committee meets to chart monetary policy, real growth is equivocal and prices are rising at most slowly. The arguments are for an easier policy, but probably the Fed thinks it’s eased already.
7. September 2010 at 17:54
Morgan, I don’t think you can do macro by envisioning real world cases. Macro’s too counterintuitive. Why should more money cause inflation–why not just put it into the bank? It’s all about the fallacy of composition.
malavel, Velocity is not trend reverting, at least not necessarily. First of all, Friedman thought the base was not reliable, he defined money as M1 or M2. But every time there are institutional changes in our monetary/financial systems, M1 and M2 get very distorted, and the change may be permanent.
I like you logic, but I just don’t think it will work. Targeting NGDP futures is much superior.
Benjamin, That’s very helpful, I’ll get the entire article from work (we have free access.)
8. September 2010 at 06:03
Scott, yes, I was afraid that the velocity wouldn’t be constant in the long run. I did a plot of NGDP/MB and it went from 12 to 22 and then back to 15 (1959 – 2009). Here’s a plot: http://i.imgur.com/Pc3G8.png
9. September 2010 at 06:54
malavel, M2 would be a little better, but not good enough.