Getting “inoculated”

How can you define the sort of sentiment expressed by SF Fed chief John Williams, who begins his speech with this “pearl of wisdom”:

I’ll be honest: These speeches get more and more enjoyable as time goes by because the economic outlook keeps getting better and better. Instead of gloom and doom with a scattering of hopeful notes, things are now pretty upbeat, with only a couple of standard economist’s caveats thrown in.

I know that humans have an enormous capacity for survival, being able to get used to (and survive) the grimmest conditions. But I would expect a highly educated and experienced monetary policymaker to be more sophisticated.

I turn to an overused chart to explain the sentiment. It´s simple: When your olfatics cannot discriminate “bad odors”, you can enjoy things again! That´s probably what happens when you have spent more than six years inside a “monotonic depression”, where the sense of direction is positive, even if you are deep inside the sh–hole!


The “Bullard Factor”

I may be reading too much into this, but it´s worth a chart.

On October 9 Bullard mused:

Right now, “the markets are making a mistake” and expect the Fed to maintain its ultra-easy policy stance longer than Fed officials themselves currently expect, Mr. Bullard said. When it comes to these expectations, “I would prefer that those be better aligned than they are.”

And one week later, on the 16th he pulled on “sheep clothes”:

The Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling U.S. inflation expectations.

The markets “reaction”:

Bullard Factor

Having been sent only the second piece, Scott Sumner refers to JB thus:

I don’t always agree with Bullard, but to his credit his views are always data driven. He’s an important swing vote at the Fed, as he’s one of the moderates.

And the market “swings” along!

A “Faustian” reading of history

From John Hopkins´Jon Faust:

Let’s look at what history tells us about episodes like this—that is, episodes in which large economies were mired for a long period with the main monetary policy interest rate at its zero lower bound. In such circumstances, traditional interest rate ease by the central bank is impossible, and the inability to lower rates brings a powerful asymmetry to the policy problem. If the economy were to boom or inflation to rise, the central bank could pursue the standard approach of raising interest rates. There is little mystery here: Sufficient rate increases reliably slow the pace of economic activity and relieve upward pressure on wages and prices.

If, in contrast, the economy were to falter, the traditional response of lowering rates is foreclosed. The central bank would be forced to dig even deeper into its toolbox of nontraditional policy measures. This is a very unattractive option: we have extremely limited experience with these tools, we are unsure about their potency, and we must acknowledge that they may have unintended consequences.

So what does history teach us about how central banks of large economies have dealt with this asymmetry? Setting aside some episodes in smaller economies, there are only a handful of episodes: the Great Depression, Japan after the collapse of the asset bubble in the early 1990s, and the U.S. and euro area at present. Of these, only the Great Depression provides an example of escape from the zero bound, and arguably that escape should be attributed to World War II. There is no clear precedent for a large economy escaping the bound in anything resembling a benign manner.

When you don´t recognize evidence staring in your face, saying “arguably that escape should be attributed to World War II”, there´s really not much hope someone, someday, will do the right thing!

Meanwhile, not understanding how the Great Depression was reversed by monetary policy (FDR´s devaluation by delinking from the gold standard), the US is mired in a “monotonic depression” as illustrated below. But nevertheless, the US is” applauded” because others, like the EZ, are trapped in an “increasing depression”!

Monotonic Depression

Does Israel want to become Sweden?

It may sound strange, but that´s what comes to mind when central bankers start playing “alternative roles”. In the case of Sweden things started unraveling when the Riksbank decided to “prick” a housing “bubble”. According to the FT:

Sweden’s central bank has been lambasted by critics for trying to use interest rates to combat signs of a housing bubble. It lifted rates in 2010 and 2011 as it publicly worried about what it saw as high household debt levels.

In the case of Israel, it may not be coincidence that NGDP began a systematic deviation from trend when Ms Flug took over at the Bank of Israel. Maybe she prefers the role of Finance Minister:

Speaking at a Calcalist conference, Governor of the Bank of Israel said today, “Exceeding the 3% fiscal deficit target will expose the Israeli economy to significant risk and will be liable to harm us citizens. We must show responsibility and take into account the consequences of our decisions over time. Israel’s structural deficit, the deficit not subject to one-time shocks, is already one of the highest in the western world.”

As the charts show, Israel was one of a very small group of countries that managed to avoid the more crippling effects of the 2008-09 crisis. And it did that by managing to keep NGDP parading very close to trend.


Sweden was “making-up” for its early mistake but then “bubble phobia” took over (leading to Lars Svensson´s resignation).

It would appear that until Ms Flug took over in July 2013, that Israel had an implicit NGDP level target rule. Up until then, Stanley Fischer was the BoI head honcho. But appearances can be misleading because shortly before stepping down Fischer said in a speech:

There are those who support setting a nominal GDP target. I think that this is very impractical. The data that we receive on nominal GDP are very unstable.  There are changes of whole percentage points between the various estimates of GDP. For this reason, I think that there is no reason to use nominal GDP as a target.

Maybe he thinks “output gaps” and “natural rates” are precisely estimated and known quantities!

By worrying about other stuff, like government spending and deficits, Ms Flug is signaling that the BoI will “neutralize” the move by contracting aggregate demand. And this is happening already!

When oil price jumped late in 2010 (after having dropped during the crisis), inflation went up and real growth down. But note (see charts below) that NGDP growth was sustained. Unfortunately, when real growth began to recover Ms Flug came on board and NGDP growth tanked, bringing down real growth and inflation, with the latter having now breached (0,8%) the lower limit of the 1% – 3% target band!



Professor John Cochrane Says Chairman Paul Volcker Had It Backwards

A Benjamin Cole post

I admire Professor John Cochrane of the University of Chicago, an economist who has an open mind, a rarity when macroeconomics is usually politics in drag, and right-wingers are cowed into conventional and conservative dress by their brethren.

But they have not cowed Cochrane.

So we have Cochrane calling for converting of the entire national debt into commercial bank reserves (through quantitative easing, no less!), and for all bank lending in the U.S. to be 100% equity-backed. By law, regulation and federal diktat, no less.

Okay, while we mull that, Cochrane then reiterates the right-wing fetish for the zero-inflation or even deflation imperative, but then he comes out a with a flaming wild lulu on how to get to the dead-prices promised land: lower interest rates!

The Fed should impose lower and lower interest rates to fight inflation, asserts Cochrane.


Well, maybe we can comprehend what Cochrane is saying, and maybe not. Cochrane’s unusual perspective on interest rates is matched by his take on QE, which he has also posited is anti-inflationary.

On rates, Cochrane cites a recent study by Stephanie Schmitt-Grohé and Martín Uribe, entitled The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery. Then Cochrane blogs, “raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.”

The pair of authors add that the Taylor Rule is uninformed, as it calls for dropping rates in deflationary recessions. Indeed, Taylor knows nothing: A Fed rate hike to, say, 6% is the right elixir now for the U.S., proffers Cochrane. Toilet-time for the Taylor Rule.

The rate hike would be effective Fed signaling despite the head fake, avers Cochrane. See, the Fed is saying it expects higher inflation and growth, when it raises rates. “By pegging the interest rate at a higher level and just leaving it there, the Fed communicates that expected inflation had better rise in the Fisher equation,” explains Cochrane.

Chairman Paul Volcker Had It Wrong?

Of course, Cochrane’s bold new stance pulls the rug out from under one of greatest, most glorious and hoariest of inflation-fighting stories of all time, that of Fed Chairman Paul Volcker smiting inflation in the early 1980s.

In 1981, inflation was 13.5%, but Volcker tightened the screws like never before, and inflation tanked to 3.5% by 1983. The prime rate topped 20% for a while, when Volcker was Volcker. In those glory days, I can remember 15% home mortgages. Unemployment hit double-digits too. Truth is, it was ugly.

But We Suffered For Nothing

Based on enlightenment via Cochrane, I surmise now Volcker had it all wrong, and we suffered back in the early 1980s for nothing.

Had Volcker lowered rates, that would have signaled to the market that inflation was in retreat, and we could have sauntered into lower inflation and higher employment without the pain of recession. Like Fed jujitsu!

If only we had known.

Calling a spade a spade

Tim Worstall comes out and calls a “spade a spade” in “Europe Doesn’t Have A Debt Crisis, Europe Has A Monetary Crisis”:

The stock markets plunge over concerns about the eurozone; there’s a flight from lower quality sovereign bonds; Greek, Spanish and other periphery bond yields spike. It looks like the eurozone debt crisis is back. But this time around we really should get to grips with the fact that what we’ve got here is really not a debt crisis. Sure, that’s the proximate problem, the one that is most obvious and in our faces. But the root problem, the ultimate cause, has nothing at all to do with either debt or fiscal policy: It’s monetary policy that is at error here. And yes, it is indeed all the fault of the ECB and the fools that designed Europe’s current monetary structure.

Market Monetarists have known that for a long time. And as this post shows, the analysis is also relevant for the US, albeit with different implications:

Same monetary view of the crisis but very different implications. Why? Because of the dysfunctional political and structural nature of the EZ currency union compared to the US´s own.

HT David Levey

Fed Chief Janet Yellen Gets An “F” in PR

A Benjamin Cole post

I cringed when I read The Wall Street Journal headline: “Janet Yellen Decries Widening Income Inequality.”

It got worse. U.S. Federal Reserve Chief Janet Yellen, reported the WSJ, addressed the “Conference on Economic Opportunity and Inequality, Federal Reserve Bank of Boston, Boston, Massachusetts.”

Hooo-boy. You don’t have to be a right-wing talk-show dittohead to know Yellen preached to a confab of lefties full of tax schemes and government programs to make life more equal for Americans.

Yellen may be an ace academic economist, but she has no sense of politics or public relations. This is a PR disaster, and also a substantive real-world blunder: a Fed Chief’s Job 1—and there is no Job 2—is to create conditions for sustained robust economic growth.

The topic of “income redistribution” is radioactive for any Fed chief.

The Right Wing Targets Yellen, a Fat Bullseye

Already Yellen is suspect in righty-tighty circles as a wishy-washy liberal. Yellen is the archetype of the Ivy League academic who conflates printing money with wealth generated by hard work and prudent investing in infrastructure, plant and equipment.

Thus, if Yellen dares to reverse the Fed’s current course on quantitative easing (QE)—and she probably should fire up QE again—she will be disparaged as an indecisive “flip-flopper,” a charge the Fox News-goons are leveling already.

Fox News digital hit-man Phil Flynn’s most recent column is entitled, “Fed’s QE Flip Flop,” and it condemned St. Louis Fed President James Bullard for surmising out loud that a monetary noose for the economy now makes poor sense, given gathering deflation and global slow growth. (Actually, deflation and slow growth are the new normals, in case anyone has not noticed.)

What Yellen Should Say

First, monetary doves need to eschew the sissy label “doves” and seize the label “bulls.” Egads, the battle is lost before begun with a banner like “doves.” Seizing the word “bull” also properly connotes a break-out from the outdated “hawks” and “doves” binary frame-up.

Yellen should first, last and always describe herself as a “monetary bull with resolve to see robust economic growth, lots of hiring and especially lots of profits.” Every speech she gives should contain references to profits and the need for higher profits.

Yellen should say, “The tight-money crowd wants to starve American businesses. I don’t.”

If the dollar exchange rate comes into question, Yellen should reply, “I am happy to abide by a U.S. export boom, and the Made-in-America jobs and profits that go along with that export boom.”

I could go on, but you get the picture.

Yellen’s sniveling about income equality is not going to convert the tight-money ascetic-fanatics to sanity. Maybe nothing will, but certainly handwringing about income inequality will only harden positions.


Besides, the best way to bring about a better life for Americans is robust economic growth and tight labor markets. Boomtimes, I want. Wages will rise if demand is robust—see North Dakota, where wages have been inching up. Businesses will hire if they think demand will stay strong for a long time.

Somehow in central-banking and money-ascetic circles, the idea of a robust and growing economy has become suspect, trumped by the imperative of zero inflation.

These are strange times—but Yellen can turn the increasing dementedness of the right-wing tight-money nuts against them.

She only needs to talk about profits and jobs and robust economic growth again and again.

But not “income inequality.”

Richard Fisher Declares Class War. Dallas Fed Chief Warns Wages Rising Faster Than Prices

A Benjamin Cole post

Like a lot of Americans, I tend to shrug off class warfare. Not for us. I want to make my money in boom times. Bring on Fat City.

And like most people who think about economics, I prefer the lightest taxes and regulations on productive behavior possible, and I am dubious about public programs for anything, from welfare to overseas occupations.

And so like most Market Monetarists, I am puzzled by the peevish fixation, the monomaniacal hysteria displayed by many influential right-wingers regarding inflation.

The right-wingers should be our allies. Why not?

Fisher Explains Why Tight Money

Like a dead mackerel in the moonlight, we have Richard Fisher, Dallas Fed President, to set me straight. You see, tight money is not about economics, tight money is about class warfare.

Well, call me “Mr. Chump.”

Fisher, a successful former money manager, has been going round-robin on press conferences of late, in a rising fever that wages in Texas are rising faster than inflation.

This led to the lamentable lead paragraph in the The Dallas Morning News that reads, “Richard Fisher, president of the Federal Reserve Bank of Dallas, is worried that wages are growing faster than price inflation in Texas.”

Egads. And the preferred alternative is?

Fisher then drew some inflation statistics out of a magic hat, as they do not exist anywhere except at the Dallas Fed. Fisher reported that Texas inflation was running at 2.5 percent and wages were running up by 3.5 percent, annually. The horror of it all.

Except for one problem: Such statistics do not exist at the Bureau of Labor Statistics. Reuters called the Fisher figures “Fed estimates.”

There are some CPI-U figures for Dallas and Houston, the biggest cities in the Lone Star State. Dallas is running a CPI-U at 1.2 percent in August year-over-year and Houston at 2.6 percent. The BLS “South” region, of which Texas is the largest part, is reporting a CPI of 1.7 percent. And the CPI runs about 0.5 percent higher than the PCE, the Fed’s preferred inflation measuring stick.

There is a BLS estimate for employment costs for the “Southwest Central” district that includes Texas, Arkansas, Oklahoma and Louisiana. It is up by 2.0 percent ending June 2014.

Fisher appears to be off-base.

So Why Fisher?

The spectacle of Dallas Fed President Fisher exaggerating inflation, and then fear-mongering and condemning wage growth, is undeniable. Is this why?

Labor Gets Thumped, 1982-Present

Labor Share BCole

As we can see from the above chart, labor is getting thumped. The labor losing streak started when Fed Chairman Paul Volcker famously went to tight money in the early 1980s.

Is that it? Is there a sense among the influential that tight money tilts the playing field against labor? And for the upper class, a fatter piece of a smaller pie tastes all the sweeter? That by squeezing the money supply, we now see 62 cents of business income dollar go to labor, and not 72 cents? And when that gets down to 52 cents, all the better?

Well, I hate to think the modern right-wing has sunk to this.

Obviously, U.S. owners/management have prevailed against labor in the last three decades (a most rarely discussed statistic), and the demand for labor has been tamped down continuously by the secular war on inflation waged by the Federal Reserve. A war ongoing, btw, as the Fed makes the rubble bounce.

And we have the Richard Fishers of the world to pose this question: “Well, you wouldn’t want wages to outpace inflation, would you?”

Oh my! When you reason from a price change…

Buttonwood makes the classic error in “Blessing in disguise”:

WHEN Winston Churchill, having led Britain to victory in the second world war, was defeated in the 1945 general election, his wife Clementine remarked that it might be “a blessing in disguise”. If so, the great man replied grumpily, it was “very well disguised.”

Could the same be true of yesterday’s market sell-off? Some investors were arguing the case yesterday. Eric Lonergan of M&G, an investment firm, tweeted that

Falling yields and oil price (are) far more of a stimulus than recent data is negative. Expect growth momentum to improve.

Certainly, lower oil prices are a tax cut for western consumers. Although, of course, the result is an income loss for oil producers, the marginal propensity to consume of consumers (as it were) is higher and this helps demand.  Rising oil prices have been a harbinger of recession, whether in 1973-1974, 1979-1980 or 2007. Lower government bond yields are a help, to the extent that they also bring down corporate borrowing costs.

Isn´t it confusing? Oil prices fell because oil demand fell due to contracting economic activity. So it´s not at all like a tax cut! In the 2000s, prior to 2008, oil (and commodity) prices were rising AND the world economy was booming. Is that like a tax hike or reflects greater oil demand?

In the 1970s, oil prices were rising because oil supply was constrained. That felt like a tax increase, so economic activity contracted.

Falling yields were also a reflection of falling NGDP growth expectations, and therefore cannot be a source of improvement in “growth momentum”!

Circular logic gets you nowhere!

Bullard needs psychiatric meds

After all, in the short space of one week he gave opposing outlooks.

On October 9:

In a speech that offered an upbeat assessment of the economy, Federal Reserve Bank of St. Louis President James Bullard said Thursday he is worried about what he sees as disconnect between what central bankers think will happen with monetary policy, and the view held by many in the market.

“When there is a mismatch between what the central bank is thinking and the market is thinking, that sometimes doesn’t end well, because there can be a surprise later on,” Mr. Bullard told reporters.

Right now, “the markets are making a mistake” and expect the Fed to maintain its ultra-easy policy stance longer than Fed officials themselves currently expect, Mr. Bullard said. When it comes to these expectations, “I would prefer that those be better aligned than they are.”

On October 16:

The Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling U.S. inflation expectations, Federal Reserve Bank of St. Louis President James Bullard said Thursday.

It would keep the program alive,” and the Fed’s options “open as to what we want to do going forward,” Mr. Bullard said during an interview on Bloomberg TV.

Once again, the markets beat individual fantasies!