“Tug of War”

From the IMF:

MUSCAT, Oman—Painting a dark outlook for the global economy, the International Monetary Fund on Thursday issued an “urgent” call for the world’s largest economies to roll out more growth-boosting policies.

The IMF said central banks need to maintain their easy-money policies and the Group of 20 largest economies must prepare contingency plans should a stagnating outlook turn into a downturn.

About the Fed:

Federal Reserve officials are looking more confidently toward an interest-rate increase before the end of the year, possibly as soon as September, as financial markets have stabilized after Britain’s vote to leave the European Union and the economy shows signs of picking up.


The Fedborg pushes for rate rises but, instead, will send them down

A James Alexander post

Jon Hilsenrath at the Wall Street Journal is an excellent journalist. He often scoops his peers by getting people to talk to him off the record. His main line is into anonymous Fed staffers in Washington – aka the Fedborg.

The Fedborg is the consensus of backoffice staff who have tirelessly argued for “normalization” of monetary policy, i.e. raising rates to historical norms despite massive evidence that inflation and nominal growth are miles below healthy historical norms. The Fedborg seems to believe that preservation of financial stability is more important than prosperity. The fact that time and again this elevation of financial stability over prosperity leads to financial instability seems to keep eluding them.

Hilsenrath’s story “Fed Officials Gain Confidence They Can Raise Rates This Year  in today’s WSJ probably moved markets. The yield curve shifted up a handful of basis points and the USD rose too – the index rose 30bps from 96.70 to 97.00

A rate increase could come as early as September if economic data hold firm

… Officials are almost certain to leave rates unchanged when they meet July 26-27, according to their public comments and interviews with officials. But the message in their post meeting policy statement could be that the economy is on a more solid footing than appeared to be the case when they last gathered in June, setting the stage for raising rates if the data hold up in the months ahead …

Such a message would get the attention of traders in futures markets, who see low chances for the Fed moving as early as September. In early June, traders on the Chicago Mercantile Exchange placed a probability of greater than 60% that the Fed would raise short-term rates by at least a quarter percentage point by its September policy meeting, according to the CME. The probability dropped sharply after a weak May jobs report and the June 23 Brexit vote and was just 12% on Monday.

As Hilsenrath weaves into his story, public comments by various hawkish regional governors have been again trying to talk up more rate rises than the market expects. But the chatter has had very little impact.

New news

So the un-named “officials” have given Hilsenrath his scoop. The officials have upped the ante and tried to get the market to take the regional governors more seriously.

The Fedborg is not at all happy that it keeps getting overruled by more sensible regional governors in alliance with more sensible permanent Fed members like Lael Brainard. So, the Fedborg stoops to spin pressuring markets and the sensible governors alike. We hope that the they will fail again, but what really needs to happen is a Kocherlakota “house cleaning” of these back office experts and their replacement with more rounded, sensible, evidence-based, pro-prosperity types. Or they could just recognise their errors and stop pushing financial stability that results in financial instability.

Although in the short term the Fed can often influence rates in the way they wish ultimately it depends on the market. The market ultimately will send rates down if the Fed tries to raise them now.

What happens when you let NGDP Drop below the trend level target?

You go the “(un)conventional” way:

The Reserve Bank of Australia has drafted an emergency playbook to follow the world’s major central banks in embracing extreme monetary policy as global interest rates stumble to historic lows and the Australian dollar stays stubbornly high.

Until mid-2014, Australia was doing nicely. In the past two years, however, it began worrying about asset bubbles:

Addressing members of the Committee for Economic Development of Australia (CEDA) lunch in Adelaide, he said monetary policy aimed at encouraging business investment and generating employment amid global economic weakness was in danger of creating a housing bubble in Australia.

And continued to do so one year on:

The Reserve Bank of Australia’s surprise decision to defer its widely anticipated April rate cut for at least another month might have been influenced by the increasingly pricey housing market, which it regards as posing a real “dilemma”.

According to UBS, in March the ratio of Australian dwelling prices-to-disposable household incomes equalled – and is presently surpassing – the previous record of 5.3 times set back in September 2003. And they predict it will climb further.

The policy interest rate has been lowered significantly. So what? That only means that monetary policy has been tight, something easily gleaned from the behavior of NGDP growth and inflation.




What Australia should do is try to get NGDP back on trend, which has served it well.


What a healthy US labor market looks like

A James Alexander post

Tim Duy provides an excellent summary  of the state of play in the US economy from last week’s data releases. While Duy lands on the side of caution in terms of rate rises he is still unsure about what the Fed is actually targeting. I don’t think Duy is cautious enough because the Fed should drop all ideas of rate rises in the future, and not just talk about delaying them. A neutral stance rather than their current stop-start tightening bias is most appropriate.

One of his charts shows wage growth over the last 20 years. I think it shows just how far the US has yet to go in terms of achieving a healthy economy that needs any monetary tightening. Back in the 1990s hourly wage growth was running at around a nominal 4%. The Atlanta Fed wage growth showing wage growth for those in work for at least 12m was running at 5% – the difference being that those in temporary or part-time employment often see less wage growth.

JA Healthy Lab Market_1

Looking at just the Atlanta Fed data itself,  there is a fascinating breakdown between different categories of employed workers. Particularly job stayers vs job switchers. A healthy labor market, from the point of view of labor, is one where there is a good degree of job switching. It is also healthy from the point of view of the economy in that it allows good nominal growth to do its magic.

JA Healthy Lab Market_2

A healthy labor market, a healthy economy

  • One where workers who perform less well (are less productive) than average or in firms of industries doing less well than average, see their nominal pay rise but by less than those doing better (more productive) than average or in firms or industries doing better than average.
  • In real terms those doing less well than average or in firms or industries doing less well than average will see smaller rises or even possibly small falls.
  • This is an excellent result as it allows relative winners and losers to emerge yet without compulsory job losses.
  • Productivity rises as those workers more productive than average or in firms and industries more productive than average do better. The result is real economic growth for all.

In the 1997-2001 period job switchers (those who were recognised as being more productive) did significantly better than average – and there was a productivity boom. Between 2002-2006 the weak recovery did not see this pattern repeated, although it was emerging by 2006 just as the Fed began to apply the monetary brakes. The story post 2008 is dreadful. Monetary tightness has prevented not only any significant nominal wage growth but also any healthy differentiation – and any productivity growth to boot. It is only in the last few quarters that there has been any signs of healthy wage growth and again the beginnings of some healthy differentiation – differentiation in wage growth between job-stayers and job-switchers that leads to productivity growth.

A potential tragedy versus a potentially healthy labor market

Yet what do we see? A Fed already intent on repeating its historic 2007-2008 mistake of tightening monetary policy when on the cusp of a healthy labor market. What a tragedy! No wonder economic populism came close to winning the Democratic nomination, has won the Republican nomination and may yet win the Presidential election. Elites reap what they have sown (see Brexit). Neglect nominal GDP growth at your peril.

Three ideas for new UK Chancellor Hammond

A James Alexander post

The UK has a new Chancellor of the Exchequer this weekend, Philip Hammond. Encouragingly he has studied at least some economics having read the infamous PPE course at Oxford, more than could be said for George Osborne who just read Modern History. Although Hammond was awarded a 1st we don’t know (yet) whether he specialised in the Politics bit (hopefully, little), the Philosophy bit (OK’ish) or the Economics bit (hopefully a lot).

The fact that he has been in business and especially property development is reasonably encouraging. He should recognise the need for nominal growth across the economy, as economic actors live in the (real) nominal world and not in artificial constructs like inflation and Real GDP.

Here are three ideas he should be considering this weekend:

  1. Commission his UK Treasury to update the 2013 Review of the monetary policy framework. The strict inflation targeting was more or less reaffirmed but has failed to get inflation up to, let alone averaging, 2%. The grand line-up of public and private sector economists who criticised NGDP targeting should all be asked back to justify the failure of IT to deliver.

2. Downgrade the essentially arbitrary inflation target of 2% as secondary to a target of 5% growth in underlying          nominal GDP. This growth rate of 5% is about right for nominal wage or income growth such that an economy has flexibility to cope with shocks and not lead to involuntary unemployment and recessions. This level will also allow much greater relative real wage and income flexibility, which in turn will allow for relatively more productive individuals and firms to be rewarded by real rises in wages and incomes, and for less productive ones to be let down gently in real terms but still grow (more or less) in nominal terms. Productivity will rise, people will be happier and you will be more popular.

2.1. If this is  too much change in one step, move to a properly assessed dual target of inflation in a range of 1-3% with the flexibility coming from reference to real growth in GDP. It is imperative to stop the 2% target becoming, as it may already have done, a 2% ceiling to projections two years out.

3. Issue some government bonds tied to a 24 month moving average of NGDP or, better still, sponsor an NGDP Growth Futures market and target NGDP growth one or two years ahead. Do not target current or historic NGDP as there is always noise in that data that needs to settle down as estimates become actuals and errors corrected. CPI is an unwise target as it is an economic and politically-sensitive index that cannot be corrected for its inevitable errors – except when the whole framework is revised like with the switch from RPI.


Brexit devaluation: Reasoning from a price change?

A James Alexander post

One of Scott Sumner’s great contributions to economics (blogging) has been his oft-repeated mantra of “not reasoning from a price change”. Probably its most familiar usage  is related to the oil price, although there are many, many more.

The oil price case

The 2014 collapse in oil prices was heralded by many financial types and economists as a great boon to wealth creation, a sort of hidden tax cut. What Scott tirelessly pointed out is that if the oil price drop was as a result of a drop in demand then the cut in price would not herald a rise in wealth, but was more a consequence of a fall in wealth.

While many thought the fall in price was related to supply it did also coincide with the great monetary tightening that followed on from the end of QE3 and the rise and rise of the USD further confirmed this thesis. There were no wild consumer celebrations of the oil price fall, things carried on pretty much as usual: the dull, low growth environment.

Similarly, earlier rises in the price of oil, often dramatic ones, should not have heralded real economy shocks as they are most often associated with an increase in demand. Real economy shocks have only been the consequence of oil price shocks when central banks have mistakenly decided that the short term CPI impacts are long term inflationary impacts – which they never are and never can be unless they are a trigger for excessive monetary tightening by those same central banks.

Sometimes the OPEC oil cartel has managed to raise prices dramatically, but economic crashes following such actions should only occur if monetary policy overreacts.

All in all, positive and negative oil price shocks are really just another instance of central banks being the real shockers, and not real shocks, just like Brexit. Bernanke himself wrote a paper in 1997 which concludes:

Substantively, our results suggest that an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy. This finding may help to explain the apparently large effects of oil price changes found by Hamilton and many others.

Currency devaluation not like any commodity price move

On Brexit I have been criticised for reasoning from a price change when celebrating the fall in the value of the pound. Surely it has fallen because of Brexit, and thus cannot also ameliorate the impact of Brexit?

Macroeconomists have struggled to make clear exactly the nature of the potential Brexit shock. Is it an Aggregate Supply or an Aggregate Demand shock? Or both?

Supply shock offset partly by devaluation

A “supply shock” is one that shifts the Aggregate Supply curve to the left, less is supplied at each and every price level along the curve. Such a shock would be inflationary as less output is available for the same amount of money around.

JA Brexit AS-AD Shocks_1

The tricky wrinkle is that the shock is, potentially, to the supplying of overseas markets only, not UK ones. Brexit is firstly a threat to UK exports. This would be expected to impact the currency not the UK economy per se. This shock would mean less GBP demand and the consequent drop in the currency.

The drop in the currency would then partially offset the impact as cheaper UK production would tempt other foreigners, even EU ones, to buy UK goods and services, shifting the AD curve to the right. How much so depends on the elasticity of overseas demand, an unknown, especially in advance.

JA Brexit AS-AD Shocks_2

The potential supply shock from Brexit will also depend on the deal with the EU and the deals with the RoW now negotiated independently of the EU. These are huge uncertainties but uncertainty is normal. Businesses live with it all the time.

The theory that the EU will want to “punish” the UK is interesting but self-interest will win out.  Assuming the worst case seems like scaremongering. This piece “Long Day’s Journey Into Night” by the Centre for European Reform being typical:

Economic developments in Britain since the referendum suggest that a recession is coming. And the politics of the negotiation with the EU suggest the country will suffer a prolonged period of weak economic growth … It is clearly in the EU’s interest to be inflexible. The EU wants the UK to understand the trade-off between single market access and free movement, and to come to a decision about what is more important to Britain. If people elsewhere in Europe see mounting economic problems in Britain, they might be less likely to support anti-EU parties, for example in France.

Many countries thrive outside the EU, why not the UK? Many countries inside the EU are in dire straits.The almost wide-eyed optimism that the EU is the best for the UK, or even many countries left in it, is sadly unimaginative.

This optimism could be envisaged as the AS curve shifting right in the short-term. In the longer run the AS curve is usually considered more vertical, so Brexit may not really alter the level of RGDP but would have raised the price level. Insofar as the EU was holding back UK productivity the AS curve may indeed shift to the right, lowering the price level and increasing RGDP.

JA Brexit AS-AD Shocks_3

Demand shock may occur too, entirely offset’able by monetary policy

The “pure” shock of Brexit was on UK politics. Spending decisions may well be put off. A surprise change in leadership of government is undoubtedly unsettling. Especially to non-Brits used to British stability. Part of the UK devaluation was this pure negative shock. And insofar as it was pure shock the impact will dissipate as politics settles down again, and the GBP will rally – as it has partly been doing so already.

It is even possible UK political economy will improve, and thus turn into a positive demand shock. Cameron was an average PM, more style than substance. More importantly, Osborne was over-focused on the deficit and under-focused on NGDP growth – even if he did recognise the worsening of the problem he did nothing about it. And the Labour Party may implode, which is usually good for UK economic confidence – though not always. The Blair years with Brown at the Treasury were mostly good ones for the UK economy.

The furious ignorance about monetary policy in this piece from the UK’s Centre for Policy Studies is quite encouraging – in that they fear a loosening of monetary policy from the new government:

Plans to relax the UK’s deficit reduction programme open up the risk of monetary policy

being used to deal with UK debt by inflation.

  • The UK has already been through unprecedentedly loose monetary policy with record low

interest rates for 83 consecutive months and a £375bn QE programme.

  • Risks of persistent loose monetary policy are clear. Asset price inflation, increasing

consumer debt, rising inflation and sustaining zombie firms are major risks.

  • Government borrowing costs have fallen since Brexit, but counter-intuitively costs to insure

against government defaults have increased. Additional risk of investor flight if holders of

0.38 per cent yielding debt may soon face a 2.5 to 3 per cent inflation environment (as

currently forecasted).

  • Abandonment of deficit targets, political instability and inappropriate monetary policy

response could lead to potential recession risk.

It is hard to know where to start putting these people right except to point out that low rates are a sign of tight monetary policy not loose or even ultra-loose, that 2.5-3.0% inflation is absolutely nothing to fear, and that only strong nominal growth can deal with “excessive” debt.


Sometimes it feels like the UK is sailing between the Scylla of EU wrath for requesting a divorce and the Charybdis of tight monetary policy. I expect that like with most divorce proceedings, even the sometimes bloody ones, life moves on sooner rather than later. And I hope that now Osborne has left the Treasury the blockages to a more flexible monetary policy will dissolve.

Growth is to be avoided at all costs!

That´s the sort of reasoning a depression can bring about! In “How a Surprise Upturn in U.S. Growth Could Trigger the Next Recession”, we read:

Could the cause of the next U.S. recession be too much growth? That is one risk of an unprecedented environment in which investors are betting heavily on a perpetually weak economic expansion.

If markets are wrong–and the economy surges instead of sputters–the bad bets could roil the financial system, some economists are increasingly warning.

“Ironically, one can think of a scenario where a stronger-than-expected expansion leads to financial trouble, which in turn puts into question the expansion itself,” said former International Monetary Fund chief economist Olivier Blanchard.

Mr. Blanchard is the latest prominent economist to warn that a surprise upturn in growth may force the Federal Reserve to raise rates faster than investors expect. A jump in borrowing costs could catch many off guard, given that much of their portfolios are based on lower rates.

“If the economy were to pick up faster than markets think, which I think has substantial probability, it could lead to some financial turmoil,” Mr. Blanchard, now a senior fellow at the Peterson Institute for International Economics, said in an interview.


“When the Brexit smoke clears, if, as I expect, it clears, then the Fed should tighten,” said Mr. Blanchard. And given that it takes roughly a year for interest rates to have a substantial effect on the economy, that means the Fed can’t wait too long to raise the cost of borrowing to temper inflation.

“You have to anticipate,” he said. “If I was at the Fed, I would be slightly on the hawkish side.”

The economy is being smothered by the Fed. In that case all the risk is on the downside. Higher growth is a chimera!

Brad DeLong’s basic mistake

A James Alexander post

In a response to Paul Krugman’s continuing puzzlement over the Brexit shock, Brad DeLong tries to claim Krugman is making some sort of basic error. It i is not easy to spot what it is but he does commit one himself. He thinks that the main channels for the working of a devaluation are greater exports and a rebound in (?overseas) investment once the currency has dropped far enough and make UK costs internationally attractive.

As I tried to show in my previous post, the main channel for devaluation is domestic not international. The worsening of the value of the pound stimulates nominal demand in the UK, so long as the central bank does not fight it with monetary tightening – aka “defending the currency”. The domestic currency is less valuable, in terms of the goods and services it will buy and this is a good thing. It will prompt people to spend money more quickly, the hot potato effect” in action.

This faster circulation of money, higher velocity, will increase Aggregate Demand and be a successful fightback against the potential Aggregate Supply shock. The market’s immediate response was a mix of political and economic fears, while technically trying to factor the most likely near term impact of leaving the EU – like lower FDI, reduction in output via moving production to EU ex-UK, and indirectly less UK labor demanded, etc.

The rise in Aggregate Demand may not mean in real terms the UK economy will not lose out from the potential Aggregate Supply shock, but it will prevent the potential AS shock from turning into a damaging recession. It will also allow the government time to negotiate new trade relationships with the EU and others and for the real economy to then respond to the new arrangements – which may turn out better than the worst case assumed by dazed (or is it crazed) Europhile doom-merchants , or better than now as Brexiteer economists have modelled.

The devaluation channel is not “more exports” or “more foreign investment”. This is naive despite a widespread belief of much of the financial commentariat that it is the main channel. I would have supposed that someone as knowingly iconoclastic as Brad DeLong would not have fallen into this sort of trap.

Brad DeLong may be making a second huge error, but it is hard to tell. He has a chart in the post that shows UK Gilt yields collapsing after 2008. He doesn’t refer to it in the text but does claim 2016 is different from 1992, when the UK left the Exchange Rate Mechanism and saw a mild potential AS shock swamped by massive monetary easing as the GBP devalued.

I think he may be claiming that because Gilt yields are already on the floor there can be no more easing. If so, then he is making a very common error that associates low interest rates with monetary easing. Low rates are a sign that monetary policy is or has been tight, high rates that monetary policy is or has been easy.

Are bond yields low?

In a recent post, Scott Sumner argues that they are not particularly low conditional on NGDP growth.

The chart shows that for a long time bond yields have been falling together with the fall in inflation expectations (from the Cleveland Fed), which were converging to the 2% “target”.

Falling Idol_1
Since the Great Recession ended , however, there has been a disconnect, with the yield continuing to fall while inflation expectations, although below target, have remained stable.

This disconnect can be attributed to the low growth of NGDP which, after tanking in 2008 has never “tried” to get back on the “saddle”. The chart illustrates.

Falling Idol_2

Once the recovery began in mid-2009, NGDP growth accelerated. After mid-2010 it “tapered off”. So there would be no “catch-up” growth. The NGDP growth chart illustrates.

Falling Idol_3

With inflation expectations below target and expectations of low nominal and real growth going forward, there´s no reason for yields to rise! And so they fall. Notice that the start of the rate hike talk in mid-2014 clinches the “low nominal growth-low inflation-falling yield” scenario.

Falling Idol_4

PS Tim Duy has a good post. On John Williams:

Williams gives his view of the disconnect between financial markets and the Fed:

In term of the private-sector forecasts, I think it’s very hard to fully understand what the Fed’s decision-making is given that we haven’t done many active policy steps in the last few years. I mean we did obviously as I mentioned the asset purchases during that period, but since we’ve ended that, we talked a lot about raising rates, we’ve given a lot of “dot plots” about raising rates, we did one rate increase in December, but then it has been over six whole months since then, and – I try to put myself in the shoes of a private sector forecaster – one of the hard things to do is kind of see what is our reaction function. What is it that is driving our decision?…

…Right now we’re just in a situation where there is just not a lot of data on actual actions because, for various reasons we’ve held off a long time on our first rate increase and then we held off so far on a second rate increase.

This I think is wrong; lack of action is a policy choice as much as action. Williams seems to think the only useful information about the Fed’s reaction function comes when the Fed changes rates. This implies that holding policy steady conveys no information. I would argue that steady policy is in fact signaling the Fed’s reaction function, and hence, in combination with the data flow, financial market participants are concluding that the Fed will continue at a glacial pace regardless of what the “dots” say. Indeed, I would say that financial market participants are signaling that the Fed’s stated policy path would be a policy error, an error that they don’t expect the Fed to make. I guess you could argue that the market doesn’t think the Fed understands it’s own reaction function. And given the path of policy versus the dots, the market appears to be right.

Brexit devaluation is monetary offset in action

A James Alexander post

I agree with Scott Sumner in his strong belief in the Efficient Market Hypothesis. The market is always right. But quite what it is “right” about is not always easy to tell. Sure, on central bank announcements the immediate market reaction is very telling. The market reaction is the policy, and this is not always what the central banks thinks is the policy.

The surprise Brexit vote did lead to some huge movements as markets opened on Friday 24th June and then more on Monday 27th after a weekend of follow-up news and reflection. But what were the markets signalling, especially the GBP devaluation and the large drops in the most domestically-oriented equities?

Scott Sumner wrote:

Brexit will reduce the foreign demand for British goods, services and assets. Since one needs pounds to buy British stuff, this reduces the value of the pound, as well as the quantity of exports. Think of it as a leftward shift in the demand for pounds, on an S&D diagram.

I am willing to admit less demand for pounds due to expected less FDI, as some global firms who based their EU businesses in the UK think of moving that production to inside the newly shrunk EU ex-UK. This is not a domestic demand shock directly as businesses would be choosing to produce less goods and services in the UK that were then exported.

Exports would also be expected to fall, further weakening demand for pounds, already weakened from less expected FDI.

The indirect effect is a demand shock for labour in the UK, that in turn reduces demand for goods and services within the UK.

UK workers are not less productive, there is just less demand for them. It is very hard to claim that the potentially lost UK export industries are more or less productive than average UK industry.

Other things being equal, less FDI, less exports and a potential, indirect, demand shock will shrink the size of the UK real economy. The drops of 10%-30% in some domestic-focused UK shares in particular sectors like commercial and residential real estate (British Land and Barret Developments), retail (Tesco and Marks & Spencer), banks (Lloyds Bank and Close Brothers) and media (Sky and ITV) illustrate this fear well.

However, care needs to be taken when looking at these sectors and judging the stock price falls. Property companies and banks are leveraged plays on the local economy, so that any local economy weakness gets magnified, sometimes greatly. Retail companies have been suffering from weak NGDP for years, as well as from the secular change to internet retailing, and so their equity prices may be particularly vulnerable to small changes in AD.

And care also needs to be taken not to assume the worst. Both the outcome of the negotiations with the EU and the eventual trade agreements with the Rest of the World will alter greatly these worst-case scenarios. In the absence of a government, fear and uncertainty get free reign but will dissipate over time, perhaps more quickly than many expected. if the latest news on Mrs May’s unopposed path to the top job is anything to go by.

Here comes the offset

But as Scott knows well a leftward shift in the demand curve for pounds is not like a shift in the demand curve for apples. A devaluation will lead to major monetary offset in the country experiencing the devaluation – even if these benefits are not immediately apparent – or understood by many commentators. The benefits will still accrue unless the devaluation is artificially prevented. So far the signs from the Bank of England are that it will be encouraged.

The current account may or may not improve following a devaluation as Chris Giles succinctly explained in the FT last week. He was echoing many macro experts. Unfortunately, Giles, like most economists and commentators who understand the subtleties of devaluation on trade deficits missed the bigger picture. The main benefit of a devaluation is something else.

In early 2014 in a discussion about Abenomics Scott re-posted a classic comment from the legendary Mark Sadowski. The punchline is very clear:

Devaluation improves a country’s trade balance only if the Marshall-Lerner condition on trade elasticities holds, and research shows that they’re not met in the majority of cases, either past or present:

That’s not to say that currency devaluation isn’t beneficial, of course it is, but the benefit flows primarily from increased domestic demand. 

Chris Giles does understand, and in fact warns in a follow-up  piece about higher inflation in the UK as a consequence of the devaluation and how it might hurt households:

In summary, Brexit has unleashed a different sort of currency depreciation, according to modern economics, one that is less likely to encourage domestic investment for exports, is more likely to raise inflation and will be more painful for hard-pressed families.

But it will drive up NGDP up, as domestic demand has to rise in nominal terms, and this, given wage and price stickiness, will drag up GDP in real terms too.

In fact, this rising nominal demand will be especially welcome in a UK economy starved  of nominal growth for the last 12 months. Something on which Giles and most of the UK macro-economic commentariat have been notably, not to say shamefully, silent.

Around the same time as the Sadowski re-post but on a different subject, Britmouse over at uneconomical also had an excellent post making a related point:

It is not that a[negative]productivity shock causes a rise in unemployment.  A productivity shock causes a tightening of monetary policy which causes a rise in unemployment.  

Brexit may cause a supply shock but there will only be a rise in unemployment if monetary policy is also tightened. If monetary policy is eased there will be moves within the economy from one job to another, but not an overall reduction in employment. That is the benefit of stable nominal growth, some people may experience low or no nominal wage growth but they will not be made unemployed.

Will the UK be poorer on leaving the EU? Maybe, but economies are quick to adjust as long as nominal growth is maintained at a suitable level. Unilateral free trade would also help as sagely proposed by the economists for Brexit.