“In the dumps”

From the WSJ:

Chart of Day

It gets worse. NGDP growth (a.r.) was significantly negative (-1.7%):


Leading John Makin to conclude:

There is one good result that might come from the very weak economic numbers being reported. The silly blather about rising inflation, that intensified in June as headline CPI inflation reached a year over year pace of 2.1 %, may end. Most of the modest rise in inflation is due to negative supply shocks: drought that has boosted food prices and rising Middle East tension that has boosted energy prices. The Fed doesn’t respond to higher inflation tied to negative supply shocks because any Fed tightening, a negative demand shock, would result in a collapse of output and employment. That lesson was learned the hard way during 1974-75 when central banks boosted interest rates in response to the jump in inflation caused by a jump in energy prices.[not quite, they did it again in 2008]

The US economy is weak and there isn’t much left in the Fed’s tool kit beyond a shift away from talking about when it will exit from zero interest rates to things it could do–like buying a wider range of assets–to at least sustain modest growth.

Update: Bad omens. In most of the pot war period, negative NGDP growth, when it ocurred, was always (until now) associated with a recession, although not all recessions experienced negative NGDP growth. The chart illustrates.


One thought on ““In the dumps”

  1. The Fed, far from being circumspect or risk-averse, has actually been taking an extremely risky path—that of dancing along the edge of a new recession, while interest rates are still depressed. The ZLB slump may emerge next.

    In a ZLB slump, of course, the traditional tools of central banks—higher or lower interest rates—become nearly useless. Basically central banks then must rely on QE.

    But the Fed has dithered, and now already all but declared it will quit QE this fall. So, if we hit another recession, the Fed will face the disagreeable option of embracing QE, which it just said it planned to abandon. That will been as an about-face, or flip-flop, or policy failure.

    There is even a risk Yellen will not go back to QE, as that would be to admit a huge policy error in ever dropping QE. It took the Bank of Japan seven years to get back to QE, after halting QE in 2006. Sadly, governments have proven time and again they will persist in policy failures for years past the expiration date. In the private sector, a firm gets run out of business that persists in a bad idea. No one will run the Fed out of business.

    Central banks must simply come to accept QE as a conventional policy tool, preferably while targeting aggressive NGDPLT targets. If central banks can get growth and inflation high enough, maybe then QE can be dropped.

    Sadly, we may never get that far.

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