Uncanny resemblance

In a recent post, Krugman writes:

Anyway, one alleged fact I keep hearing is that recessions were short and shallow under the gold standard. I don’t know where that’s coming from, but it just ain’t so. The data aren’t as good for the pre-1933 era as they are now, but for what it’s worth they suggest that there were a number of nasty, prolonged slumps under the gold standard. In particular, the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years. That’s a pretty ugly, prolonged slump. Gold is no panacea.

Maybe it doesn´t matter which monetary regime you are under (Gold standard, Fiat Money), if MP is successful in maintaining monetary equilibrium. The figures show an uncanny resemblance between what transpired then and now! A steep drop in NGDP is accompanied by a steep rise in unemployment. The difference is that there was deflation then and only “low” inflation now. The monetary disequilibrium 120 years ago, according to Friedman, came not from the threats to the gold standard from the effects of the silver purchases by the Treasury, that added to high-powered money and so contributed to an expansion of the stock of money, but from the effects of the silver purchases on the willingness of foreigners to hold dollars. According to Friedman (Monetary History p. 132-33),

Paradoxically, therefore the monetary damage done by silver agitation was almost the opposite of that attributed to it at the time. It kept the money stock from rising as much as it otherwise would have, rather than producing too rapid an increase in the money stock… The fear that silver would produce an inflation sufficient to force the United States off the gold standard made it necessary to have a severe deflation in order to stay on the gold standard. In retrospect, it seems clear that either the acceptance of a silver standard or an early commitment to gold would have been preferable to the uneasy compromise that was maintained, with the uncertainty about the ultimate outcome and the consequent wide fluctuations to which the currency was subjected.

 Note: Krugman´s unemployment data come from a diffrent source, but qualitatively they give out the same information.

Desejos mercantilistas do Ministro

O Ministro Fernando Pimentel, do Ministério do Desenvolvimento, Indústria e Comércio Exterior (MDIC), que é amigo e colaborador de longa data da Presidente Dilma, tem estado bastante no noticiário, em geral defendendo a limitação da queda do superávit comercial (aqui). Ministro, não pense como um “mercantilista”.  No longo prazo, o saldo comercial “ótimo” é ZERO! Para exportar mais, você tem que importar mais. Se tentar frear as importações com tarifas e outros tipos de barreiras, a consequência será um comércio externo menor (menos importações E exportações). Esse fato, de que desencorajar importações é equivalente a desencorajar im EXportações é conhecido como “Teorema de Simetria de Lerner”. Uma boa explicação está (aqui).

As figuras abaixo ilustram. Durante boa parte doa anos 1980, o Brasil restringiu fortemente as importações. O saldo ficou positivo, mas o comércio se manteve estagnado. Já a Coréia, que no início da década de 1980 exportava e importava valores semelhantes ao Brasil, como não adotou medidas restritivas às importações viu se comércio crescer de modo que atualmente exporta e importa aproximadamente o dobro do Brasil, com o saldo alternando entre ligeiramente positivo e negativo. Esse padrão se repete em todos os países que não impõem barreiras significativas ao comércio.

1 picture=1000 words, 3 pictures=3000 words?

Both Scott Sumner and David Beckworth say the same thing: What the Fed wants is that nominal expenditure growth (NGDP) gets translated into as much real growth as possible. So, “talking” about “wanting” 2% inflation is “bollocks”. As David makes clear, that´s true IF inflation expectations are anchored. In that case stabilizing nominal expenditures is the “trick” that allows smooth growth, low unemployment and low inflation.

The figure below reproduces David´s picture with minor changes (I consider PCE-core price inflation instead of the GDP deflator). The Greenspan years indicate that a “Great Moderation” is possible to achieve and “perpetuate”, even if the talk is always about the “inflation fighting credentials” of the Central Bank. The ultimate cause is the maintenance of “monetary equilibrium”, which requires that changes in money demand (velocity) are offset with changes in the stock of money.

The next figure shows that during the period of the “Great Inflation”, from around 1965 to 1979, inflation expectations weren´t anchored so that growth in nominal expenditures were mostly reflected in changes in inflation. Real growth was very volatile. The oil price (supply) shock, which increases inflation and reduces real growth, is clearly visible. To Arthur Burns, there was nothing monetary policy could do and nominal expenditures were increased to reduce unemployment, with inflation control being the province of “incomes policy”. The result: more inflation.

The last figure provides a nice view of why the “Great Moderation” was lost in 2008. Contrary to the Greenspan years, Bernanke did not offset the fall in velocity (increased money demand resulting from “greater uncertainty”). In fact, the money stock fell! Now they are faced with the uphill battle of bringing the economy back to close to the trend path from which it dropped in 2008-09. But the “inflation paranoia” is very much alive, with important representatives residing in the FOMC!

Are we there yet? An extended comment on David Beckworth

David Beckworth, Scott Sumner, Bill Woolsey, Nick Rowe, among several others (in Germany Kantoos Economics has joined the group) agree on one fundamental point. The recession received the moniker “Great” due to the failure of monetary policy to keep aggregate demand (nominal or dollar expenditures) close to the historical 5% plus growth along a level trend. In other words, the Fed (Bernanke) allowed “monetary disequilibrium” to take hold.

Getting into some details, in his blog Scott Sumner equates nominal expenditures with NGDP (Nominal Income), Bill Woolsey represents nominal expenditure by Final Sales of Domestic Product (FSDP) while David Beckworth favors Final Sales to Domestic Purchasers (FSDPur). The difference between the last two being that  FSDP is NGDP less the change in private inventories while FSDPur represents purchases by US residents of goods and services wherever produced (i.e. includes imports). David and Bill are fans of “pictorial” representations while Scott does mostly verbal arguments with a sprinkle of data and numerical tables. For this reason, the comments are mostly geared to David and Bill.

When one goes the “pictorial” way, some housekeeping work is necessary. One is to decide on the “appropriate” period to establish the “trend”. On this account, David has explained in detail his choice of the 1987-1998 period. In essence it contemplates the first 10 years of the Greenspan Fed, a time during which there “were no wide, unsustainable swings in economic activity”. But he goes on to say that: “Moreover, 1998 is when the Greenspan Fed for the first time significantly deviated from past practice by lowering the federal funds rates even though the economy was experiencing robust economic growth”. Maybe, but if so I think the trend period should stop in 1997 so as not to be distorted by the policy “deviation”. Bill favors considering starting the “trend” in 1984 – the beginning of the “Great Moderation” – and extend it to 1998.

For the reason already stated I favor ending the “trend” period in 1997, but I agree with David that the start should be 1987. In addition to the reasons he stated, the 1984-85 years are “distorted” by the strong RGDP growth (far above “potential”) following the end of the long and deep 1980-1982 recession periods. The figure gives a visual representation of the chosen period.

The second chore is to stipulate the nominal aggregate to use in the analysis. Here is where David “stands apart” with his choice of the FSDPur aggregate. I also think this choice strongly influenced his view that Greenspan´s MP during 2002-04  bears significant responsibility for the housing boom and bust and the ensuing financial crisis. To see why, the three pictures below show the 1987-97 trend and the path of nominal expenditures under the three definitions. The “black sheep” immediately stands out (under the assumption that “majorities win”). It is the path of FSDPur relative to trend. Under my choice of breaking the trend defining period in 1997 (instead of 1998), FSDPur stays above trend for the whole 1998-07 period, indicating that MP was consistently too expansionary according to the “rule” Py =Py “star”.

Given that NGDP and FSDP give about the same quantitative information I´ll stick in what follows with FSDP. The next figure gives a good representation of “stability/Instability”, defined as the absolute difference between actual FSDP and what it would be had the economy stayed on trend.

The size of the drop after early to mid 2008 is truly “amazing”, being equivalent to the size of the Brazilian economy (the 7th largest) as shown in the figure (2009 PPP dollars from Groningen). There´s no mystery here as to why unemployment has increased so much!

The 1998-04 is a period of instability in a “sea of stability” comprising 1987-07. And it all started after 1997. (Note that about that time home prices also began the “upswing” according to Case-Shiller, long before the “too low for too long” period).

 According to David, 1998 is when Greenspan deviated by lowering the FF rate even though the economy was growing robustly This was likely a reaction to the financial fall-out (LTCM comes to mind) of the Russia crisis in mid 1998, being quickly reversed. More significant, I believe, is the sharp increase that follows. And it did so precisely because the economy was growing “too strongly”.

And I think David will agree with me that it was a “wrong” move! Why? As David has consistently written, inflation targeting tends to “get it wrong” when supply shocks hit, and on several occasions he has written on the effects of positive productivity shocks, which increase real growth and decrease inflation, a situation in which, if the Fed reacts to the low (below “target”) inflation by decreasing rates, or increases rates due to growth “above potential”, the system is destabilized. During 1997/98 lots of voices, including Krugman wearing a “hawkish” hat, complained that the Fed was behind the curve, that the economy had a well defined “speed limit” and that the fall in inflation reflected things like reduced medical costs and falling commodity and oil prices. As the figure shows the 1997-00 period neatly describes David´s scenario of a positive productivity shock, in which the Fed should not “swing” the interest rate “stick”!

But it did and, as David predicts in those situations, instability took hold. In a sense, MP in the 2002-04 period, during which FSDP is below trend, was the right policy to “correct” the previous “mistake”. And the fact remains that in January 2006 Greenspan handed over to Bernanke a newly stabilized economy!

Oh! Yes, the preliminary GDP release was good news, FSDP (more intensely than the other two nominal aggregates) turned in the right direction.

“Regra de Taylor” goela abaixo – Parte 2

Em artigo no WSJ (aqui), Taylor volta à carga na sua cruzada em prol da revisão do mandato do Fed para que este contemple “apenas” o objetivo de “estabilidade de preços no longo prazo no contexto claro de um quadro de estabilidade econômica”. Ou seja, quer “obrigatorizar” a utilização da sua “Regra” na condução da política monetária. Não vejo muita diferença do mandato atual que rege: “estabilidade de preços e máximo emprego”, bastando interpretar “estabilidade econômica” como “taxa de desemprego aceitável”!

Insiste, lógico, e de maneira coerente, que a crise teve origem na política monetária praticada em 2002-2004, que teria desrespeitado a “Regra”. Segundo Taylor 75% dos economistas de empresas e 50% dos economistas acadêmicos dizem que a prática de uma PM “frouxa” exacerbou a “bolha” imobiliária que conduziu a economia à crise financeira. Estou com os 25% dos não acadêmicos que não acham isso (como discutido no longo post (aqui)).

Taylor argumenta que a melhor maneira de reduzir o desemprego é encorajar o investimento privado. E apresenta o gráfico mostrando a correlação negativa entre investimento como proporção do PIB e taxa de desemprego. O gráfico é uma “belezura”, se assemelhando ao desenho de um peixe feito por uma criança ou, como representei na figura abaixo, a uma “jarra” ou “vaso” deitado! Mas, observem, não temos aí nenhuma indicação de “causalidade”, com ambas variáveis respondendo à situação presente e prospectiva de economia.  É claro que um aumento do crescimento econômico atual e/ou esperado vai simultaneamente reduzir o desemprego e elevar os investimentos. 

Taylor insiste, argumentando que a história das duas últimas décadas mostra que reduções das compras do governo como proporção do PIB estão associadas com reduções do desemprego. Não apresenta o gráfico, mas este já havia sido apresentado em seu post (aqui) de duas semanas atrás (que inclusive me inspirou para publicar o longo “Peso do governo e crescimento econômico” (aqui).

Naquele post tentei montar uma “historinha” causal para mostrar que governo “obeso” atrapalha o funcionamento da economia, reduzindo seu crescimento. Parece que a conclusão de Taylor é a mesma. No entanto a correlação que ele apresenta (ver figuras abaixo), não justifica a conclusão.  

Lembro que “gastos do governo” tem dois componentes. Um trata das “compras” (consumo e investimento público) enquanto o outro reflete as “transferências” (como, por exemplo, seguro desemprego). Taylor está se referindo às compras, deixando de lado as transferências porque essas sobem quando a economia entra em recessão (e o desemprego aumenta). Mas durante períodos de enfraquecimento da economia, as compras do governo também tendem a aumentar (reformar estradas e pontes, por exemplo). Por esta razão, não se pode afirmar que este aumento nas compras está “causando” maior desemprego (ou menor investimento privado). Tudo faz parte do mesmo “bolo” – o enfraquecimento da economia. A figura abaixo mostra os gastos e as compras do governo. Como Krugman gosta de afirmar (aqui, por exemplo), a maior parte do aumento do déficit ocorrido no pós crise se deve ao aumento das transferências (algo como 5% do PIB) e pouco (em torno de 1.2% do PIB) como consequência do aumento das compras (“estímulos”).

O problema, como vimos no “Peso do governo…” é que o aumento na participação do governo tende a deixar “marcas”. Ao longo dos anos 1990, o “peso do governo” foi sendo reduzido. A economia teve um ótimo desempenho (“grande moderação”). Por outro lado, durante a última década o “peso do governo” voltou a se elevar. O desempenho da economia foi menos “brilhante”. Mas a crise, como meus leitores já desconfiam, foi uma consequência do “desequilíbrio monetário” (aqui) ocasionado pelas ações do Fed, não em 2002-04, como indicado pela “Regra”, mas em 2008 (devido ao desequilíbrio que a “Regra” não percebeu)!

HT S. Kinoshita

China: “Deflacionando” a economia, “inflacionando” o risco

Esse artigo recente da Economist (aqui) avalia a “Síndrome” Chinesa:

CHINA’S rise is, by any account, a remarkable story. The world’s most populous country, China represented an outsized share of global output for centuries prior to the Industrial Revolution. As the industrial west rose, China fell behind, then fell further behind amid occupation, revolution, and communist mismanagement. But then, about thirty years ago, China’s luck changed. Its leaders embarked on a path toward liberalisation, and its economy began to grow. Having fallen so far behind, China had plenty of ground to make up, and growth rates soared toward double-digits. It now seems likely that China will cross a symbolic but important threshold sometime in the next decade to become the world’s largest economy.

This growth story isn’t unique. The route from underdeveloped country to rapidly growing economy is increasingly well-trod. From the ashes of the Second World War Germany and Japan rose to become economic powerhouses. The Asian tigers followed, as did countries on the European periphery. China’s present rise is accompanied by strong growth in India, and other periods of catch-up may follow in Brazil or elsewhere in Asia. Africa may find its way into the game, as well.

Comentário sobre o novo livro de Branko Milanovic (aqui) reproduz essa passagem:

“If the U.S. GDP per capita grows by 1 per cent, India’s will need to grow by 17 per cent, an almost impossible rate, and China’s by 8.6 per cent, just to keep absolute income differences from rising,” he observes. “As the saying goes, you have to run very, very fast just to stay in the same place. It is therefore not surprising that despite China’s (and India’s) remarkable success, the absolute income differences between the rich and poor countries have widened.”

Notem que ele argumenta em termos absolutos. Em termos relativos a coisa é diferente, como pode ser visto na figura. Coloquei o Brasil a título de comparação. Daqui a pouco a China nos ultrapassa. Mas quem sabe a tendência recente de convergência se mantém?

Já no quesito “risco”, as possíveis fricções entre China e EUA causam preocupação em Davos (aqui):

The  Global Agenda Council on Geopolitical Risk, an expert advisory group to the World Economic Forum, told the WEF’s gathering in Davos today that it thinks none of these is in fact the biggest economic worry. It is the rebalancing of global power from established economies to emerging giants. In particular, the group foreshadows “greater political and trade conflict between the United States and China”. Whether it is China’s quest for energy and resource security via investments in Africa or its increasingly muscular defence of its “near abroad”, the potential for proxy wars or even direct conflict looks set to grow.

Felizmente, não é primeira, nem a segunda, vez que vamos nos defrontar com um “rebalanceamento do poder global” desde o fim da 2a Guerra Mundial! Alguma coisa deve ter sido aprendida.

Dólar: O fim que nunca chega

De Davos, Stephanie Flanders escreve (aqui):

Davos: What’s going to happen first – sensible US fiscal policy, or a global revolt against the dollar? In all my discussions about the global economy so far here in Davos, that’s the question we keep coming back to.

Ao final:

But looking at the way the global economy is shifting in China’s favour, many I’ve spoken to here think the emergence of the renmimbi as a serious alternative to the greenback is only matter of time. If the past few years are any guide, this supposedly long-term change might well happen faster than we think.

To return to where I began – the question is whether the US can stop borrowing dollars before the world stops wanting to buy them.

O fato é que desde o fim de Bretton Woods no início dos anos 70, volta e meia aparecem relatórios sobre a “morte” do dólar. O obituário foi sempre precoce. Basta digitar “End of Dollar” ou “Death of Dollar” no Google e ver milhares de páginas referenciando o assunto.

Para muitos, a questão do dólar é assunto da maior seriedade. Um exemplo: escrevendo em julho de 1995, Diane Kunz, professora de história da Universidade de Yale afirmava que o dia de agosto que marca a vitória aliada no Japão na segunda guerra mundial (V-J Day), também marca o início da era do dólar e que, “se, apesar das manifestações de Rubin, a administração não modificar sua política de laissez-faire com relação ao dólar, o qüinquagésimo aniversário da vitória aliada (que seria celebrado em agosto daquele ano) também marcaria o seu colapso”.

Essas manifestações crescem sempre que o dólar se aproxima do “piso” contra cestas de moedas, como observado na figura. Se, ao mesmo tempo o déficit público está elevado, o diagnóstico de “morte”, como em 1995, é mais “vibrante”. No entanto, entre 2007 e agora o déficit público saiu de 1.5% do PIB para próximo de 10% e o dólar flutuou dentro da “banda” demarcada pela média e “piso”.

Decisão do FOMC

O melhor comentário que vi da reunião do FOMC (aqui):

The Fed has come in for a surprising amount of criticism since its decision in the fall of 2010 to launch a new round of monetary easing — Quantitative Easing 2.  Ben Bernanke and his colleagues are right not to give in to these attacks.

 Critiques seem to be of four sorts. (Some are mutually exclusive.)

Uma delas:

4)  “The Fed is firing a volley in a destructive international currency war.”   This is the criticism that has come from some of our trading partners:  in particular, China, Germany and Brazil.   I don’t generally do “My country, right or wrong.”   But my country is right on this one.    The colorful “currency wars“ seems to have confused some people.  The current situation is precisely the point of floating exchange rates:    when some countries feel that their high unemployment calls for monetary expansion (US) at the same time that others feel that their overheating dangers call for monetary tightening (Brazil, India, Korea, China…), an appreciation of the latter currencies against the former is precisely the way that floating rates accommodate the differences.    This is why Milton Friedman favored floating rates, so that each country could pursue its own desired policies independently.   I realize that US monetary easing puts pressure on countries like China that they consider unwelcome. China is finding it increasingly difficult to cling to its exchange rate target by means of controls on capital inflows and sterilized foreign exchange intervention.   But capital flows are a far more legitimate way to let China feel the pressure than the alternative:  Congressional threats to impose WTO-inconsistent tariffs on Chinese imports if it won’t allow faster appreciation of the yuan.

A grande novidade foi que, depois de 1 ano consecutivo de voto contrário de Hoenig, não houve dissidência!

O ponto de vista alemão II

Kantoos Economics (aqui) redefine seus cálculos anteriores para concluir que o “sucesso” da economia alemã se deve ao fato de a política monetária do BCE ter sido exatamente aquela que manteve o crescimento da demanda agregada na “tendência”, só que agora, depois dos “sacrifícios”, existe o desejo de se estabelecer uma tendência de crescimento mais elevada!

Update (27/1): Ryan Avent elabora sobre esses pontos (aqui):

So to sum up, food and energy issues aside, euro zone inflation overall is unlikely to get out of hand thanks to falling price pressures around the periphery. But in Germany, faster growth is finally turning into some inflation. So what the ECB should do, both in order to facilitate recovery across the entire euro zone and to speed internal euro-zone rebalancing, is let German inflation run a bit. But all indications are that the ECB sets policy based on conditions in Germany. And so premature and costly tightening looks likely.

It’s very unfortunate. The only thing worse than a suboptimal currency area is a suboptimal central bank to go with it.

Update 2 (27/1): Kantoos manda outro post (aqui) com discussão adicional sobre a questão Alemanha versus “Periferia”:

First of all, I completely agree that looser monetary policy in the Eurozone is necessary. Not only because it facilitates the adjustment in the periphery as Ryan Avent has correctly argued. More importantly, as I have repeatedly written (in German, though) aggregate demand is almost 10% below trend – and falling. So despite my recent claim that ECB policy seems to be right for Germany, it is a disaster for the Eurozone as a whole.

Por fim, Merle Hazard, que está ganhando muito dinheiro (mais talvez do que na sua função de assessor de investimentos)com composições “celebrando” a crise em diversos países, faz a sua Ode  (aqui)

O ponto de vista alemão

Não é exagero dizer que a Alemanha tem sido pintada como a grande vilã da crise na Europa. Esse blog (aqui) que normalmente está em alemão, nesse post coloca seu ponto de vista em inglês para maior repercursão:

To regain its competitiveness, Germany had to go through a painful and long period of wage and price moderation, while still suffering from massive unemployment. Since monetary policy was no longer an option, Germany had to follow this internal devaluation path. The trend growth of NGDP during this time was a mere 2.1%.

This long period of moderation finally started to pay off in 2006. Not only did unemployment fall to roughly 7% by the end of 2008, but Germany’s new trend of NGDP might well have been the European average of roughly 4%. As the figure above shows, German NGDP is still well below that new trend, around 7.8% in 2010 Q3. So the ECB’s monetary policy is even too tight for Germany, as Matthew Yglesias has recently suggested.

Ao final:

If Germans really knew how dearly they paid for the Euro even before this crisis, the reaction to various bailouts would be even less, well, enthusiastic. Germany suffered 15 years through two massive adjustment processes that it neither wanted nor chose: the Euro was forced upon it by the Allies, and the Eastern Germans damn sure did not choose to live under an economically devastating socialist regime.

Therefore, complaints from other countries that Germany is thriving at the expense of others (the US, other European countries etc.) are simply ludicrous – and likely to end: Germany’s regained competitiveness and the rising interest differential between European countries will channel more investment to its firms in the future.