Alex Salter reviews “Market Monetarism – Roadmap to Economic Prosperity”

Alex Salter is a graduate student at GMU and a reader and sometimes guest blogger of market monetarist blogs. See in particular how he is noted in Lars Christensen´s blog.

I hope you enjoy the review, as I have.

And for those that have missed the book link, here it is.

‘Inflation day’, what to say?

Every month on the day of the CPI release I do a ‘commemorative’ post. Only I´ve run out of titles for the post!

The first chart depicts the headline CPI, the Median CPI and alternative ‘Core’ measures – ex food and energy and the 16% trimmed mean.

You were on my mind_1

Note how all measures hang close together slightly below the ‘magic’ 2% number, with the exception of the Median CPI which ‘sits’ right on 2%.

Given the other disappointing data released today – unemployment claims and Philly Fed Index of Business Activity – coupled with the astonishingly ‘stupid’ FOMC minutes released yesterday, the markets ‘spooked’:

Minutes from the central bank’s January meeting showed growing unease over future Fed stimulus. Stocks suffered their worst day in more than three months, gold and oil sold off and the market’s so-called fear gauge—the VIX—jumped 19%, its biggest one-day rise since November 2011.

But looking at the inflation chart above, we see that the Fed has inflation exactly where it wants and that´s all that matters to that august body. The rest is ‘crap’!

And look at a measure of inflation expectations. I do those every month and pray that they start moving up. It appears God´s not listening!

You were on my mind_2

Just thought of a title: “When I woke up this morning, you were on my mind…”

Norway: On the way to a ‘one trend’ economy?

In this post, Lars Christensen draws attention to a presentation by the Governor of the Norwegian Central Bank, specifically to his Chart 17.

The chart pertains only to the ‘ex-oil’ economy. Nevertheless, it appears that the ‘whole economy’ trend has been brought down to the ‘ex-oil’ equivalent! If true, that has been a hell of a feat, especially when compared to what´s been happening in most advanced economies. The chart below illustrates.


And from looking at real growth and inflation & unemployment don´t you wish Norway were the ‘average’ country in today´s world?




“Killing words”

As described by James Pethokoukis, someone gets it exactly right:

To Paul Edelstein, director of financial economics at IHS Global Insight, those opinions may have “inadvertently” produced a tighter monetary policy by altering expectations:

We don’t expect the Fed to curtail or reign in QE3 next month. There are too many voting members who favor continuing bond buying until the labor market outlook improves. And it won’t improve by March.

But the fact that Fed hawks were able to force a debate on the issue makes monetary policy less effective. This is because markets and the public will question the Fed’s commitment to keeping policy in place until it achieves its goals for unemployment and inflation. If markets do not expect the Fed to stay the course, then expectations for economic growth and inflation will stay depressed and demand for safe assets (cash and government securities) will remain high. Counter intuitively, this means lower long-term interest rates, not higher.

Markets will now adjust their growth and inflation expectations downward. Already, the stock market is down 1% (suggesting weaker growth expectations), gold is off 2.6% (suggesting weaker inflation expectations), and the dollar is up about 0.7% (suggesting stronger demand for safe assets). The 10-year Treasury rate shed a few basis points.

There is little that Ben Bernanke can do to quiet the dissenters on his committee. If they feel that QE3 should end this year, they will express those opinions in public and official forums. But what Bernanke and the majority of Fed participants that support ongoing bond buying can do is to more forcefully signal to markets that they will stick with their original plan and stay the course until unemployment comes down. They didn’t do this enough at last month’s Fed meeting, and the minutes portrayed the Doves as leaning on their back foot in the debate.

The dissenters at the FOMC must know that the more they express their opinion, the tighter monetary policy becomes, just as they wish!

Note: But Mr. Shepherdson doesn´t quite get it:

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, said investors should not be misled by the amount of space in the Fed’s account concerned about its current policies, because the Fed’s chairman, Ben S. Bernanke, and his supporters, continue to regard the asset purchases as a necessary and effective strategy to foster job growth.

“We view Mr. Bernanke as being firmly in charge of the committee, and very dovish indeed,” Mr. Shepherdson wrote in a note to clients. He said he expected the Fed’s asset purchases to continue at the current pace for the rest of the year.

It´s not either/or but lots of ‘shades of grey’.

They never ‘give in’

This is what you get when economic analysis starts off from ‘ideology’. A 2008 paper by Alan Blinder and Jeremy Rudd is a good example. One thing to notice: Blinder is a former Vice Chairman of the BoG and a colleague of Bernanke and Rudd was at the time of writing a member of the Federal Reserve Board. You might think that even 25 years later central bankers have a hard time ‘taking responsibility’. The irony behind the paper is that it was presented at a Conference on “The Great Inflation” that took place in September 2008, just as the economy was ‘crashing into deflation’. A further irony is that it took place in Woodstock, the 1968 mecca for ‘dissenters’ with the ‘festival’ taking place at the exact moment the “Great Inflation” was taking off!

From the abstract:

U.S. inflation data exhibit two notable spikes into the double-digit range in 1973-1974 and again in 1978-1980.  The well-known “supply-shock” explanation attributes both spikes to large food and energy shocks plus, in the case of 1973-1974, the removal of price controls.  Yet critics of this explanation have (a) attributed the surges in inflation to monetary policy and (b) pointed to the far smaller impacts of more recent oil shocks as evidence against the supply-shock explanation.  This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century.  We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago.  We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes.  Finally, we examine several changes in the economy that may explain why the impacts of oil shocks are so much smaller now than they were in the 1970s.

Scott has given a short and precise answer to MattD´s comment:

MattD. He’s wrong. If supply shocks were the problem you’d see normal NGDP growth, low RGDP growth, and high inflation. But instead we had normal RGDP growth (3%), absurdly high NGDP growth (11%/year in 1972-1981), and high inflation. It was obviously caused by money printing, which accelerated sharply in the mid-1960s. It’s not even a debateable point.

I´ll just put up some illustrations. These conform well to the following ‘theory’:

The oil price shock of 1973 was caused by (not the cause of) the rising inflation that began in the second half of the 1960s. The oil producing countries (at the time a much smaller group than today and heavily concentrated in the Middle East) were seeing their main ‘asset’ depreciate in value given that the dollar price of a barrel of oil had been more or less constant since the 1950s. After 1971, when the dollar depreciated strongly against major currencies, the losses were multiplied. The Arab-Israeli conflict in late 1973 was just a convenient excuse for jacking up the price of oil.



The price shocks (from oil/commodities) after the mid-eighties (up to 2006) had much smaller effects because monetary policy managed to keep NGDP on an ‘even keel’. When in 2007 monetary policy began reacting to oil prices, being ‘tightened’, we had the opposite of the 1970s. Instead of the “Great Inflation” we got the “Great Recession”. A ‘beautiful symmetry’!

Update. The charts below illustrate the “Great Moderation” and the ‘plunge’ into the “Great Recession.




Not surprising

At least not after the widely commented upon talk of Jeremy Stein a while back. Anyway, as Scott Sumner has written:

And so now we come full circle.  Do DSGE models incorporate Nietzsche’s Eternal Return?

From the Minutes:

Federal Reserve officials expressed growing unease with the central bank’s easy-money policies at its latest policy meeting and some suggested the Fed might need to pull them back before the job market is fully back to normal.

Minutes released Wednesday of the Fed’s Jan. 29-30 policy meeting showed that officials worried the central bank’s easy-money policies could lead to instability in financial markets and might be hard to pull back in the future. The Fed plans to evaluate how the programs are doing at its next meeting March 19 and 20.

Some Fed officials suggested the Fed may need to alter its stated course to continue the bond-buying programs until the job market improves “substantially,” a threshold it hasn’t defined.

This last reminds me that in the Minutes for the June 2008 FOMC meeting it came out that “the next move in rates will likely be up”!

Not Surprising

There´s really not much that´s ‘new’ under the sun

Some quotes from a late 1933 paper – The debt deflation theory of the Great Depression – by Irving Fisher:

37. Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 (namely when the more the debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized.

38. On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.

That the price level is controllable is not only claimed by monetary theorists but has recently been evidenced by two great events: (1) Sweden has now for nearly two years maintained a stable price level, practically always within 2 per cent of the chosen par and usually within 1 per cent. Note Chart IV. (2) The fact that immediate reversal of deflation is easily achieved by the use, or even the prospect of use, of appropriate instrumentalities has just been demonstrated by President Roosevelt. Note Charts VII and VIII. (“Chuck Norris effect”)

40. If all this is true, it would be as silly and immoral to “let nature take her course” as for a physician to neglect a case of pneumonia. It would also be a libel on economic science, which has its therapeutics as truly as medical science. (Do I read an anti-Austrian manifesto?)

41. If reflation can now so easily and quickly reverse the deadly down-swing of deflation after nearly four years, when it was gathering increased momentum, it would have been still easier, and at any time, to have stopped it earlier. In fact, under President Hoover, recovery was apparently well started by the Federal Reserve open-market purchases, which revived prices and business from May to September 1932. The efforts were not kept up and recovery was stopped by various circumstances, including the political “campaign of fear.” (nowadays, ‘dysfunctional’ politics and the presence, in central banks objective functions, of a negative term to reflect their ‘dislike’ for ‘unconventional’ policies)

It would have been still easier to have prevented the depression almost altogether. In fact, in my opinion, this would have been done had Governor Strong of the Federal Reserve Bank of New York lived, or had his policies been embraced by other banks and the Federal Reserve Board and pursued consistently after his death. (not ‘QE on, QE off’).

In that case, there would have been nothing worse than the first crash. We would have had the debt disease, but not the dollar disease—the bad cold but not the pneumonia.

Now, substitute ‘reflate’ by ‘increase spending’ and ‘price level control’ by NGDP-LT and voila, Fischer was a ‘Market Monetarist’.

HT Suvy

President Coolidge in vogue

I imagine it´s rare that one can repost the same post on a subject 18 months on. But this is one such occasion. 18 months ago I wrote this post as a comment on an op-ed piece by Charles Johnson. This time it is to counter an op-ed (also on the WSJ) by Amity Shlaes (who just published a book on Coolidge). Since both Johnson and Shlaes use the same arguments, I´ll keep the same post (except for the title)!

The intellectuals shy away from “pedestrian” debates and choose “demons” and “idols”. While Krugman chooses to “demonize” Reagan, Charles Johnson chooses to “idolize” Calvin Coolidge. The correspondence with the ongoing debate about fiscal policy is very clear.

But rarely there are “demons” and “idols”. In a couple of posts (herehere) I argued that Krugman “distorted” history in order to lambast Reagan (“representative agent” for those who wish for small government). I´ll try to show that Charles Johnson “distorts” history to “idolize” a “representative agent” of another epoch for the small government group.

Here is Charles Johnson in the WSJ (where else!):

Eighty-eight years ago this week, Calvin Coolidge took office upon the sudden death of President Warren Harding. Like the current administration, the Harding-Coolidge administration faced a tough recession from 1919-1921. But unlike the current administration, the Harding-Coolidge and Coolidge-Dawes administrations cut taxes, balanced budgets and slashed government spending, reducing federal debt by over a third in a decade.

The economy grew, averaging just over 7% from 1924 to 1929, the years of his presidency. So did Coolidge’s popularity. He was so popular that even during the Great Depression’s height song-writer Cole Porter compared his lover to the “Coolidge dollar.”

What a hero! And note that he´s known as “Silent Cal”! It´s Hard to believe that a politician would work in “silence”. But never mind, Johnson makes attributions that are just not true.

Figure 1 shows that when he took the oath the war deficit had already disappeared and had turned into a small surplus.

Figure 2 shows that just as taxes had had gone abruptly and sharply to finance the war effort, they just as sharply came down after the war. By the time Coolidge became president all the “work” was already done. But notice that taxes didn´t fall to the pre war level.

The same argument holds for government expenditures seen in figure 3.

And the economy only grew by 3.3% on average from 1924 to 1929, not 7%! The strong growth took place in 1922 and 1923 as the economy bounced back from the 1920-21 recession.

“Fiscalists” will say that the 1920-21 recession was due to government expenditure falling from 23% of NGDP in 1919 to 7% in 1920.The problem is that they continued to fall reaching 3.2%  in 1924 and averaging 3% from then until 1929, but the economy rebounded smartly.

Krugman doesn´t mention monetary policy much. After all we are in his “beloved” liquidity trap (and Bernanke is not “manly” enough to increase inflation expectations). Johnson says the “roaring 20s” was all due to “slashing taxes, government spending, etc.” Not a word on monetary policy. But let´s look closer.

During the war, everything “took off”. Be it Prices, Nominal Spending (NGDP) or RGDP. When the war ended, prices and NGDP continued to rise but RGDP began to retreat. So the Fed tightened MP. NGDP, Prices and RGDP dropped immediately, the prototype result of an Aggregate Demand shock. The set of figures below illustrate. Note that money (M2) growth and velocity fell steeply.

But who was responsible for the 1920/21 recession. Could be both MP & FP. But what comes after allows us to put the “blame” for the recession and the “cause” for the recovery square on the shoulders of MP.

The following set of figures show the strong rebound in NGDP and RGDP in 1922/23, before “Silent Cal” took office. Prices rebound slightly (1.8% inflation on average from 1922 to 1925). Look at the picture of money growth and velocity. Just as the money velocity picture for 1919/21 explains the observed fall in NGDP (RGDP and Prices), this one explains the steep rebound in 1922/23.

From 1924 onwards nominal and real growth fall back to 3.3% on average with prices stable. In 1927 monetary policy failed to compensate the fall in velocity. Real growth dropped close to zero and there was a slight deflation.

“Silent Cal” didn´t manage monetary policy which I showed was responsible both for the recession and the recovery. Maybe if, like FDR (who dictated monetary policy in 1933 and got a recovery on the way), he had decided that the government share of the economy should increase (with something along the lines of New Deal policies) the “roaring 20s” would not have been. But to “Fiscalists” the “Great Depression” was the “natural consequence” of all that “laissez-faire”, much like the present day (now) “Second Great Contraction” is the “child” of all the “laissez-faire” that was disseminated during the “Great Moderation”.

Just recently, David Beckworth argued that fiscal consolidation can be consistent with an economic recovery. But for that to be true, monetary policy has to be expansionary (just what transpired in the early 1920s). Here´s DB:

Like Roberts, I am skeptical about the ability of discretionary fiscal policy to stabilize the business cycle.  His critique, however, is too quick to embrace the popular view that fiscal policy consolidation actually improves the economy.  On this point, Krugman is correct that most of the empirical evidence (e.g. here,here, and here) does not support this view.  What the evidence does show is that in most cases where fiscal consolidation was accompanied by a robust recovery it happened because monetary policy was accommodative.  In other words, a loosening of monetary policy made it appear that fiscal policy tightening was the cause of the economic recovery when in fact it was not.

HT Catherine

Update: An Austrian ‘counterattacks’:

The prosperity of the 1920s appears much like prosperity of the “Great Moderation” where a supply-side focused fiscal policy enhanced productivity was combined with a loose monetary policy guided by an emphasis on price level stability provideda toxic mx leading to a significant boom-bust cycle. Should be a cautionary tale for those enamored by  the promise of nominal gnp targeting.

Mises’s Liberalism coupled with Rothbard’s wisdom is a better guide to truly free and prosperous commonwealth than the policies of either Reagan or Coolidge.

“God forbid”!

Two wrongs don´t make a right!

To Robert Samuelson it´s in our minds:

We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending.

In criticizing Samuelson´s ‘psychological’ take, Dean Baker concludes:

In short, the story of the downturn remains depressingly simple. We have nothing to replace the huge amount of construction and consumption demand created by the $8 trillion housing bubble. Perhaps if the problem were more complicated policy types would have an easier time seeing it.

Dean Baker is wrong. The ‘”simplicity” of the story lies elsewhere. The charts indicate that it was only AFTER nominal spending first faltered and then dropped off a big cliff that consumption, nonresidential investment and overall employment followed suit. Construction tanked long before, without causing any measurable grief. Why? Because the Fed kept NGDP chugging along close to trend.

In fact, Robert Samuelson´s ‘psychological’ reason is also nothing more than a case of ‘missing spending’!

Dean Baker-RS_1


Dean Baker-RS_2


Dean Baker-RS_3


Dean Baker-RS_4


Dean Baker-RS_5

“Currency Wars” – “Let´s defend our borders”

When he coined (or just popularized) the term “CWs” in 2010, Brazilian Finance Minister Guido Mantega was implying it was a negative sum game. The expansionary monetary policies in the US would not have much effect locally but would create havoc in emerging markets in general and in Brazil in particular.

So, defensive action had to be taken. A non-exhaustive list includes:

  1. Increase implicit and explicit charges to capital inflows
  2. Increase tariffs
  3. Increase requirements on domestic content in tradable goods produced domestically
  4. Increase ‘vigilance’ against dumping
  5. Fiddle with the exchange rate
  6. Provide tax relief measures

But no matter the measures taken, Brazilian competitiveness only deteriorates. An example: Since 2007 the number of exporting firms has dropped from 20.9 thousand to 18.6 thousand and the number of new entrants into the export market is the lowest among 15 selected countries. Coup de grace: An exporter not only lost an export contract to a British client but later saw his former customer export to Brazil at a price significantly lower than his own!

The government is continuously worried about propping demand to sustain growth, but Brazil´s main problem lies elsewhere. The big constraint is supply. In 2011 growth was only 2.7% and in 2012 it is expected to have been a measly 1%.

The charts are a good indication of supply constraints in Brazil. I compare industrial production in Brazil with emerging markets production and with production in Asian emerging markets. Just to get a sense of the lackluster dynamics I also compare Brazil´s production with production in the advanced economies. Note that since the “currency wars” began, Brazil´s industrial performance has managed to be even worse than that in the advanced (and ‘sick’) economies!




In short, ‘something’ has really been ‘restraining’ Brazil´s growth and it sure isn´t economic policy in advanced economies. That´s just a convenient excuse.

Update: Take a look at how real wages and productivity have evolved!