Carney helps clear a mess he partly made

A James Alexander post

Mark Carney gave a speech at 4pm today that clearly eased monetary policy and raised NGDP growth expectations. Sterling immediately fell 1%, gilts rose 1% and stocks surged. What had he said that was so good?

Essentially this: The fall in Sterling would push up domestic inflation and not only was he OK with that but he also expected he would have to ease monetary policy even further.

Finally, as expected, sterling has depreciated sharply. For given foreign demand, this will mean support to net trade, though this may well be dampened by uncertainty around future trading relationships. A lower exchange rate will also entail higher prices for imported consumer goods, energy and capital goods, and consequently lower real incomes.

As the MPC said prior to the referendum, the combination of these influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than set out in the May Inflation Report. In such circumstances, the MPC will face a trade-off between stabilising inflation on the one hand and avoiding undue volatility in output and employment on the other. The implications for monetary policy will depend on the relative magnitudes of these effects.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer. 

We have been consistently critical of Carney due to his instigating a crushing slowdown in NGDP growth during 2015. It has dragged down RGDP growth and made the UK vulnerable to shocks, like Brexit. To be fair, he is only one of many central bankers with the same mindset of inflation-phobia that blinds them to weak NGDP growth – and one shared by most mainstream economists and many financial types.

He didn’t help his credibility by taking sides in the referendum debate warning of potential long term damage to the economy. No one can predict with any confidence what the economic outcome will be given the huge unknown of the future political and trade relationships. These are political issues on which he was badly trespassing. 95% of economists reckoned an 8% loss of RGDP by 2030, roughly what the domestic FTSE 250 index fell. It’s an approximation that will depend on the politics.

The politics quickly became a huge mess, but is gradually being resolved. The FTSE 250 is recovering. A big help has been and will be the devaluation, a natural offset to economic damage from political uncertainty. Carney has now not only blessed the devaluation but vowed to protect it. So credit where credit is due.

That said, the bad old Carney was still evident earlier in the speech when he said this:

In May, the MPC judged that a sustainable return of inflation to the 2% target probably required a gradually rising path for Bank Rate over the next three years as growth picked up, jobs and wages increased and the drags from a stronger currency and lower commodity prices faded. 

To get inflation up he needs to tighten monetary policy? What? It still shows he is badly confused about his role even if he seems to be a good man in a crisis. The sad thing is that he is partly responsible for the crisis – a characteristic of far too many of today’s central bankers.

Do you believe in miracles?

From the WSJ:

“At a time when the global economy is doubting itself in the face of Brexit, the U.S. consumer is emerging with a smile on his face,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics.

I find it hard to see much reason for smiles! That´s not what the data show. The chart indicates that nominal consumption expenditure growth has come down over the past two years. The basic reason is the Fed tightening of monetary policy through the “rate hike talks”. On a smoother basis (12-month growth), it has fallen and has remained reasonably flat.


The chart below clearly illustrates that consumption is depressed! Both the spending level and the trend growth are below what they were. Maybe Gregory Daco is mistaking “open mouth” for “smile”!


What about the Fed´s inflation mandate? The Fed does not understand what inflation means! Sometimes they think it´s the “oil price”, sometimes the “foreign exchange” and sometimes, “other stuff”.

The fact is that for the past 20 years “inflation” has not been a problem. And given the (low) growth rate of spending, inflation will blossom only through a miracle!


Raghuram Rajan: A Globalist Who Supports Helicopter Drops? David Beckworth Should Podcast Rajan

A Benjamin Cole post

With the insouciance of a true international central banker, Raghuram Rajan, the outgoing Governor of the Reserve Bank of India recently opined in Project Syndicate that “what we need are monetary rules that prevent a central bank’s domestic mandate from trumping a country’s international responsibility.” here

You might think the transcontinental University of Chicago grad Rajan has in mind tighter money everywhere and always, because a looser monetary stance would lower the exchange rate of a nation’s currency, and that is a “beggar thy neighbor” policy.

But maybe not.

While suggesting coordinated rate moves and so forth, Rajan makes breezy allusion to central-bank financing of national outlays. “If all else fails, there is always the “helicopter drop,” whereby the central bank prints money….”

Rajan then links to a Project Syndicate piece by Kemal Dervis, former Minister of Economic Affairs of Turkey and a vice president of the Brookings Institution, who is a fan of helicopter drops, or more accurately “money-financed fiscal programs,” that is financing government deficits through central bank money printing.  here

Chopper Drops

Until recently, helicopter drops have been heresy in monetary circles, despite the success of money-financed fiscal programs in averting the brunt of the Great Depression in Japan, under their brilliant central banker, Takahashi Korekiyo. But of late the likes of British monetary authority Lord Adair Turner and noted Colombia University scholar Michael Woodford have tipped their hats to helicopter drops.

Bring On Beckworth

Fun would be to listen in on a podcast between senior research fellow with the Mercatus Center Program on Monetary Policy economist David Beckworth and Rajan.

The ever-insightful Beckworth has pointed out that the U.S. Federal Reserve essentially exports monetary policy to almost half of the globe’s economy. Here’s Beckworth on the post-Brexit U.S. dollar strength: “Why does a strengthening dollar matter? There are two reasons. First, over 40 percent of the world economy ties its currency to the dollar in some form….That means when the dollar strengthens, these currencies strengthen too. This is the curse of the so called ‘dollar block’ countries–they import their monetary policy from abroad. Via this channel, Brexit has just further tightened monetary conditions in all these countries.”here

But why blame Brexit? The Fed has been tight for years, as seen by the shriveled inflation, NGDP growth and interest rates of the United States.

Perhaps Beckworth should ask if Rajan thinks the U.S. Fed should loosen up and let some air into the global economy, given the “international obligations” of Chair Janet Yellen.

And helicopter drops? Hey, send in the B-52s. Why dilly-dally around?

Speaking up for the Euro Area

A James Alexander post

Our fellow Market Monetarists seem to be struggling a bit with making sense of the enormity of the post-Brexit market moves. It’s actually a curse sometimes being a Market Monetarist and having to take wild market moves seriously, or having to interpret them. NGDP Futures markets make sense, little else does.

Sure, the swing from 90/10 probability for Remain at 10pm on the 23rd to 0/100 certainty of Leave two hours later was pretty extreme. The huge swings in markets on the news could be seen as the “pure” reaction to the news, but then again what were markets actually pricing from one moment to the next. All sorts of stuff.

And once you start trying to analyse market moves in the following days you start to open the Pandora’s box of analysing thousands of things. And you actually then have to start looking at movements prior to the Brexit news, or anticipation of that news, and all the other thousands of things that influence market movements.

The Brexit issue has been hanging around the UK, Europe and the world for many, many years. The future of the EU and the Euro Area, likewise. It is tangled up with geo-politics: the Russia question, the breakdown of the Middle East, relations with Turkey. Is the EU a superpower? Is it the EU vs the US. Is it the G7 vs the RoW? Brexit throws all these things up in the air, and thousands more. Ask any International Relations undergrad.

One part of the jigsaw is Euro Area monetary policy. Scott Sumner today tries to make sense of all the market movements and says, without irony:

“the rest of Europe needs to take this very seriously.  Right now, almost no plausible amount of monetary stimulus from the ECB would be excessive.  It’s pedal to the metal time.”

Of course the rest of Europe needs to take this very seriously, very seriously indeed. Does he suppose it isn’t? There are lots of issues to consider, thousands, in fact. Sure the EU and the ECB are dysfunctional, but tell us something new. Is it more or less dysfunctional than the US at the moment? Maybe, maybe not.

Sumner appears to have slightly lost the plot when he talks of monetary stimulus. There are some facts out there already. The ECB is undertaking huge monetary stimulus already if he means QE or negative rates. Currently, the Euro Area is seeing 40%+ YoY Base Money growthThe ECB is committed to its current and recently expanded programme for at least 18 months. Target interest rates are solidly below zero.

What Sumner may mean is changing the targets, rather than ever bigger tools. If he does mean that, then he should say it. We have been arguing here for months that the ECB should either raise its inflation ceiling or far better, switch to NGDP level targeting.

Strangely, things aren’t too bad on the NGDP growth as we have documented.  As the chart indicates, as the US began tightening monetary policy in mid-2014 through the “rate hike talk”, we see US NGDP growth trending down. The opposite is observed in the EZ countries.


The stimulus is working slowly, but could work so much better if the targets were changed.

Brexit is noise in the bigger picture of monetary strangulation

A James Alexander/Marcus Nunes post

Independent of Brexit, the bigger issue remains that all three currency blocs – USD, Euro and British Pound – are seeing low NGDP growth, too low for comfort. Small real shocks like Brexit (let´s call them, à la Robert Higgs, actual and/or potential institutional discontinuities) cause market mayhem precisely because NGDP growth is too low and thus rather fragile and easily knocked lower.

Why is NGDP level and growth so low? Because central banks seem to like it that way. Their 2% inflation targets dominate their discourse and all their internal projections show them on course to meet their targets in two years’ time – and to hell with NGDP growth. The result is slow monetary strangulation; Brexit is mere noise in this bigger picture.

Nevertheless, given the nature of Brexit, that mixes Supply and Demand shocks, some clarification is in order.

  1. Brexit caused a (global) fall in velocity (AD shock). This requires an offsetting rise in money supply
  2. Brexit caused a (less global) fall in trend real growth (AS shock). Given that monetary policy is synonimous with interest rate policy, this requires a fall in interest rate (because the neutral rate has fallen), which at the ZLB is not forthcoming. In that case, a negative AS shock automatically turns into a negative AD shock.

Solution: Forget interest rate targeting and concentrate on nominal stability (NGDP-LT)


If the negative AS shock is permanent, for nominal stability to be maintained you require a lower trend growth in NGDP.


Permanent AS shocks tend to be rare!

Brexit? BIS Calls For Tighter Money

A Benjamin Cole post

“Monetary policy is running out of room for maneuver,” said Hyun Song Shin, head of research at the Bank of International Settlements (BIS), in a June 26 interview, three days after the Brexit, and the subsequent global retreat of stock and asset values. “It is not clear how much further stimulus of the real economy can be achieved using monetary-policy tools alone without inviting unwanted distortions.”

You can tell that monetary policy has been hyper-accommodative from the soaring interest rates and inflation seen globally, right?

So let’s see: U.S, 10-year Treasuries are offering a 1.48% yield. In shades of the Weimar Republic, the German 10-year Bund is up to a 0.05% yield. No, that is not 0.50%. It is 0.05%. And Japan, or Switzerland? Don’t even ask.

No matter. As news service Bloomberg reported, “The BIS on Sunday (June 26) called on governments to reduce their reliance on extraordinary monetary policy for spurring economic growth. Instead, they should redouble efforts on structural and financial reforms, it said. The stimulus produced by the world’s monetary authorities will approach the limits of its effectiveness, according to the BIS, which was formed in 1930 and acts as the central bank for many of those institutions.”

These proclamations are being issued from the BIS as it has just released it annual report, parts of which have been written in deep, even abject confusion. For example, the report conducts a round-robin of global central banks, including even those of S. Korea, Japan, China, Indonesia and Thailand, and finds all are below inflation targets. This is blamed on falling commodity prices, which have undercut the “very accommodative” monetary policies of central bank after central bank.

The BIS contends that easy money extended for years on end has led to falling commodity prices and even deflation, as seen in Sweden, Switzerland and Japan.

The BIS Solution

The solution to dead prices and anemic growth is structural and financial reforms, avers the BIS. In combination with, of course, tighter money.

I am glad we have the Basel, Switzerland-based BIS’ers to tell us the politico-economic facts of life. Who ever dreamed that democracies, and probably even worse, the statists in mainland China, needed economic structural reforms?

Of course, Singapore is also struggling with deflation (headline CPI down 1.8% YOY in May) and the city-state recorded no real economic growth in 2015, and only 0.2% Q-o-Q real economic growth in Q1 2016, at SAAR. Evidently, Singapore (cited by many as a kind of structural econo-nirvana) is in need of extensive structural reforms, even worse than the United States.


It is confounding that the globe’s central bankers cannot fathom they will never get back to “normal” interest rates if they continue to asphyxiate the global economy with tight money.

Moreover, no nation will ever have the kind of regulations and tax laws that macroeconomists would prefer. As a consequence, monetary policy has to be made in the real word, as it is. And anyway, is the problem of slow real global growth structural and not monetary?

Brexit aside, the world’s economies are more open to trade and innovation than ever before, connected by Internet no less. Services can be dispensed globally by the click of a button, and there are more large cargo ships than ever.

Why has econo-nirvana Singapore slipped into deflation and anemic growth? Structural problems?

Sadly, the retrograde, even punitive tight central-bank monetary policies are promoting the very kinds of socialism and nationalism that will undercut real economic growth. Well, unless some nationalists seize control of a central bank. Even that might be an improvement.


Yet more sad news: Blogger Dajeeps has pointed out that Don Trump appears to have a better feel for monetary policy than Hillary Clinton. Trump talks about monetizing debt while Hillary says it was easy money that collapsed the US economy.

Hillary appears headed for the White House, where no doubt she will embrace the effectively tight money policies of Janet Yellen.

Post-Brexit, what will Janet Yellen’s next excuse be?

A James Alexander post

Well the British have voted for Brexit. We shall see how it turns out.

Carney must not defend sterling

Market Monetarists must hope that Mark Carney doesn’t seek to defend the pound, but let currency weakness do it’s magic, monetarily offsetting any expected economic weakness. A drop in the pound is not like a drop in the price of a company after a profit warning that reflects a weaker future. Of course, a hit to potential economic growth will damage the value of the UK economy but the currency is a different issue. Currency reflects the monetary value of the economy not its real economic prospects.

Low or negative real economic growth but with even lower inflation tends to see currency appreciation, like in Japan or Switzerland. If there were expected to be 5% real growth and 5% inflation, other things being equal, the currency would not move.

If (as 95% of economists forecast) the UK leaving the EU were to result in 5% less real economic growth over time, or even a recession, then the central bank should ensure nominal growth stays at a level 5%. The pound could then fall up to 10%, other things being equal, ie ignoring what other currency blocs are doing. That would be the right thing for the central bank to allow and even facilitate. The currency drop would then automatically boost domestic demand offsetting the drop from “lost confidence” in the future, or whatever is supposed to happen to the UK outside the EU.

I suspect no such dramatic drop in real GDP as things change very slowly when it comes to international affairs, and businesses and consumers adjust their behaviour to fit the expected new environment. The UK government should focus on eliminating any supply side restraints on the economy and any potential tariffs that the EU may impose.

What the EU should do
Clearly the remaining EU members should be very careful about entering tariff wars given the modest nominal and real growth they currently enjoy. The Euro Area likewise. The Euro Area should move to a loose monetary policy by either abolishing the inflation ceiling or better still targeting nominal growth of 4-5%.

Draghi was recently asked in the European Parliament why he didn’t raise the inflation target. His reply betrayed a profound confusion about his current stance. His ECB projects 1.6% inflation two years away. De jure, his monetary stance is only neutral. De facto, market prices indicate much lower inflation two years out, thus the stance is actually very tight. Raising the inflation target or introducing nominal income growth targets would allow the market to expect no tightening if inflation were to go above 2%, thus easing policy as expectations for policy would be easier.

What will Yellen do next?
The more interesting question for the US is what excuse Janet Yellen might now have to come up with to explain away the consequences of the Fed’s tight monetary policy. She may think it is “highly accommodative” because rates are low and the Fed balance sheet bloated with QE securities. To be fair, very many economists and market commentators think likewise, making the same basic mistake. But Market Monetarists know better.

Monetary policy is judged by market expectations for nominal growth and these remain low. Current NGDP growth is low and both straight long duration government bonds and TIPs indicate very low inflation.

Yet the FOMC is indicating seven rate rises of 25bps over the next two and half years, with another three promised in the long run. Tight or what? Policy is tight because it is expected to be tight for the next two years. The result has been weakening nominal growth, weakening real growth, and low nominal wage growth. Real wage growth has supposedly been better but it certainly hasn’t felt like it – hence the rise and rise of populist politics.

“Money makes the world go round” …but can also bring it crashing down

So I take issue with what Brad DeLong writes:

The dot-plots tell us that the FOMC now thinks that it is headed for a 3% Treasury Bill rate–at the upper end of this range, but still very far from a 5% rate. And if we do live in a semi-permanent age of secular stagnation, this will not be a temporary inconvenience but, rather, a permanent structural fact.

That means that if the FOMC keeps its current inflation target then it will have only 3% of sea-room when the next big recession comes, whether next year, next decade, or a quarter century from now.

That means that if the FOMC keeps attempting to raise interest rates back to a 5% normal–or even, unless it is lucky, to a 3% normal–it will find itself continually undershooting its inflation target, and continually promising that rates will go up more real soon now as soon as the current idiosyncratic fit of sub-2% inflation passes.

I do not know anybody seriously thinking about all this who thinks that 3% of sea-room is sufficient in a world in which shocks as big as 2007-2010 are a thing. And I do not know anybody seriously thinking about all this who thinks that pressing for a premature “normalization” of interest rates is a good idea.

Because, “a world in which shocks as big as 2007-2010 are a thingis only true if the Fed so wishes.

As a good friend reminds me: “Because of group-think (within the econ profession as well as the FOMC), no one even is considering the idea that monetary policy has been unduly tight and whatever “regime” we’re in is the product of their confusion about what they’ve done or should be doing.  If nothing else, it would be nice to have someone on the committee who would suggest looking at things from a different perspective.”


The Fed really needs a makeover!

If it isn’t bad enough that the mainstream model is driven by two unobservable variables — the neutral rate and the real rate — James Bullard wants to convince us that policy decisions are based on regimes that are unknown and, even better, switches between regimes that are not forecastable.  Does this in anyway differ from a Ouija board?