Why are economists in denial about the eurozone?

[Before starting this post, I’d like to thank Timothy Lee for his nice Vox.com post on the NGDP futures market project.]

I do sort of understand why people resist my claim that the Fed caused the Great Recession in the US.  After all, I’m asking people to believe several highly implausible claims:

1.  It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.

2.  Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

3.  Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.

Although I must say it’s odd that these points are so implausible, after all, they are taken word for word from Frederic Mishkin’s textbook, which was the number one monetary textbook in the US back in 2008.

But here’s what really confuses me.  You don’t even need to make these sorts of “implausible” claims to blame the ECB for the Great Recession (“Depression?) in the eurozone.  I was thinking of this when I heard David Wessel explain the eurozone’s possible triple dip recession on NPR this morning.  Basically he said (as far as I recall):

1.  The 2008-09 eurozone recession was caused by the ripple effects of the US housing crisis.

2.  The 2011-12 double-dip was caused by sovereign debt problems.

3.  The current slowdown and possible triple dip is caused by Russia/Ukraine.

Wessel’s a fine reporter, and it’s his job to express the conventional wisdom.  I have no doubt that he has done so.  But this view seems preposterous to me, on all sorts of levels.

It is possible for real shocks to get transmitted via trade and/or financial channels, even with sound monetary policies.  But even if the linkages are very close (as with the US and Canada), the secondary effects will be milder.  And they were milder for Canada (and would have been still less pronounced if the BOC had targeted Canadian NGDP.) The eurozone is far less closely linked to the US than is Canada (which sends 70% of its exports to the US.)  So the ripple effects should be much milder in the eurozone than Canada.

And even if you don’t buy anything I just said, there is a much bigger problem with the standard view.  It completely ignores the fact that the 2008-09 NGDP plunge in Europe began earlier than in the US and was actually deeper (a bit over 4% vs. a bit over 3% in the US.)

But it’s even worse; the eurozone was already in recession in July 2008, and eurozone interest rates were relative high, and then the ECB raised them further.  How is tight money not the cause of the subsequent NGDP collapse?  Is there any mainstream AS/AD or IS/LM model that would exonerate the ECB?  I get that people are skeptical of my argument when the US was at the zero bound.  But the ECB wasn’t even close to the zero bound in 2008.  I get that people don’t like NGDP growth as an indicator of monetary policy, and want “concrete steppes.”  Well the ECB raised rates in 2008.  The ECB is standing over the body with a revolver in its hand.  The body has a bullet wound.  The revolver is still smoking.  And still most economists don’t believe it.  “My goodness, a central bank would never cause a recession, that only happened in the bad old days, the 1930s.”

For God’s sake, what more evidence do people need?

And then three years later they do it again.  Rates were already above the zero bound in early 2011, and then the ECB raised them again.  Twice.  The ECB is now a serial killer.  They had marched down the hall to another office, and shot another worker.  Again they are again caught with a gun in their hand.  Still smoking.

Meanwhile the economics profession is like Inspector Clouseau, looking for ways a sovereign debt crisis could have cause the second dip, even though the US did much more austerity after 2011 than the eurozone.  Real GDP in the eurozone is now lower than in 2007, and we are to believe this is due to a housing bubble in the US, and turmoil in the Ukraine?  If the situation in Europe were not so tragic this would be comical.

And now we have a third possible murder, although at least this time the revolver is not smoking (they didn’t raise rates–it was errors of omission.)  Like the Pink Panther series of films, this story is beginning to move from classic comedy to utter farce.

(Whenever I do these posts I can’t get anyone to refute what I am saying.  How could they? But they don’t accept it either.)

PS.  Some commenters will always say; “if it’s monetary, how can Germany be booming?”  As if supply-side factors can’t explain regional variation in a demand slump.  In any case, German real GDP has risen by a grand total of 3% since the first quarter of 2008, vs. 7.5% in the US.  If Germany is booming, how would you describe the US?  And BTW, the recent monthly numbers look pretty good for the US, and horrible for Germany—they are the leading edge of the triple dip.

PPS.  Is there any more confusing database than Eurostat?  I’d expect more of the Iraqi central bank. 


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76 Responses to “Why are economists in denial about the eurozone?”

  1. Gravatar of Brian Donohue Brian Donohue
    14. October 2014 at 10:46

    Just keep laying markers down. In the fullness of time, the truth will out.

  2. Gravatar of Justin Irving Justin Irving
    14. October 2014 at 10:50

    RE: the matter of Germany faring fairly well

    There still is no ‘European economy’. It ain’t a natural currency area, policy that’s good for Germany probably won’t be good for some other members. The conventional wisdom should be that the Eurozone is a highly suboptimal monetary arrangement that’s being run in a highly suboptimal way.

  3. Gravatar of W. Peden W. Peden
    14. October 2014 at 11:07

    You can prove anything with facts, Scott, even the truth-

    https://www.youtube.com/watch?v=9KsVu11CSrQ

    I never really took the idea that the recession caused (most of) the financial crisis seriously until people kept making fun of Eugene Fama for saying it.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. October 2014 at 11:23

    ‘Meanwhile the economics profession is like Inspector Clouseau….’

    And they don’t even get to hang out with Elke Sommer.

  5. Gravatar of TravisV TravisV
    14. October 2014 at 11:29

    Wonderful post. Ashok Rao also had a great post on this topic in June: http://ashokarao.com/2014/06/03/the-europe-issue

  6. Gravatar of TallDave TallDave
    14. October 2014 at 11:42

    Some commenters will always say; “if it’s monetary, how can Germany be booming?”

    The ECB really seems to think they are running a monetary policy solely for Germany.

  7. Gravatar of steve from virginia steve from virginia
    14. October 2014 at 11:58

    What nonsense!

    Europe (ex-FSU) guzzles 12.5 million barrels of petroleum every single day, all but 2 million of these barrels is imported, all paid for with little scraps of paper with the word ‘E.U.R.O’ stamped on them = in reality, more and more euro-denominated debt.

    There is debt because burning the petroleum does not pay for it, the process of burning is collateral for the euro loans … how self-destructive!

    To the petroleum seller, what do these euros represent?

    They represent failure, non-remunerative luxury and decadence, ineptitude and unwillingness to face reality … along with the certainty of more euros to come. The Europeans cannot pay their debts with labor even if Jesus himself comes down from the mountain and offers to do so for them. Only more and more euro loans mindlessly and endlessly into the future … until the petroleum is shut in by Europeans’ inability to borrow any more.

    That’s underway right now.

    The problems are not in the bourses or in central bankers’ offices but at the end of your driveway. Get rid of the cars … or all is lost & all of Europe turns itself into Yemen.

  8. Gravatar of Scott N Scott N
    14. October 2014 at 12:30

    Studies about human nature show that facts and evidence rarely change anyone’s mind. Instead, they are most often used to justify the person’s pre-existing belief – a belief largely formed “intuitively.”

    For example, here’s a good article about what happens when you show anti-vaxxers facts and evidence that contradict their beliefs.
    http://healthland.time.com/2014/03/04/nothing-not-even-hard-facts-can-make-anti-vaxxers-change-their-minds/

  9. Gravatar of ThomasH ThomasH
    14. October 2014 at 12:50

    Should you not say “too many European economists?”

    I there a big school of US Economists who think the ECB has done it’s job properly (even if they think that job is making sure that inflation does not fall below 2%)?

  10. Gravatar of W. Peden W. Peden
    14. October 2014 at 13:05

    UK CPI inflation is down to 1.2%, while our NGDP growth has been almost exactly 5% this year. So it looks like we’ve got both an excellent position on the SRAS curve and finally some good monetary policy. Carney’s tenure thus far looks very good on paper.

  11. Gravatar of W. Peden W. Peden
    14. October 2014 at 13:06

    In fact, things haven’t looked this good since… Well, the last time we had decent monetary policy:

    http://research.stlouisfed.org/fred2/graph/?g=NC5

  12. Gravatar of Don Don
    14. October 2014 at 13:14

    I get that politicians with agendas stick to “more spending” as the only answer to every problem. Some even blame ebola on lack of spending. I get that some economists act like politicians. I don’t get why most economists deny the effects of monetary policy. Time won’t fix it. Those same economists and politicians deny the effects of monetary policy during the Great Depression. Thus, the dismal science and triple-dip recessions.

  13. Gravatar of Matt McOsker Matt McOsker
    14. October 2014 at 13:51

    Germany ran a trade surplus, combined with other factors, this helped them avoid any debt problems like Greece did. I firmly believe that ECB rate hikes (an other ineptitudes), euro imposed debt contrasts on member countries, and private debt issues all harmed the eurozone economy. Some countries fared better than others.

  14. Gravatar of Major.Freedom Major.Freedom
    14. October 2014 at 14:27

    1. “It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.”

    2. “But it’s even worse; the eurozone was already in recession in July 2008, and eurozone interest rates were relative high, and then the ECB raised them further. How is tight money not the cause of the subsequent NGDP collapse?”

    MAYBE BECAUSE YOU JUST SAID HIGHER INTEREST RATES CAN MEAN LOOSENING MONEY?!?!?

  15. Gravatar of benjamin cole benjamin cole
    14. October 2014 at 16:06

    Excellent blogging. BTW, the CPI-U for Dallas is now 1.2%—but Dallas Fed President Richard Fisher says monetary policy hss been dangerously loose for years, if not decades.

  16. Gravatar of Robert Simmons Robert Simmons
    14. October 2014 at 16:26

    Major.Freedom, he’s saying even simply judging it on most people’s terms, monetary policy tightened in Europe. There’s no way to look at what the ECB did in 2008 as anything other than as tightening.

  17. Gravatar of Jason Smith Jason Smith
    14. October 2014 at 21:11

    J’accuse le Fed!

    http://informationtransfereconomics.blogspot.com/2014/10/did-fed-cause-great-recession-in.html

    The Eurozone may have been in a liquidity trap since the Euro’s inception, so that short term interest rates had no impact — ever. I’d probably say it is more like Hawtrey’s credit deadlock (as opposed to the ZLB liquidity trap per Krugman) that David Glasner refers to in a recent post.

    That would explain why the ECB has appeared so helpless. It really is helpless.

  18. Gravatar of Major.Freedom Major.Freedom
    14. October 2014 at 22:23

    Robert Simmons:

    That does not work. If as Sumner actually believes rising interest rates generally mean money has been loose, then he cannot believe at the same time that money in fact has been tight. What he is doing is trying to do is convince people under false pretenses. He wants rising rates to be believed as tight money, while not believing it himself. He wants something he regards as false to be regarded by others as true.

    There is no other way to regard the ECB as anything but tight?

    Sure there is. We can include the period previous to 2008 and consider the overall increase in money aggregates up to today. Previous to 2008 in isolation there was too much, after 2008 in isolation there was too little, but overall there was not too little (or not too much).

    I don’t see the justification for starting the stopwatch at 2008.

  19. Gravatar of Major.Freedom Major.Freedom
    14. October 2014 at 22:40

    Another way of saying the above:

    If rising rates means loosening money according to Sumner, then he should look at the rising rates in the ECB and conclude money has been loose, not tight.

    Where us there the shouting from the hilltops the Friedman analysis of rates and money?

    Right, we have to convince people the conclusion money was tight, so oh let’s temporarily give credence to the idea that rising rates means money was tight, because rates were rising then.

    Sumner is now making it seem like rising rates can indeed mean tight money, despite the fact that he has chastised anyone who said that very thing.

    He does the same thing with “bubbles” and “reasoning from price changes.”. Ok for him, not ok for others. He wants to believe he has some special insight separate from the rest of us mere mortals, but in reality it is just snakeoil salesmanship.

  20. Gravatar of wiretap wiretap
    15. October 2014 at 00:43

    Friedman’s formulation was that high interest rates are a sign that money has been easy.

    That’s different from saying rising interest rates are a sign that money has been easy, and not subtly.

  21. Gravatar of wiretap wiretap
    15. October 2014 at 00:54

    Also, is it worth noting that where we stand today rates have not risen and are not rising in the eurozone? That according to Friedman’s formulation the advent of the ECB’s zero interest rate policy is a sign that money under their earlier above-zero interest rate policy was tight?

  22. Gravatar of Major.Freedom Major.Freedom
    15. October 2014 at 02:59

    wiretap:

    That doesn’t work either, because high rates means higher than some lower rate, and that means ratea must have risen.

    The term “high” abstracted from transition from some lower standard is meaningless.

  23. Gravatar of Major.Freedom Major.Freedom
    15. October 2014 at 03:01

    I’ll buy your second comment however.

  24. Gravatar of Francois Francois
    15. October 2014 at 03:11

    Frankly, this is a post for the already converted (I am one of them).

    The problem is that most people here in the Euro Area believe that monetary policy is loose (and has been loose since 2008) as the ECB refinancing rate is and has been so low (and is now even negative). In fact, most people do not have the slightliest clue about monetary policy.

    And I am not just talking about common folks, but also about top people such as the CEO and the CFO of the company I work for (a 60.000 employee behemoth).

  25. Gravatar of Adam Adam
    15. October 2014 at 03:38

    “PPS. Is there any more confusing database[website?] than Eurostat? I’d expect more of the Iraqi central bank.”

    Yes, the UK Office for National Statistics site takes that crown 🙁

  26. Gravatar of Robert Simmons Robert Simmons
    15. October 2014 at 03:42

    Major.Freedom, I slightly overstated, but you’ve misunderstood. Scott says rates are a poor indicator of looseness/tightness. But, given that others use them, those people should look at 2008 as a tightening. Scott looks at 2008 as a tightening for other reasons, that he’s gone into. An Austrian would likely disagree, but the vast majority who use rates should agree.

  27. Gravatar of zoe keller zoe keller
    15. October 2014 at 03:50

    the mandator (germany) and a couple of accomplices (EU commission) are also there, in the murder scene, alongside the ECB

  28. Gravatar of Maurizio Maurizio
    15. October 2014 at 04:10

    I am curious why Mario Draghi does not do more QE. Theories?

    (For example: Merkel is concerned about bond yields, because in Germany retirement funds are mostly bonds. ).

  29. Gravatar of Major.Freedom Major.Freedom
    15. October 2014 at 04:10

    Simmons, no Sumner has said that rates are a pretty good indicator, specifically rising rates generally mean money has been loose and lowering rates generally means money has been tight.

    He keeps favorably quoting Friedman who believed that very thing. Your interpretation that Sumner thinks rates are a “poor” indicator, would contradict all those years of quoting Friedman, as well as the many posts saying as much without the explicit quoting. It also contradicts all those times he said those who link lowering rates with loosening money are not just possibly wrong, but flat out wrong.

    If the position NOW is that rates are merely a poor indicator, and that no longer are we to accept Friedman’s point, then fine, but it is bad form to just pretend like that has always been the position. Admit that there has been a change.

  30. Gravatar of Major.Freedom Major.Freedom
    15. October 2014 at 04:12

    And try not to shine me on with any “he just misspoke” or “he could have been clearer” rhetoric. A bed made is one to lie in.

  31. Gravatar of Jussi Jussi
    15. October 2014 at 04:34

    Great post. And as Krugman pointed out, Germany might be doing O.K. but that’s because of its heavy exports.

  32. Gravatar of M.C. M.C.
    15. October 2014 at 05:08

    Apart from the mid-2011 hike, ECB rates has been sliding downwards since the crisis, and the deposit rates is now negative. People will just look at that and assume that the ECB has done very much to help, and then listen to the politicians (and even Draghi) who say that it’s mainly up to fiscal policy/structural reforms now.

    Don’t overthink these things, people do not think policy is tight, they just see rates that are low compared to historical rates (not to some model based equilibrium rate). Even economists at the ECB and the various Euro national central banks are not using anything much more sophisticated than that. And when they do, they’ll overshoot into too-clever arguments like Stephen Williamson of why rate increased can be expansionary, because arriving at “surprising” conclusions with obfuscated models makes them look really smart.

  33. Gravatar of ssumner ssumner
    15. October 2014 at 05:12

    Matt, I thought Germany did have debt problems. Specifically German banks holding PIIGS debt. Is that wrong?

    Jason, We know the ECB is not “helpless,” that’s not even debatable. The question is why?

    Francois, Economists over here are just as clueless—most believe low rates mean easy money.

    Maurizio, Perhaps he lacks political support within the ECB. But It’s hard to understand why that would be. Most eurozone members would clearly benefit from easier money, indeed there are probably only 4 or 5 that would not.

    Jussi, Yes, that’s what I mean by supply-side factors. But more important is their labor market reforms. Germany was an export juggernaut in 2004, and had double digit unemployment.

  34. Gravatar of M.C. M.C.
    15. October 2014 at 05:21

    The sad thing is, if you read Ito & Mishkin (2004)
    http://www.nber.org/papers/w10878.pdf
    you see that ECB is pretty much repeating the BoJ playbook to a tee, repeating pretty much all the BoJ concerns/excuses about more expansionary policy.

  35. Gravatar of Robert Simmons Robert Simmons
    15. October 2014 at 05:44

    Has been tight and tightening are not the same thing

  36. Gravatar of Orn Gudmundsson Jr Orn Gudmundsson Jr
    15. October 2014 at 05:47

    Scott, it is even worse than this. Even if the ECB committed to hit their own inflation targets, the Euro’s twin flaws, the inability of labor markets to really rebalance across borders and fiscal differences which limit money flow to the “better countries”, would allow overall NGDP to rise, but will mean the expanded money supply will only flow through the countries with strong banks, basically leaving the south still in stagnation as sticky wages and cultural barriers prevent labor markets from rebalancing except over very extended periods of time.

  37. Gravatar of TallDave TallDave
    15. October 2014 at 06:01

    W. Peden — that’s great news! Let’s hope the salutary trend continues and becomes an example to others.

    Robert Simmons — you’re right of course, but I don’t think you’re going to succeed in conveying the difference. Most of us just scroll by at this point.

  38. Gravatar of Pete Pete
    15. October 2014 at 06:17

    You should read Ambrose Evans-Pritchard (crazy name – clever guy) in the UK Telegraph. He has been pointing out the idiocy of the euro set up and the ECB for the past 5 years.

  39. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. October 2014 at 07:31

    Speaking of clueless economists, here’s one outwitted by a comedian;

    http://thecolbertreport.cc.com/videos/e301vf/thomas-piketty

  40. Gravatar of Lawrence H. White Lawrence H. White
    15. October 2014 at 07:54

    Btw, Wessel is no longer a reporter. He now heads the Hutchins Center on Fiscal and Monetary Policy, at the Brookings Institution, which “provides independent, non-partisan analysis of fiscal and monetary policy issues.” He hired Ben Bernanke for the Center, so there’s your independent analysis right there.

  41. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    15. October 2014 at 08:00

    The question is not why the ECB does not do something, but why should they? The current policy is popular, which translates to strong political support for it. Why risk public scolding from the inflation-phobes?

  42. Gravatar of CrisisStudent CrisisStudent
    15. October 2014 at 08:01

    Ok I confess I am not believer in your explanation that tight money was behind 2008-2009 recession in US, but I see some benefit in 2011 case in Europe. But I struggle to understand how is current macroeconomic deterioration CONSEQUENCE of tight money (in any other way that ECB did not offset some other developments enough). Could you elaborate?

  43. Gravatar of M.C. M.C.
    15. October 2014 at 08:27

    Luis, that’s right. The ECB will loosen a bit when a crisis becomes acute enough to threaten the Euro’s existence, like the sovereign debt problems a few years ago. They’ll happily continue with too-tight policy for a few years till the next acute crisis.

    Meanwhile, inflation is pretty much universally unpopular (even for people for whom it should be beneficial) due to the many misconceptions around it, and the muddled messages of the ECB are not helpful at all (“With low inflation, you can buy more stuff”).

  44. Gravatar of Kevin Erdmann Kevin Erdmann
    15. October 2014 at 08:41

    So, after this morning’s movement, is the Fed thinking, “Great! These lower rates will help, so we should be fine.” I’m afraid that might be the case.

  45. Gravatar of Matt McOsker Matt McOsker
    15. October 2014 at 08:50

    Scott yes German banks have problems too. I was speaking to their government issued debt. In the end their trade surplus has masked, and probably prevented other problems from dragging the German economy down.Krugman noted this as well:

    http://mobile.nytimes.com/blogs/krugman/2014/10/12/german-weakness/

  46. Gravatar of Brian Donohue Brian Donohue
    15. October 2014 at 09:20

    @Kevin, perhaps this is how the whole “short term/long term” tightrope over the past six years was always destined to play out. I’m for more accommodation, but the stock market was overdue for a correction anyway.

    There is SOMETHING to the idea of lower rates encouraging growth- the housing market, for example, which stalled earlier this year, should benefit.

    I do marvel at the way real rates (not so much expected inflation) have dropped this year as the Fed tapers and telegraphs. Aren’t today’s rates somehow “less artificial” than, say, a year or two ago? New normal indeed.

  47. Gravatar of TallDave TallDave
    15. October 2014 at 10:44

    And right on cue, there goes Greece again.

    Another few rounds of austerity and they might reach 1990s levels of gov’t spending.

  48. Gravatar of ThomasH ThomasH
    15. October 2014 at 13:24

    Another blog that attempts to explain (or in this case asks what can explain) X [economists in denial about the Euro zone] without showing that X exists.

    The only person named with mistaken views about the ECB is David Wessel who is not an economist. Most US economists did not even think the Euro was a good idea to begin with. Where is anything like the IGM poll that shows economists support ECB policy?

  49. Gravatar of Steven Kopits Steven Kopits
    15. October 2014 at 16:36

    The Cost of Euro Zone Membership

    I compare the PIGS to the non-EZ comps of Hungary, Romania, Poland and Bulgaria.

    Conclusion:

    “Euro Zone membership, as it turns out, proved unimaginably costly for the weak Euro Zone members. What did it cost Greece, for example? About 20 percentage points of GDP and 15 percentage points of unemployment. A truly horrific price.”

    http://www.prienga.com/blog/2014/10/15/the-cost-of-euro-zone-membership

  50. Gravatar of ssumner ssumner
    15. October 2014 at 18:12

    M.C, Good point.

    Orn, I think it would do more for the south than you assume, but overall the south’s problems are mostly supply side.

    Pete, Yup, AEP is great on monetary issues, and I’m proud to say he follows this blog.

    Thanks Larry, I should have known that.

    CrisisStudent, I’d suggest reading Ben Bernanke on this topic. He says the way you identify tight money is not looking at interest rates or the money supply, but rather NGDP growth and inflation. I think expectations of NGDP growth and inflation are falling in the eurozone, and by Bernanke’s criterion that means tight money.

    Kevin, Even I don’t think the Fed is that clueless, indeed I am pretty sure they basically understand what is happening. But it’s awkward to have to backtrack.

    Matt, I don’t think their trade surplus explains anything important. It’s a common myth that trade surpluses are good and deficits are bad.

    Thomas, I’ll tell you what. Do a poll asking how many economists believe that tight money at the ECB caused the 2008-09 slump. If I’m wrong, I’ll do an abject apology.

    Steven, That sounds plausible.

  51. Gravatar of ssumner ssumner
    15. October 2014 at 18:17

    Patrick, Great stuff.

  52. Gravatar of TravisV TravisV
    15. October 2014 at 19:50

    Wow! Yglesias:

    http://www.vox.com/2014/10/15/6981837/global-economic-slump

    “people got really spooked when the Census Bureau reported Wednesday morning that retail sales in the United States fell in September.

    One month’s worth of bad data shouldn’t necessarily cause a panic, but in light of all the other trends it’s alarming. In particular, one would want to see that consumers who are spending less on gasoline and other energy products are pouring at least some of their savings into buying other stuff. Instead, the September report appears to show consumers pulling back across the board “” even as demand from abroad is clearly falling apart….”

  53. Gravatar of TravisV TravisV
    15. October 2014 at 20:58

    ??????

    “In A Private Meeting, Janet Yellen Reportedly Told People She Still Feels Good About Growth”

    http://www.businessinsider.com/yellen-comments-on-us-economy-october-15-2014-10

  54. Gravatar of TravisV TravisV
    15. October 2014 at 21:10

    Noah Smith: Links: 10/16/2014

    http://noahpinionblog.blogspot.com/2014/10/thursday-roundup-10162014.html

  55. Gravatar of Jason Smith Jason Smith
    15. October 2014 at 21:18

    Scott, you said:

    ‘We know the ECB is not “helpless,” that’s not even debatable.’

    *All* of macro is debatable. That’s what makes it fun.

    I recognize that my view is not a mainstream view — but it is consistent with the data. If mainstream macro is right, then the ECB bad at its job; if my view is right, then the ECB is helpless.

    Putting it that way, this mainstream view (Krugman thinks the ECB is bad at its job as well) seems like a giant case of fundamental attribution error:

    http://en.wikipedia.org/wiki/Fundamental_attribution_error

    The idea is that given two possible scenarios:

    1) Qualities of the ECB are responsible for the outcomes.
    2) The situation the ECB finds itself in is responsible for the outcomes.

    … people will tend toward explanations that involve 1) rather than 2).

    That doesn’t mean 1) is wrong, it’s just that it’s a bias.

    If it was just the ECB, then I’d say that maybe they’re inept. But it’s three of the most advanced economies: US, EU and Japan. The Fed, ECB and BoJ are all bad at their jobs? In roughly the same way (low inflation)? And meanwhile the economies without this malady all appear to follow the quantity theory of money?

    It’s like watching a dirt bike race and almost everyone is zooming around, except for three bikes all near each other in the lead that aren’t making much progress.

    Maybe they’re bad at dirt biking. Or maybe they’re stuck in mud.

    I’d at least say it’s debatable.

  56. Gravatar of Major.Freedom Major.Freedom
    15. October 2014 at 23:57

    Robert Simmons:

    “Has been tight and tightening are not the same thing”

    Actually they are, because all reflections on the stance of empirical monetary policy are historical. When people say money is tight or is loose, they are in fact referring, whether they realize it or not, to a historical series of events.

    ———-

    TallDave, you seem to lack some analytic effort.

  57. Gravatar of James in London James in London
    16. October 2014 at 01:10

    If economic data turn down and the central bank doesn’t react, is that a tightening of monetary policy?

  58. Gravatar of ssumner ssumner
    16. October 2014 at 04:31

    Jason, Here is your claim. We know that market data often show a massive spike right at 2:15 on days when the Fed makes an announcement. We know that the chance of that occurring randomly is less than one in a quadrillion. Your claim is that it is random.

    James, I’d say yes, if the data is expected NGDP growth.

  59. Gravatar of J.V. Dubois J.V. Dubois
    16. October 2014 at 04:47

    Very good post and I wholeheartedly agree. The length to which some economists go while defending bad policy is astounding. For instance I literally cringed while reading one of the new pieces by Krugman:

    “Draghi can try to get traction through quantitative easing, but it’s by no means clear that this could do the trick even under the best of circumstances “” and in reality he faces severe political constraints on what he can do.”

    “Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength.”

    I am really at loss here. So when it comes to monetary policy ECB is source of strength and beacon of light surrounded by some anonymous political opposition on every step. However when it comes to fiscal stimulus Krugman does not hesitate to call names like when he said that “In failing France, Mr. Hollande is also failing Europe as a whole “” and nobody knows how bad it might get”

  60. Gravatar of Robert Simmons Robert Simmons
    16. October 2014 at 04:50

    Major.Freedom,
    “‘Has been tight and tightening are not the same thing’
    Actually they are, because all reflections on the stance of empirical monetary policy are historical. When people say money is tight or is loose, they are in fact referring, whether they realize it or not, to a historical series of events.”

    I accept that in your way of looking at monetary policy that that’s true. It’s not in mine (I think in Scott’s too, but won’t speak for him). If NGDP grows at a 3% rate for 3 years, that’s tight. If the Fed changes policy and now it grows at 4%, that’s still tight but has loosened. If alternatively the Fed makes it now grow at a 1% rate, that’s both tight and a tightening.

  61. Gravatar of TravisV TravisV
    16. October 2014 at 06:43

    Bravo?

    Fed’s Bullard: The Fed Should Consider Delaying The End Of QE

    http://www.businessinsider.com/feds-bullard-on-delaying-qe-taper-2014-10

  62. Gravatar of Major.Freedom Major.Freedom
    16. October 2014 at 07:23

    Robert Simmons:

    “If NGDP grows at a 3% rate for 3 years, that’s tight. If the Fed changes policy and now it grows at 4%, that’s still tight but has loosened. If alternatively the Fed makes it now grow at a 1% rate, that’s both tight and a tightening.”

    Now you’re talking about something different. You were comparing “money is tight” versus “money has been tight”, which was intended to distinguish present policy versus past policy, which I replied with saying those are actually both past policies.

    Now you are comparing two present policies. Money is or is not tight, in the present, if certain past monetary policy trends have taken place. For example, borrowing from what you said, if NGDP has in the past 3 years minus an unstated number of days or weeks or whatever grown at 3%, and then, also in the past, but more recent past, namely, during those same unstated number of days or weeks or whatever, grown by 4%, then those two historical rates of growth you say imply that money is, in the present now, both tight and tightening.

    You have abandoned your claim of there being a difference between money being tight in the present with money having been tight in the past.

  63. Gravatar of Matt McOsker Matt McOsker
    16. October 2014 at 08:10

    Scott writes:
    “Matt, I don’t think their trade surplus explains anything important. It’s a common myth that trade surpluses are good and deficits are bad.”

    It depends sometimes these can be bad, good, or neutral it depends on other factors in play.

    If a country is running a large trade deficit that must be offset by public and/or private sector debt. So long as the former and latter is sufficient then the trade deficit should not cause any problems. But if things get out of balance it can.

    Let’s look at the great recession:
    – Trade deficit peak – 6+% of GDP in 2007
    – Governmnet Deficit % of GDP was at a bottom of about just over 1% in 2007
    – The offsetting debt was primarily household, which was skyrocketing as we led up to 2007.

    Then the Fed was tightenting all the way to the peaks in 2007, when it all unraveled. Private sector debt was not sustainble at the higher rates. So the Fed’s actions were magnified by existing imbalances. Possibly an important thing to understand when valuing NGDP futures.

    See Wynne Godley’s Sectorial Balances which explains what I am trying to get at:
    The trade deficit of the US is now about 6.5 per cent of gross domestic product while that of the U.K. is about 4.5 per cent. In both countries domestic demand in total has so far been held up by budget deficits as well as by personal expenditure (on consumption and investment combined) far in excess of disposable income, and this has perforce been financed by unusually high borrowing leading to rapidly rising personal indebtedness…….

    …..The unusual size of the deficits, both in the US and in the U.K., has introduced a novel element into economic prospects viewed strategically because if (or when) personal borrowing and expenditure slows down, neither government has any obvious politically feasible policy instrument to avert a prolonged deficiency in total demand.

    – Godley 2006

    (I-S) + (G-T) + (X-M) = ΔNGDP (change NGDP)

  64. Gravatar of Robert Simmons Robert Simmons
    16. October 2014 at 08:25

    Major.Freedom, hopefully tightening my language will clear up what I mean, I haven’t abandoned anything. Your example of 3% to 4% acceleration is not the same as mine, I hope you can see that, and I would not characterize it as a tightening.
    If NGDP has grown at a 3% clip, policy has been tight. If the expectation is that it will grow at 3% going forward, policy is tight. If policy changes so that the expectation becomes 4%, it has loosened but is still tight. Is that better?

  65. Gravatar of TravisV TravisV
    16. October 2014 at 09:25

    So alarmist…..

    “China’s Banks Are Getting Ready For A Debt Implosion”

    http://www.businessinsider.com/china-banks-preparing-for-debt-implosion-2014-10

  66. Gravatar of TravisV TravisV
    16. October 2014 at 10:27

    ??????

    Larry Kudlow on CNBC (paraphrasing):

    The drop in oil prices is unambiguously good, it is almost certainly a positive supply shock that’s why I’m a buyer on these dips in stocks…..

    You have got to be kidding me!

  67. Gravatar of DOB DOB
    16. October 2014 at 11:22

    Excellent post. It about sums it up.

  68. Gravatar of Major.Freedom Major.Freedom
    16. October 2014 at 12:46

    Robert Simmons:

    “Your example of 3% to 4% acceleration is not the same as mine, I hope you can see that, and I would not characterize it as a tightening.”

    You’re right, sorry. I misspoke. I should have said 3% to 4% would be a case of money being tight and loosening.

    What I had focused in my mind was the distinction, alleged, between money tight (or loose) in the present, and money having been tight (or loose) in the past. As a result ended up sloppily glossing over the precise wording you used for describing what was only a policy in the present (a “present” of which I dispute is in fact distinct from the past).

    I don’t see how you can confidently assert that monetary policy you have observed as being X over the last 3 years minus an unstated number of days or weeks, as well as those unstated number of days or weeks, all chronologically in the past, as an example of what money is right now.

    Why would it be wrong to say that what you described was an example of “Money has been tight (at 3%) from three years ago (to last week, say) and then has been less tight (at 4%) since (last week, say)”, or something similar?

    Or, perhaps less wordy and yet still reasonable, “Money has been tight”? Would not the last 3 years of below 5% NGDP growth be something we would say “Money has been tight” after all, and thus implicate the Friedman/Sumner relationship between low interest rates and the stance of money? If not, why not?

    “If NGDP has grown at a 3% clip, policy has been tight. If the expectation is that it will grow at 3% going forward, policy is tight. If policy changes so that the expectation becomes 4%, it has loosened but is still tight. Is that better?”

    So if I have this right, what is really meant by policy in the present is not actually policy itself, but people’s thoughts concerning policy?

    That seems to me now a third explanation of what it means to distinguish past from present policy.

  69. Gravatar of Robert Simmons Robert Simmons
    16. October 2014 at 12:53

    I’ll state that number of days right here: 0. Not sure why you keep adding that.
    But you are right about one thing, the epistemology of monetary policy is a bit confused.

  70. Gravatar of Major.Freedom Major.Freedom
    16. October 2014 at 13:28

    If it is zero, then how can you know policy went from 3% starting three years ago, to having observed 4% at some later date? If you claim to know policy changed to 4%, then would not that imply policy changed some positive time ago, which means greater than zero time?

    If you can agree with that, then are we not still talking about a case of “Monetary policy has been X”?

    I really do think you have abandoned defending your claim that there is a difference between past and present monetary policy, which was originally supposed to have countered my initial argument, which has now been all but forgotten.

    I kind of feel like I am being given the runaround.

  71. Gravatar of Major.Freedom Major.Freedom
    16. October 2014 at 13:32

    I don’t mean that in a combative way, btw. I just don’t get a lot of what is being thrown around as if we’re supposed to all get it.

  72. Gravatar of Robert Simmons Robert Simmons
    16. October 2014 at 18:40

    Scott’s efforts at getting an NGDP futures market up and running (hopefully) will allow us to see what I’m talking about instantaneously. I’m not 100% sure how to characterize the situation when the market predicts 4% growth and it turns out to be 6%, I think we should say it was tight at the time of the prediction but proved to be loose, but could be wrong. Until then, it will be less than objective, but we can still say actions by central banks change the tightness or looseness of the situation.

  73. Gravatar of Major.Freedom Major.Freedom
    16. October 2014 at 23:36

    Robert Simmons:

    An NGDP futures market will tell me the difference between present policy and past policy? Wouldn’t it only tell us past policy and expectations of future policy?

    I agree with your last sentence.

  74. Gravatar of Andy Andy
    17. October 2014 at 00:08

    Merkel said yesterday: “We in Germany are showing that growth and investment can be strengthened without leaving the path of consolidation.” How out of touch can a human being be? The truth of course is that Germany is not growing and Germany is not investing. Everything in that Merkel comment is 100% wrong. Getting a bit desperate here in Europe…

    http://www.bloomberg.com/news/2014-10-16/euro-economy-s-managers-aren-t-blinking-in-market-rout.html

  75. Gravatar of Nick Nick
    17. October 2014 at 04:34

    Travis,
    You posted that Kudlow comment in near real time. And when I read your comments in general, it’s pretty clear you are keeping up with many stock market talking heads on a daily basis. Are you a trader?!? What gives???
    I’m watching all this stuff bc I can’t stop gambling. What’s your excuse?
    😉

  76. Gravatar of ssumner ssumner
    17. October 2014 at 05:45

    Godley, I strongly disagree with that Godley comment, governments can easily use monetary policy to control AD. The deficit is not a useful tool.

    Andy, Yes, very sad.

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