Inspector Clouseau & Hrundi V. Bakshi

Two mischievous and confusion-wrecking Peter Sellers characters. The first in the Pink Panter series and the second the party-crasher in the movie “The Party”.

Benjamin Cole has codenamed Dallas Fed president Fisher “Inspector Clouseau”. It turns out St. Louis Fed president Bullard wants to try to beat him to the “silly prize”. So let´s cast him as Hrundi!

Falling unemployment and rising inflation are bringing the Federal Reserve closer to its goals more rapidly than policy makers had foreseen, and may justify raising interest rates as early as the end of the first quarter of 2015, St. Louis Fed President James Bullard said Thursday.

A rebound in U.S. economic growth in the second quarter following a drop in output in the first three months of the year confirmed the dismal first quarter was an anomaly in an otherwise improving trend, Mr. Bullard told The Wall Street Journal in a telephone interview. Hiring has also shown consistent strength, he said.

Basically we’re way ahead of schedule for labor-market improvement,” Mr. Bullard said. He noted that former Fed Chairman Ben Bernanke said last summer the unemployment rate would likely be around 7% when the Fed wrapped up its bond-buying program. Instead, it was 6.2% in July, and “could go below 6% by the time we end bond buys,” Mr. Bullard said.

The idea that the Fed might get behind the curve is a powerful one, and that’s certainly been the history of the institution. People are right to worry about that,” Mr. Bullard said.

He just cannot entertain the idea that the Fed has missed the “curve” altogether, and has been operating in a different “galaxy”.

Needed: “Truth” in textbook writing

I have received the second edition of Mishkin´s Macroeconomics – Policy and Practice textbook. Some time ago I did a couple of posts commenting on the first edition (here, here).

In this second edition there are several additions, most notably Mishkin´s introduction of what he calls “A Dynamic Approach to Macroeconomics”. According to Mishkin (page XXXIV):

Analyzing today´s hot-button policy issues requires approaching macroeconomic theory using the models that researchers and policy makers employ. The central modelling element in Macroeconomics: Policy and Practice, Second Edition, is a powerful, dynamic aggregate demand and supply (AD/AS) model that highlights the interaction of inflation and economic activity. In this model, inflation (as opposed to the price level) is plotted on the vertical axis.

In justifying the use of the Dynamic AS/AD (DASAD) model Mishkin says, inter alia, that:

  1. The DASAD framework focuses on the interaction between inflation and output, which is exactly what the media and policy makers focus on. In contrast, traditional AS/AD analysis focuses on the interaction between the price level and output.
  2. The DASAD framework characterizes monetary policy easing or tightening as a change in the interest rate, which is exactly the way central banks conduct monetary policy…

What put me off?

His DASAD is only “partly” dynamic because in the horizontal axis you won´t find the rate of real output growth but the deviation of output from ‘potential’ (a ‘mystery’). In that sense the AD curve is not a rectangular hyperbola (see here).

If he had presented the DASAD model that way he could easily characterize monetary policy as providing nominal stability (keep AD growing along a level growth path).

And I really don´t know why he eschewed that route because in his “valedictory remarks” in his last FOMC meeting six years ago (August 5 2008) he was very clear:

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.

My question: Why can´t textbook writers write down what they really believe?

If only it were just China 7 Brazil 1!

Scott Sumner does a post on Brazil! Nothing wrong with it, but it only scratches the surface. This is a crucial comment:

And to return to the opening—there’s the deeper mystery of why more people don’t talk about Brazil as a failed state. Why this continual hyping of Brazil as the country of the future? Recall it’s one of the original BRICS.

Because it isn´t and has never been either a failed state or “country of the future”, although the last has been an enduring “selling point”. But the country has the dubious characteristic of eluding any precise “autopsy”. And this will likely “go on forever”! So Scott, you´re not the only one “puzzled”.

In some “games” China scores 10 (or more) to 1!

Brazil Puzzle_1

Brazil Puzzle_2

Draghi is “Waiting (in vain as known from the play) for Godot”

Desmond Lachman has a pessimistic take:

Following strong economic growth of 0.8% in the first quarter of the year, the Germany economy is widely estimated to have stagnated in the second quarter. More troubling yet are indications from high frequency data that this slowing might not be a transitory phenomenon. Since those indicators suggest that German industrial production is now contracting and that German investor confidence has now slumped to end-2012 levels.

In his recent press conference following the ECB’s last policy meeting, Mario Draghi did recognize that geopolitical uncertainty was weighing heavily on the European economy and that such uncertainty constituted an important risk to the European economic recovery. However, he stopped short of considering that those geopolitical risks were all too likely to persist over the next several months. This is to be regretted considering that all the clues seem to be pointing in the direction of a deepening and a prolongation of the Ukraine-Russia crisis as well as of a continued deterioration in the Middle-East situation. Sadly, those crises are all too likely to weigh heavily on German investor confidence in the months immediately ahead. And they will do see at the very time that a highly export dependent German economy will be confronted with an economic slowdown in a number of its key Asian and emerging market export markets.


The other countries, in the doldrums, don´t count for much. Germany still has to do a bit worse for the ECB to act! It will and it will, soon, but nevertheless late!


How to be politically correct (and, therefore, bland)

From two heavyweights: M. Feldstein and R. Rubin:

In the short run, markets tend to be psychological and in the longer run tend to reflect fundamentals. Whether and how much markets are mispriced relative to fundamentals is always uncertain. But when markets have moved across the board as much as they now have, that should be a warning of the possibility of excesses.

Our conclusion is not that the Fed should respond to those risks by raising interest rates now. Weak labor markets are and should be a deep concern and a pressing issue. But the Fed should also take into consideration the possibility of excesses brought on by low interest rates that could create financial crises. In making interest-rate decisions, the Fed should have a realistic view of the broad range of the existing systemic risks and of the limits of the government’s currently extant macroprudential tools.

The stress in these interest-rate decisions is heightened by the political system’s failure to act on our nation’s broader policy challenges, increasing the pressure on monetary policy, despite the limits on what it can do and the risks its expanded use can pose.


The European Central Bank Doesn’t Listen to PIMCO; The Continent Fades to Black? USA Next?

A guest post by Benjamin Cole

A couple of years back already, the gigantic U.S.-based bond manager Pimco ($1.97 trillion under management) berated the European Central Bank (ECB). The man-bites-dog part of this recounting is that the Pimconians bashed the ECB for being too tight.

Readers know that the financial sector is dominated by conservatives, and it is a curious and hardening modern-day affliction of Tories everywhere that they reflexively extol tight money. For their own reasons, central bankers embrace and fan this predilection.

To state the obvious, the ECB didn’t listen to PIMCO; now the Irish Independent newspaper has just run an op-ed that bluntly stated,  “Europe needs to start printing more money—and it needs to do it now.”

Duh. The continent is sagging towards deflation; Italy is in its third recession since 2008. The International Monetary Fund has called on the ECB to consider quantitative easing (QE).

Frankly, there is no choice; the ECB must go to QE. Even Taylor Rule aficionados have to concede that for PIGS countries a Taylor diktat would require negative interest rates—on other words, a fictional solution. And that has been the ECB’s course so far—embracing a fictional solution.

Is the USA So Different?

Like many others, I have lamented the glacial pace of the U.S. recovery, and the timid, irresolute flat-footedness of the Federal Reserve. But the U.S. did seem on the mend, as seen by GDP and unemployment statistics.

But recently I came across a chart that made me wonder if the “recovery” was even slower and more constrained that I had thought.

Here you go:


Egads, Americans are working fewer hours than in 2007!

This is “recovery”?

Granted there are productivity gains in the U.S., granted some people are retiring. But fewer hours worked now than in 2007?

Fed Chief Yellen is right to ponder if the official unemployment rate has become a misleading figure—but she should do more than merely pontificate and ponder. She should fight to keep QE, or threaten to resign her chairmanship.

The Fed has undershot its 2 percent inflation “target” for years. Would it kill the FOMC to overshoot for a few years?

You Can’t Tighten To Kill Structural Impediments

To be fair, the observers who blame “structural impediments” for retarded U.S. economic growth often have a point. For example, there are now nearly 12 million people in the United States collecting “disability” payments, from the Social Security system, or the Veterans Administration.

That 12 million figure is much larger than the less than 4 million who collect unemployment insurance. I think the 12 million disabled is a number large enough to have macroeconomic considerations. I am happy to link arms with government bashers and leftie-haters and demand these two “disability” programs be cut in half. We can chant, and write letters. Then we can chant some more….


But the fact remains: Monetarily asphyxiating the economy does nothing to push those 12 million back into the private-sector and payrolls. Quite the opposite.

It is a sad fact of political and economic life that a central bank cannot fix structural impediments, but it can starve an economy—and good employees and businesses—of prosperity.

That is what is happening now in Europe, and to a lesser extent, in the United States.


Wim was nothing like “The Duisenberg”, Trichet was “Tricky just like Dick” and Draghi is “Dragging the economy down”

The real “Duisenberg”:

Duisenberg_1“Tricky Dick Trichet”


“Dragging down Draghi”


With a straight face he says:

Overall, recent information, including survey data available for July, remains consistent with our expectation of a continued moderate and uneven recovery of the euro area economy. Looking ahead, domestic demand should be supported by a number of factors, including the accommodative monetary policy stance and the ongoing improvements in financial conditions.

When your brain is “high jacked”!

Raghuram Rajan, governor of the Reserve Bank of India and formerly professor at Chicago´s Booth School of Business, shows, among other things, that he has no understanding of what caused the Great Depression and of the role monetary policy (exiting the gold standard and devaluing) played in lifting the countries out of it. He says:

Reserve Bank of India Governor Raghuram Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense.

The difference: competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster. Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said.

As the clearest symptom of the malaise he chooses the euro zone:

A clear symptom of the major imbalances crippling the world’s financial market is the over valuation of the euro, Mr. Rajan said.

The euro-zone economy faces problems similar to those faced by developing economies, with the European Central Bank’s “very, very accommodative stance” having a reduced impact due to the ultra-loose monetary policies being pursued by other central banks, including the Federal Reserve, the Bank of Japan and the Bank of England.

So “very, very accommodative” monetary policy is deflationary and what you really want is “ultra-loose” monetary policy. One more instance of confusing the stance of monetary policy with the level of interest rates. You´re bound to get into mischief!

Rajan on MP

What are stock markets signaling?

The top chart shows the normalized stock indices for the last couple of months

Stock Signals

In Japan, Abenomics still enjoys “contained credibility”

In the UK, despite all the good news on growth and employment, the market seems wary of the BoE.

It´s more or less the same in the US, where “robust” second quarter growth was a “downer” and a weaker than expected employment report didn´t sustain an “upper”.

In Brazil the market “rejoices” every time the President falls in the polls and the chances of an opposition victory increases. Between polls the sorry state of the economy concentrates the attention of investors.

The smaller chart is from an April post and depicts the first fall in the polls of the President. It was a strong “upper”.

PS President Rouseff was so “peeved” with this sort of analysis put up by a Santander analyst, that the bank felt “compelled” to fire her!

Profligate foreigners

Simon Wren-Lewis has an interesting post, widely illustrated, to indicate that the conventional story, in which:

You know, when we all went on a borrowing binge and there was a housing bubble and now we are all paying for this excess. I hear this often in comments, as well as the media. It is a story that seemed implausible at the time, but is it more plausible now? This post is about an alternative story that is in many ways rather more interesting.

To conclude, the evidence that there was a significant UK boom before the Great Recession is pretty weak, as is the idea that it was due to profligate consumers or government. So why do many people say there was a borrowing led boom? Partly this may just reflect a tendency to assume what happened in other countries must have also happened in the UK. Partly it may reflect a sort of economic moralism: our problems today must reflect our personal sins of the past. But we should also note that this story about UK debt does distract from what was a clear cause of the UK recession: a financial crisis caused by unwise lending overseas by UK banks.

In other words, the “profligates” were abroad. The UK crash was the result of “contagion”.

But when I look at charts like the one below I wonder if the true reason for the UK crash was not the abandonment of “good” monetary policy by the BoE and in many other countries simultaneously. I grant you that US monetary policy plays a leading role. As David Beckworth has said many times, the US is a monetary hegemon. But even so…

SWL_Alternative story