There we go again saying Monetary Policy is “Too Easy”

The Wall Street Journal takes a stab:

Another suspect—one Mr. Obama doesn’t like to mention—is U.S. monetary policy. Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama’s appointees who are now a majority on the Fed’s Board of Governors.

Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of “quantitative easing” in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again. John Paulson says he’s betting on gold, the ultimate hedge against a falling dollar.

Fed officials and Mr. Obama want to take credit for easy money if stock-market and housing prices rise, but then deny any responsibility if commodity prices rise too, causing food and energy prices to soar for consumers. They can’t have it both ways, as not-so-stupid Americans intuitively understand when they buy groceries or gas. This is the double-edged sword of an economic recovery “built to last” on easy money rather than on sound fiscal and regulatory policies.

Let´s take a look at the “evidence” for all those claims.

If they´re trying to revive the housing market, they´ll have to “try harder”. The C-S chart for National House Prices does not indicate a “revival”.

The next chart plots the broad US dollar exchange rate (trade weighted against a broad set of trading partners) and oil prices on a weekly basis since January 2008. For the last 12 months oil prices have fluctuated little while the dollar is at the same level of one year ago, higher than a few months ago and at the same level it was in early 2008.

And if monetary policy is “so easy”, why is nominal spending still “comfortably tucked inside the hole”?

So when the WSJ talks about “surges” in oil and commodities at present and “easiest monetary policy in modern times” it is surely “exaggerating”!

My preferred commodity price “story” is told by the chart below, taken from a post of one year ago.

Yes, China in the WTO made a “world of difference”.

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10 thoughts on “There we go again saying Monetary Policy is “Too Easy”

  1. There is an identification problem with your Chinese imports/CRB WTO-event chart. Many things changed around that period.

    For 2000 also marked the peak in US rates for some time, after which US rates came down to what all observers in history up to that point would have considered extraordinarily low levels. Given that China has a currency peg, this also was the beginning of a period of sharp easing in Chinese monetary policy. So Chinese productivity started to increase very substantially thanks to a cost of funding that was incredibly low vs prospective return on capital. At the same time India started to benefit from the build-out of fibre, and with pressure on profits corporations were under pressure to offshore work.

    Picking just one factor that suits one’s story is suggestive, but may not be a good guide to the future outlook.

    For the rest, I do not wish to be disagreeable. But it’s in the nature of things that recoveries from busts take time. Would you care to give a few examples in history where thanks due to sufficiently easy money, the recovery after a bubble has been wonderfully smooth? Examples that don’t turn a blind eye to other favourable factors such as very favourable terms of trade shocks.

    If one were to try to keep nominal GDP on target according to your linear conception of potential output, you will tend to see inconceivable volatility in both monetary policy, and GDP. Because we don’t actually know the structure of the economy; economic forecasts are generally horrible. So one can’t control output in the same way that one could hope to if we truly were dealing with a machine. An engineering solution does not consider our ignorance of the sensitivity of demand to rates, its nonlinearity, the long and variable lags, and the problem of decoding from realtime economic data what is actually going on.

    Let me ask you something. If it turns out we see quite strong growth ahead over the next couple of years despite policy that is not very significantly easier from how it is today – would you take that as evidence suggesting the problem of what you call market monetarism is rather harder than you presently anticipate? Based upon what you write here, this scenario can absolutely be ruled out, no ?

  2. Excellent post.

    The morons at the WSJ who think we have “easy money” should investigate Japan. Interest rates have been at zero for decades. Yet the yen has appreciated, and they have deflation. So “easy money” brings ruinous deflation and a soaring yen?

    All economists favor the least amount of taxes and regulations possible. The WSJ’s pompous pettifogging to that effect adds nothing to the argument, except it marks them as unoriginal boobs. And are we to believe that suddenly in 1992 Japan hiked sharply hiked taxes and regulatory burdens? But no one noticed or pointed that out?

    And then the USA did the same thing in 2008?

    Europe has actually been going towards deregulation, and smartly so—and yet it is teetering into recession again.

    China and India, bastions of corrupt state meddling, yet are growing rapidly, and are expanding their money supplies.

    You see a pattern here?

    In the real world, if you want a growing economy, you gotta grow the money supply and accept some inflation. I like monetary policies that work in real life, not some Theo-Monetarist sermons or chants from Econo-Shamans.

    Baby, I want boom times. That’s what we need now.

    Go the Market Monetarism, and in the meantime, print money until the plates melt.

  3. Cantillon. A host of things are changing all the time. But there are some changes that are “momentuous” and change the “shape” of things. China´s admittance to the WTO was such an event (check the old post I linked to). On interest rates, specifically, the 10 year was 13% in 82, 8.8% in 88, 6.5% in 95 and 5.0% in 2001. So it had been falling for 10 years (the period along which inflation was “conquered”).
    “If one were to try to keep nominal GDP on target according to your linear conception of potential output, you will tend to see inconceivable volatility in both monetary policy, and GDP”. Check the 20 year period from 1985 to 2005. It came to be called Great Moderation, quite the opposite of “inconceivable volatility”. NGDP was not an explicit target (although the strategy had been discussed both by the Volcker Fed and the Greenspan Fed), but it was “practised”..
    “If it turns out we see quite strong growth ahead over the next couple of years despite policy that is not very significantly easier from how it is today…” It would be evidence and, yes, I rule it out.
    One suggestion: “Lighten up”. What I do is blog, not academic research. And Blogs have to be “light”, and I like them “picturesque”.

  4. Marcus, you’re surely right about this. The WSJ surely is exaggerating. The truth is that the only reason we hear so much about high gas prices lately is the Republicans have decided this is their last chance to score political points against Obama.

    Much is made of the fact that gas was $1.87 per gallon when he came into office and is $3.47 or so now. This ignores that the $1.87 price was because of the huge negative shock to NGDP at the end of 2008 to the beginning of 2009. Since then oil prices have done little more than return to trend.

  5. By the way Marcus, as I’m new to reading your blog, let me just say I really ap;reciate it. You have so many great throught provoking posts in the archives it’s tough to know where to start.

    What I like is you post often.

    • Thanks Mike. But you were here some months ago! Maybe it was just that once and you forgot. Anyway, thanks for the compliment. As I said to Cantillon I want to have some fun while doing it. Take your time and “shop around”.

  6. Yes I was. But this is the first time I have left comments and really seen how much you have here. I will shop around!

    Of course you can feel free to visit me at my blog too-as you have done in the past.

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