Ryan Avent and Karl Smith ‘get it’. Tyler Cowen not so much

From R.A.:

TYLER COWEN writes on the euro-zone economy:

Would the new helicopter drop money be kept in periphery banks and lent out to stimulate business investment? Or does the new money flee say Portugal because Portuguese banks are not safe enough, Portuguese loans are not lucrative and safe enough, and Portuguese mattresses are too cumbersome?

The former scenario implies that monetary policy should be potent. The latter scenario implies that the helicopter drop will be for naught and the fiscal policy multiplier also will be low, on the upside at the very least (fiscal cuts still might cause a lot of damage on the downside). I call this the liquidity leak, rather than the liquidity trap.

Karl Smith gives the correct response:

What Tyler calls a liquidity leak, I call markets at work. The ECB provides enough stimulus to get all of the Eurozone going but it all leaks to Germany. Fine. The German market heats up. German wages and rents rise. Retired German doctors start considering the virtues of a flat in Lisbon overlooking the harbor. German consultancies hold seminars on “How to make your Mediterranean town competitive in the new German Outsourcing Model.”

This is the way things are supposed to work. The idea that a more competitive and efficient Germany should not command higher wages and rents is bizarre; and is only called inflation because the Eurozone, in its heart-of-hearts, doesn’t actually believe it´s one monetary union where the richer parts are distinguished principally by the fact that they have more money.

In a previous post I charted France´s dire demand situation which was prompting Hollande to ‘act’. The situation is much the same for the other Eurozone countries except, you guessed, Germany. As a representative for ex-Germany unemployment I picked a large (southern/periphery) economy, Italy, and a small (northern/core) economy, The Netherlands.

“These are their charts”:

Summon “la resistance”

No wonder Hollande is worried stiff:

François Hollande promised an “offensive” to bring “more growth and less austerity” to Europe as he launched a bid to resurrect his presidency.

Struggling against record low approval ratings and an economy in reverse, Mr Hollande laid out proposals for closer “economic government” of the eurozone, a drive to tackle youth unemployment and a 10-year investment plan for France.

But Germany will not ‘set Paris free’ (again):

Mr Hollande is being pushed hard by France’s European partners – especially Germany – to speed up the pace of reform to reinvigorate the eurozone’s second-largest economy, which has suffered badly declining competitiveness in recent years.

Kocherlakota embraces a market monetarist argument

Just yesterday David Beckworth published a post where he states:

One of the big challenges facing the global economy is the shortage of safe assets. These are the highly liquid, information-insensitive assets that function as money. The financial crisis raised the demand for these safe assets just as many of them were disappearing. This cyclically-driven safe asset shortage (or excess money demand) that emerged continues to this day and is why aggregate demand in many countries remains depressed.

The only problem with my story is that it seemed it would never get tested. But that was before Abenomics. Though it doesn’t target NGDP, Abenomics does create a radical departure from past economic policy in Japan. Among other things, it has committed the Bank of Japan to open-ended asset purchases until inflation hits 2% and the monetary base doubles. This has provided a significant jolt to expectations, a big regime change that should catalyze the demand for and supply of privately-created safe assets if my story has merit.

And in a speech today Kocherlakota makes the same argument:

Since the Great Recession, workers and businesses are seeking safer assets, even as the supply of assets perceived as safe dwindles, Minneapolis Fed President Narayana Kocherlakota told a group convened by the University of Chicago Booth School of Business.

“The increase in asset demand, combined with the fall in asset supply, implies that households and firms spend less at any level of the real interest rate-that is, the interest rate net of anticipated inflation,” he said in prepared remarks.

The Fed has kept short-term interest rates near zero since December 2008, and has bought well over $2 trillion in Treasuries and housing-backed bonds to bring down long-term interest rates and stimulate spending and hiring.

Still, Kocherlakota said, “The (Fed) has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.”

He only has to make one correction. Instead of proposing rates remain low until unemployment comes down to 5.5%, a full percentage point below the Fed´s threshold, he should canvas the Fed for a regime change and target NGDP.

That´s not outside the realm of possibility if one remembers that less than three years ago Kocherlakota was saying that unemployment was structural and that to avoid deflation (and become the ‘new Japan’) the Fed should RAISE the Fed Funds rate!

HT Patricia Stefani

The ‘hyenas’ are getting desperate!

From ‘luminary’ Fred Bergsten:

“Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs,” he said in prepared remarks to the Peterson Institute of International Affairs Thursday afternoon. Mr. Bergsten officially stepped down as the director of the institution last year, replaced by former Bank of England board member Adam Posen.

Those currency tensions, and the policies that are fueling them, are costing the U.S. economy millions of jobs and threatening to create the kind of global problems that contributed to the Great Depression, he said. Hyenas.

“Eliminating excessive currency intervention would narrow the trade deficit by 2% to 3% of gross domestic product and move the economy much of the way to full employment,” he said.

He´s advised to read Lars/McCallum on this!

Canada & Australia: Both commodity exporters but different outcomes

In the comments to a recent post, James in London asked:

“Does Canada fit, or at least partly fit, the Russia described in Lars’ post today? 25% of exports are energy products (oil and LPG), and then a lot of the rest are raw or nearly raw materials.”

The chart below plots two important developed commodity exporting countries, Canada and Australia.

I believe Australia provides a much better ‘fit’ to the EPN (in this case commodity price norm) than Canada.

Just take the last couple of years. While Australia has clearly tightened monetary policy, bringing NGDP back towards the trend, which it surpassed in 2005-08 when it pursued a ‘loose’ monetary policy; Canada´s exchange rate has moved in tandem with commodity prices, but from the behavior of NGDP we figure that monetary policy has been excessively tight.

So, although Canada has been following closely the EPN, this has not been enough to keep NGDP close (or moving) to trend. Maybe my ‘country specialists’ readers would like to weigh in.

Additional information: House Prices (HPI)

Another data point

I was a bit surprised by this headline. “Jobless claims jump in warning sign for labor market“

(Reuters) – The number of Americans filing new claims for unemployment benefits climbed last week at the fastest pace in six months, a worrisome sign for the economy which has been hit by government austerity.

But you don´t get that feeling from looking at the data. The weekly data is noisy (full of ‘winkles’), even if you smooth it by a 4-week moving average. The important thing to observe is that the trend remains pointing down.

And the downtrend also remains in the continuing claims data, which indicates the number of people receiving unemployment insurance.

So, despite the headline ‘scare’, there´s still no evidence of a negative impact of ‘austerity’.

On the other data release, if anything, the story told by today´s CPI inflation report is that the Fed is still too timid and that all the talk about reigning in bond purchases is ludicrous, although it would be better and more effective if Bernanke followed Christy Romer´s suggestion and proposed a regime shift.

Unbridled hypocrisy

This shows the sad state of the ‘debate’. The title of the piece is ‘masterful’: “Abenomics is working—but it had better not work too well”.

Japan’s newfound confidence means that Japanese outbound investment in Asian emerging markets is likely to increase. But the IMF, World Bank and Asian Development Bank (ADB) have all warned that this could end in tears. ADB managing director Rajat Nag told an audience at the bank’s annual meeting recently that “the positive thing of quantitative easing out of Japan and other economies is that they will start to grow, but we have to be wary of building asset bubbles.”

Then there’s the problem of Japan’s export competitors. As we’ve previously reported, policymakers worldwide are having to deal with the impact of a devalued yen, which has slipped to over ¥100 to the dollar from less than ¥80 in October, making Japanese exports cheaper. Japan’s Toyota is already feeling the benefits, but South Korea is busy cutting interest rates, partly to assist its vehicle and electronics exporters.

But reality is very different, or doesn´t history matter?