IMF Growth Forecasts: “Going, Going…Gone?”

Jon Hilsenrath has a take in “What If This Is As Good As It Gets?”:

The International Monetary Fund’s spring meetings are turning into a depressing affair. By April every year in the wake of the financial crisis, it seems the world’s top finance officials and central bankers are busy revising down expectations for annual growth and navigating some brewing financial storm. And so it is in 2015. Washington’s cherry blossoms are in full bloom and so is economic angst and frustration.

Unfortunately, world growth forecasts are still “shrinking”, so it “could get worse”!

IMF Forecasts

What a difference one month makes in the views of John Williams

On March 23 it was “up, up and away”:

“Things are looking better–in fact, they’re looking downright good,” the official said in a speech to be delivered to an audience in Sydney and Melbourne via video.

Given how much the economy has improved and is likely to continue to gain ground, “I think that by mid-year it will be the time to have a discussion about starting to raise rates,” Mr. Williams said.

On April 20 another FOMCer is not so sure any longer:

Hopefully” the economic data will “support a decision to lift off later this year,” Mr. Dudley said, in reference to taking the first move to push interest rates off of their current near-zero levels.

But, “because the economic outlook is uncertain, I can’t tell you when normalization will occur,” he said. When it comes to rate rises, “the timing is data dependent. We will have to see what unfolds,” he said.

And on goes the FOMC, directionless!

PS Could have titled this post as “Random Walks at the FOMC”

Reincarnation exists

John Tamny is Andrew Mellon reincarnated! In “Recessions Are Absolutely Beautiful, And Should Be Renamed ‘Recovery‘”, he concludes:

Thinking about all this, what’s plainly missed by Ip is the unseen.  Indeed, imagine how much lower unemployment would be and how much higher asset prices would be today if the Fed had allowed the economy to cleanse itself of all that was restraining it back in 2008.


“Three coins in the fountain” of the monetary policy stance. Unanimously, they say interest rate does not define the stance!

First Milton Friedman:

The Federal Reserve cannot and does not control interest rates, though its actions clearly have an effect – but in a more complex way than would justify the identification of easy money with low interest rates and tight money with high interest rates.

Followed by Bernanke:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman  . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

Then Mishkin:

What I’d like to spend some time on—because I feel this is sort of my swan song, but maybe because I’m a classy guy, I’ll call this my “valedictory remarks”—are three concerns that I have for this Committee going forward. I’m not going to be able to participate, but I have a chance now to lay them out.

The first is the real danger of focusing too much on the federal funds rate as reflecting the stance of monetary policyThis is very dangerous. I want to talk about that.

So what best defines the stance of monetary policy? Let´s check Bernanke´s alternatives. The charts show NGDP relative to trend, Inflation and the FF target rate for different periods.

In 1992, Friedman wrote about monetary policy being tight with reference to money supply (M2) growth. Unfortunately, that´s not a good measure of the stance. He should have said monetary policy had been tight, because at that moment the Fed was just getting it right given NGDP was fast converging to trend, despite the falling/low FF target rate and falling inflation.

MP Stance_1

The 1993-97 period describes what a “perfect” monetary policy looks like.

MP Stance_2

NGDP hugged the trend, the FF target rate initially low, was subsequently raised (does that mean it was initially “easy” and then “tightened”?) and inflation fell throughout (does that mean the stance of policy was “tight”?).

The end of the decade describes what an “easy” stance of monetary policy looks like. Despite the increase in the FF target rate and inflation remaining below the “desired” (2%) level, the fact that NGDP rose above the trend level accurately describes the easy stance of monetary policy.

MP Stance_3

The subsequent period includes John Taylor´s “too low for two long” level of the FF target rate. According to the deviation of NGDP from trend, monetary policy was initially too tight, only becoming stimulative in the second half of 2003, when forward guidance was introduced, even though the FF target rate soon began to rise.

MP Stance_4

The following period accurately describes what a very tight monetary policy looks like, despite an initially constant and then falling FF target rate and inflation. Soon after taking the Fed´s helm, Bernanke proceeded to tighten monetary policy, and the “screws” turned until NGDP “crashed”! It looks like Lehman was a consequence and not the trigger.

MP Stance_5

And monetary policy, despite all the “highly accommodative” talk, has in fact remained pretty tight ever since!

In 1992, Milton Friedman Said the Fed Was Too Tight!

A Benjamin Cole post

“The Federal Reserve has reduced the federal funds rate repeatedly from nearly 10% in 1989 to about 3% recently. According to conventional wisdom on Wall Street, that is evidence that monetary policy has been extremely easy, that the Fed has done all it can to stimulate the economy, and that it is pushing on a string, as another ancient cliché has it. This wisdom may be conventional, but it is incorrect.”—Milton Friedman, The Wall Street Journal, October 23, 1992.

It was October 1992, inflation as measured by the CPI was running at about 3.2 percent, and real GDP was expanding at about 4.0%.

Yet the title of Friedman’s op-ed concerning the Fed? Too Tight For A Strong Recovery

The monetary master added, “It is hard to escape the conclusion that the restrictive monetary policy of the Federal Reserve deserves much of the blame for the slow, and interrupted, recovery from the 1990 recession.”

If readers are surprised, maybe they should not be. Three other times in his career—at least three—Friedman bashed central banks for being too tight: The Great Depression, the 1956-7 recession in the United States, and the Great Stagnation of Japan in the 1990s.

In that long-ago October in 1992, Friedman also opined that Fed open-market operations—the buying of bonds—would be the most effective tool, even if commercial banks were loath to lend. It was paleo-QE.


As many others have pondered, what has happened to America’s right-wing economists? There was a time when the preeminent right-winger—Milton Friedman—would call for robust, pro-growth policies from the Fed, even when the economy was growing and inflation was a little above 3%. And The Wall Street Journal would print it!

Can anyone name an establishment right-wing economist today who would demand a more growth-oriented central bank? Who is not obsessed with 0% inflation, if not deflation?

When did America’s right-wing economists become “higher interest-rate crack-heads”?

And why?

A peek at inflation expectations

Excluding short-term (1-year) Inflation expectations, which dances to the tune of oil prices, medium and long-term CPI inflation expectations did not react when the 2% target became official in January 2012. More than one year later, they stabilized at a higher level. Lately, maybe because of all the “time has come to increase rates” talk, they have come down a bit and are still probing to find s new stable, but lower level!

Inflation Exp_415

Note: Since this reflects CPI inflation expectations and the CPI inflation is a few points above the PCE inflation, the CPI “target” is a bit above 2%.

Fed As Interest-Rate Crackheads? The Funny Letter Received By Former FOMC’er Bob McTeer Regarding Cocaine Junkies

A Benjamin Cole post

“What is it about the Fed and raising rates? They are addicted to it like a junkie is addicted to cocaine as the one answer to every situation other than outright depression.”—A letter received by Bob McTeer, former Federal Open Market Committee (FOMC) member, as revealed on his blog.

The portrayal of the FOMC as interest-rate crackheads is funny—and yet falls short of the mark.

Not only do various FOMC members seem to have a monomaniacal obsession with raising rates, but the tool of QE has vanished from the short-term collective memories of FOMC’ers and Ben Bernanke.

The Fed Wants To Live in Yesterday

I have been reading Ben Bernanke’s blog, and wondering when he will tackle the topic of QE, which was, after all, his monetary policy flagship for several years.

Evidently I will have a long wait. Bernanke blogs long and hard about interest rates, and also about “normalizing” Fed policy—that is, raising rates. Maybe Bernanke is not yearning like an interest-rate crackhead, but…what happened to QE?

The policy of central-bank buying of bonds, aka quantitative easing or QE, seemed to work in the United States to boost aggregate demand and resulted in little if any inflation (while paying down the national debt, no less). What is not to like?

You would think central bankers would wheel out QE as the super-weapon to end all recession-depressions forever.

But endlessly we hear Fedsters crying to get back to the good old days, when a central bank could jigger interest rates and obtain macroeconomic results. The Fed seems to want to good old days of moderate inflation and a viable Fed policy consisting of hopping interest rates around—but without the moderate inflation.

Is that not a null set? Interest rates do not work at ZLB. And with a 2% inflation target then ZLB is always on the doorstep—when not in the house.

Bernanke Talks Up Big Federal Deficits

“But economically, it would be preferable to have more proactive fiscal policies and a more balanced monetary-fiscal mix when interest rates are close to zero.”—Bernanke, in his latest blog post.

In a fleeting mention, Bernanke relegates QE back “to the shelf,” once everything gets back to normal, presumably after Washington borrows and spends gobs of taxpayer money.

Yet, what has been the success of Japan in fighting deflation, after years—even decades—of mind-boggling and world-record federal deficits?

Until they recently got serious about QE, they were still in deflation!

Interest-rate Crackheads?

You know, the more I re-read that letter to Bob McTeer…the less funny it becomes.

Germany is not fit to lead!

That´s my conclusion from (Germany Finance Minister) Wolfgang Schäuble´s NYT article “Wolfgang Schäuble on German Priorities and Eurozone Myths”:

The financial crisis broke out seven years ago and led many countries into an economic and debt crisis. A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence(!) that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis. Let me run through some of these myths.


My diagnosis of the crisis in Europe is that it was first and foremost a crisis of confidence, rooted in structural shortcomings. Investors started to realize that the member countries of the eurozone were not as economically competitive or financially reliable as the uniform bond yields of the pre-crisis years had suggested. These investors began to treat the bonds of certain countries with much more caution, causing interest rates for those bonds to rise. The cure is targeted reforms to rebuild trust — in member states’ finances, in their economies and in the architecture of the European Union. Simply spending more public money would not have done the trick — nor can it now.


The priorities for Germany, as the current president of the Group of 7 nations, are modernization and regulatory improvements. Stimulus — both in fiscal and monetary policy — is not part of the plan. When my fellow finance ministers and the central bank governors of the G-7 countries gather in Dresden at the end of next month we will have an opportunity to discuss these questions in depth, joined — for the first time in the G-7’s history — by some of the world’s leading economists. I am confident that we can reach some common ground in Washington in advance of that meeting.

Maybe Germany´s Finance Minister has a “euro death wish”! A real Greek exit, not just Grexit, is upon us, ever more likely. With that the whole will be broken and the euro will be perceived as just another (likely to fail) fixed exchange rate arrangement!

The NGDP contrast between core and periphery (with Greece as the “benchmark).

German Leads_1

German Leads_2

Schaüble´s idea that “many European countries are reaping the rewards of reform and consolidation efforts” is risible. Just compare RGDP in the EZ with RGDP in the US since the 2007 cyclical peak.

German Leads_3

I wonder who “some of the world´s leading economists” attending the G-7 will be.

Update: You really can´t square Schaüble´s “The financial crisis broke out seven years ago and led many countries into an economic and debt crisis” with the facts, especially regarding Spain, whose debt/gdp at 36% in 2007 was one of the lowest in the EZ (and at that point Spain was running a fiscal surplus!). It looks and feels like a monetary induced NGDP crisis!

German Leads_4

The Right-Wing Should Be Sweat-Drenched Hysterics—About Deflation! “Soak The Rich, Who Cares?” Will Be New Global Anthem

A Benjamin Cole post

Okay, this will take some explaining, but deflation is a tax-dagger pointed right at the purses of the wealthy in developed nations.

It goes like this: In high-tax developed economies (i.e., the West and Japan), deflation results in explosions in cash in circulation. Evidently, people and businesses start to save in the form of cash, and then start doing transactions in cash to avoid the tax-man. Dealing in cash becomes socially acceptable.

The problem is people and businesses in the underground economy do not care about taxes. The state needs more money for welfare and warfare? Fine, let ‘em raise taxes!

And who pays income taxes? Who will be left operating legitimate aboveground businesses?

Cash Is King

We see now in the United States more than $4,200 in circulation per resident, and perhaps double that in Japan, the latter long in the throes of deflation, and where many businesses do not “take plastic.” In Europe, euros in circulation have exploded by 66% to €3,600 per resident since 2008 and deflation, despite a stagnant economy and population.

Academic economists have ignored the cash economy—one that cannot be measured, and which only indirectly contributes to official data. The official data is increasingly inaccurate, one might add.

Academics are left with the dubious stance that U.S. cash is offshore and in suitcases doing drug deals. Because they saw that in the movies?

And what explains the explosions of euros and yen in circulation?

The Upshot

So, we in the West we are heading towards deflationary bifurcated economies, one half aboveground, regulated, expensive and taxed, and one half untaxed, unregulated and less expensive.

Oh, guess which is the growing part of such economies?

Of course, disrespect for the law and state can be contagious; see Prohibition in the United States. Once cheating on taxes becomes a virtue…well, see Greece.

Maybe it is better to live with prosperity, an above ground economy and 3% inflation or so.