Now, Bernanke obfuscates!

In his latest post Bernanke takes on the WSJ editorial “The Slow-Growth Fed?”:

The unemployment rate is a better indicator of cyclical conditions than the economic growth rate, and the relatively rapid decline in unemployment in recent years shows that the critical objective of putting people back to work is being met. Growth in output has been slow, despite solid job creation, because productivity gains have been slowperhaps as the result of the financial crisis, which hammered new business formation and investment in research and development, perhaps for other reasons. But nobody claims that monetary policy can do much about productivity growth. Where it can be helpful is in supporting the return to full employment, and there the record has been reasonably good. Indeed, it seems clear that the Fed’s aggressive actions are an important reason that job creation in the United States has outstripped that of other industrial countries by a wide margin.

The WSJ also argues that, because monetary policy has not been a panacea for our economic troubles, we should stop using it. I agree that monetary policy is no panacea, and as Fed chairman I frequently said so. With short-term interest rates pinned near zero, monetary policy is not as powerful or as predictable as at other times. But the right inference is not that we should stop using monetary policy, but rather that we should bring to bear other policy tools as well. I am waiting for the WSJ to argue for a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive. We shouldn’t be giving up on monetary policy, which for the past few years has been pretty much the only game in town as far as economic policy goes. Instead, we should be looking for a better balance between monetary and other growth-promoting policies, including fiscal policy.

In “The Fed´s Lullaby”, I said that the Fed was happy with satisfying “the other mandate”! Note that BB doesn´t mention inflation!

“Growth in output has been slow, despite solid job creation, because productivity gains have been slowperhaps as the result of the financial crisis”. Not so subtly he says “it was not my (the Fed´s) fault. However, that argument doesn´t stand up to scrutiny.

The panel below puts productivity and unemployment side by side for the following periods: 1983.I – 1995.1; 1995.II – 2003.IV; 2004.I – 2014.IV.

Note that productivity growth rises when unemployment increases (as expected). That´s not so evident for 1995.2 to 2003.IV because throughout this time productivity was booming. Nevertheless, there´s a big difference in productivity growth between 1995.II – 2000.IV at 2.5% and 2001.I – 2003.IV, when unemployment was on the rise, at 3.6%.

BB Obfuscates_1

Note also that between late 1992 and early 1995 (top row) productivity growth was nonexistent, and lower than what has been observed since early 2011, nevertheless real GDP remained close to trend (see RGDP & Trend chart).

What Bernanke still fails to address after having blogged for one month is WHY the Fed, under his command, allowed a depression to materialize. If he had only acknowledged early on after 2008 the mistake of letting nominal spending (NGDP) tank he would have “guessed” the solution. Long-term real growth is not the province of the Fed. The best the Fed can do to allow the economy to “flourish” at the highest level is to maintain nominal stability, a task in which it failed miserably. It´s no good and no use now calling for “a better balance between monetary and other growth promoting policies”, whatever that means.

BB Obfuscates_2

As George Selgin wrote today, it may be late in the game to regain much of what was lost because:

You see, unlike some economists, although I’m happy to allow that an increase in the Fed’s nominal size, which is roughly equivalent to a like increase in the monetary base, is neutral in the long run, I don’t accept the doctrine of the neutrality of increases in the Fed’s relative size.  I believe that Fed-based financial intermediation is a lousy substitute for private sector intermediation, and that as it takes over, economic growth suffers.  The takeover is, in other words, financially repressive.

Which means that the level of spending is, after all, not the only relevant indicator of whether the Fed is or isn’t going in the right direction.  Another is the real size of the Fed’s balance sheet relative to that of the economy as a whole, which measures the extent to which our central bank is commandeering savings that might otherwise be more productively employed.  Other things equal, the smaller that ratio, the better.

And there, folks, is the rub.  If you want to know the real dilemma facing the FOMC, forget about the CPI, oil prices, and last quarter’s weather.  Here’s the real McCoy: NGDP growth is too low.  But the Fed is too darn big.

Yes, Bernanke, by your misguided policies you´ve made the Fed too big AND mostly useless!

The wrong inference

The WSJ goes in the wrong direction in “The slow-growth Fed”:

Yet the great paradox of this expansion is that the monetary policy that is supposed to spur faster growth hasn’t spurred faster growth. The nearby table compares GDP projections from the Fed’s policy makers with actual growth since 2011. The Fed has always been too optimistic—to a startling degree.

Wrong Inference

Economic forecasting isn’t easy, but it’s striking how consistently the Fed has been wrong in a single direction. Our guess is that the Fed gurus have been wrong because like so many in Washington and Wall Street they have overestimated the power of monetary policy to propel the real economy.

Some time ago I argued for the “opposite”:

I don´t think Keynes or Krugman despise (or hate) monetary policy. In fact, they believe it´s ´powerless in certain circumstances. On the other side the policymakers, the guys responsible for implementing monetary policy, also are fond of saying that monetary policy is powerless (when interest rates drop to zero). In this they are following Keynes who thought interest rates defined the stance of policy.

But the real reason is that, as policymakers they are afraid of the “beast” under their care.

The evidence for that claim is abundant…

There´s no risk of recession, we´re just depressed!

I usually find Ambrose Evan-Pritchard an interesting read. However, today he spins an unlikely optimistic tale on the near future of the US economy in “Ignore the ‘whiff of panic’ as US economy stalls”.

He ends with a picture of job openings

Cusp of recession_1

And writes:

The ratio of job openings to applicants is now higher than it was at the top of the last boom in 2007 by a substantial margin. Hours worked have surged. The labour market is tightening hard. Unless Americans have gone through a Puritan conversion, their swelling disposable income must soon start flowing into the shopping malls.

This is not the picture of a country on the cusp of recession.

Only no one is talking about “recession”. In fact, Jim Hamilton´s GDP-based Recession Indicator Index has rarely been as low as it is now for it´s more than 45-year history!

What people have stopped doing is referring to the post 2009 “recovery” as a “depression” (intimately called Bernanke-induced “little depression”). And the job opening picture is not at all inconsistent with that, which is well described in the chart below.

Cusp of recession_2


The Fed´s “Lullaby”

Fed Lullaby_1

The FOMC met concurrently with the release of the GDP report. Despite the far below expectations result the Fed remains steadfast:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

They sure expect a lot! Given the realizations of the past five years, I wonder how far they can extend their expectations!

Since the Fed is miles from practicing anything that could resemble an appropriate monetary policy, it will be surprising if their expectations are ever realized!

Some relevant pictures:

Fed Lullaby_2

Note: FSDP = Final Sale of Domestic Product (excludes inventory change)

Fed Lullaby_3

Nothing to worry about because “we are close to satisfying our other mandate”!

Fed Lullaby_4


It appears there will never be a R.I.P. for Inflation Targeting!

Benyamin Appelbaum has a survey in “2% Inflation Rate Target Is Questioned as Fed Policy Panel Prepares to Meet:

The cardinal rule of central banking, in the United States and in most other industrial nations, is that annual inflation should run around 2 percent.

But as the Federal Reserve prepares to start raising its benchmark interest rate later this year to keep future inflation from exceeding that pace, it is facing persistent questions about the wisdom of the rule and the possible benefits of significantly increasing its target.

Higher inflation could disrupt economic activity, but it also would enhance the Fed’s power to stimulate the economy during recessions. And some experts say the struggles of the Fed and other central banks to provide enough stimulus since the Great Recession suggest they could use more room for maneuvering.

“Most developed countries’ central banks have experienced difficulty in providing sufficient monetary stimulus to spur a robust recovery in their economies,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a recent speech in London. “This may imply that inflation targets have been set too low.”

IT has been “dead” for seven years but a “burial ceremony” is never planned! Instead, applying “CPR” is the “solution” most discussed.


When “theory” placed inflation targeting at the “center” and interest rate targeting as the “mechanism” to accomplish it, they simultaneously took money out of the equation.

Give IT the R.I.P. it deserves, and bring out “nominal stability” to centerfold. Money will naturally become the “accomplishing mechanism”.

“Normalizing” Monetary Policy should be with reference to money, not interest rates

Mike Belongia and Peter Ireland have written a nice essay on Japanese-style deflation:

One can make sense of the inflation data by looking at both interest rates and the money supply. It may be true that during normal times, when long-run inflationary expectations remain anchored, lower interest rates can signal that monetary policy has become more accommodative, putting upward pressure on prices. It seems far more likely over the past two decades in Japan, however, that the direction of causality has been reversed. Instead, interest rates are low because expected inflation has fallen: bond-holders no longer need a higher interest rate to compensate for rising prices that, if present, would erode the purchasing power of their saving. Slow money growth therefore represents the driving force behind both low inflation and low interest rates.

And conclude:

Strangely, central bankers around the world appear to have forgotten this simple lesson. Despite seeing the clear example provided by Japan, policymakers at the Federal Reserve have paid less, not more, attention to measures of broad money growth since the mid-1990s. That’s a pity. By emphasizing in public statements that they are both willing and able to use monetary policy to control the growth rate of money, Federal Reserve officials could easily reassure Americans that the United States need not ever suffer from “Japanese-style” deflation.

The corresponding US charts follow:

Japan style deflation_1

Japan style deflation_2

As Benjamin Cole loves to say: “Print more money”! Meaning that “normalizing” monetary policy should refer to money growth, not the FF target rate.

Bernanke takes on John Taylor and his (namesake) rule

I think Bernanke is still “taking it easy” in his blogging. I hope he´s “warming up” to what really matters, i.e. explaining why the Fed bungled in 2008!

Bashing the Taylor-rule is easy, even if, like me, you´ve never been a central banker. I did that in a number of posts (two examples, here and here).

In the following paragrah, BB disappoints, and indicates that the bad things that happened after 2008 were not the fault of the Fed. In fact, according to him, the Fed came out ahead of the pack!

As John points out, the US recovery has been disappointing. But attributing that to Fed policy is a stretch. The financial crisis of 2007-2009 was the worst at least since the Depression, and it left deep scars on the economy. The recovery faced other headwinds, such as tight fiscal policy from 2010 on and the resurgence of financial problems in Europe. Compared to other industrial countries, the US has enjoyed a relatively strong recovery from the Great Recession.

Hooray For the Supply Side! Germany Labor Markets And Demand

A Benjamin Cole post

I have complained before in this space about the macroeconomic defeatism seen among both left- and right-wing economists. We are told that due to demographics and lower productivity, future economic growth must be muted.

Not so.

Labor Markets

There is excellent news: In Germany, the employment rate has risen from 65% in 2003 to 75% presently, reports The Economist magazine in their April 25 issue. I guess they do not know about demographics in Germany.

My supply-side friends will be happy to know it was labor-rule changes that helped Germany obtain higher employment rates, though it should not be forgotten that the ECB, as currently configured, essentially funnels demand to Germany also.

In the United States, there are 12 million beneficiaries collecting “disability” payments from either the Social Security Administration or the Veterans Administration, let alone other labor-thwarting disincentives. What Germany can do, the U.S. can also do, and better—if there is political will. But we need the demand-side to also grow, as it has in Germany.


The present idea that Americans cannot more rapidly increase productivity, or output per hour worked, is one of the more peculiar ailments of modern economists. As pointed out by Marcus Nunes in this space recently, there was a record-setting surge in U.S. productivity in that long-ago era of…1997-2004.

In 10 years, Americans have lost their ability to innovate? And what has happened since 2004? Well, we had the Great Recession, and very tight money, and excess capacity in nearly every industry. It has been a tough environment in which to justify investment in plant and equipment. Output per hour tends to sag in slow growth.

The answer to the productivity question is more demand. Not “Build it, and they will come,” but rather, “Demand it, and they will build it.”


Economic historians know that after every serious economic event—such as a prolonged recession, or sustained inflation—there are observers who pronounce a “new norm.”  After the double-digit inflation of the 1970s, some observers have been waiting for a reprise ever since—for them, inflation is the new norm, whether in fact or fear.

The good news is that we need not fear inflation, demographics or lower productivity. There is much to gain by demand-side (print more money) and, yes, supply-side reforms.

Monetary Policy Creates Financial Instability?

A Benjamin Cole post

Paul Krugman may be persona non grata in my house, but I must begrudgingly admit when the NYT blogger makes a good point:

“Let me also add that if it’s really that easy for monetary errors to endanger financial stability—if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history—this is an overwhelming argument for draconian bank regulation. Modest monetary mistakes will happen, so if you believe that these mistakes caused the global financial crisis you must surely believe that we need to do whatever it takes to make the system less fragile. Strange to say, however, I don’t seem to be hearing that from (John) Taylor or anyone else in that camp.”—Paul Krugman.

Krugman plays a little fast and loose here, and also ignores University of Chicago scholar John Cochrane, who has in fact called for major reforms, such as bank lending 100% backed by equity. No more 30-to-one leverage.

And inflation did sag after 2008, indicating monetary policy was too tight, as Market Monetarists have said. There was a “mark on the inflation rate,” such as Western economies sinking into deflation. I noticed that mark.

Still, Krugman has a point. We keep hearing monetary policy is too loose, and have heard that for 30 years. Yet the developed world is in deflation or close, led by Japan. Then we had a global financial collapse.

So, the record suggests the inflation-hysterics have it exactly backwards. If monetary policy has threatened financial stability, it has been because it has been too tight. We are in ZLB now—that is not a sign of decades of easy money.

Krugman has a point about banks, too. How is it in the U.S. we have such a feeble financial system? Why has the right-wing no interest in measures that would create strong banks? Being “against Dodd-Frank” is not a policy. If Dodd-Frank is no good, then embrace John Cochrane, or please devise a policy that would make for strong banks.

And, as I always say, print more money.

Because, not printing more money will have unintended and unforeseeable but catastrophic consequences on financial stability. Well, you can take out the word not, but the insanity level remains unchanged.

Early medieval roots of Austrian, Austerian and Germanic principles

I was reading the engrossing “The Norman Conquest – the battle of Hastings and the fall of anglo-saxon England” when I hit the following sentence on page 14:

“That [king]AEthelred [father of king Edward the Confessor) was ill-advised is not open to doubt: the king himself admitted as much in a charter of 933, in which he blamed the mistakes of his youth on the greed of men who had led him astray. From that point on he put more faith in peaceable churchmen, but they regarded the Viking attacks as divine punishment, and thus saw the solution as spiritual reform: more prayers, more gifts to the church, and, in the meantime, large payment of tribute to persuade the invaders to go away…”