Greenspan´s last 10 years and Bernanke/Yellen´s first Decade

Greenspan´s first 10 years

No visible difference in the behavior of inflation, which remained closer to “target” during Greenspan´s last decade.

There´s a big difference in the behavior of unemployment, much lower during Greenspan´s tenure.

The defining difference is in the behavior of nominal spending (AD or NGDP) growth, which translates into a significant difference in the growth of real output.

Note than in 2001, when Greenspan allowed NGDP growth to drop below trend, unemployment goes up and stays up until NGDP growth returns to trend. In 2008, unemployment soars when NGDP growth tanks and becomes negative. The yellow bar shows that when NGDP growth stops falling, unemployment “levels off”, beginning to fall when NGDP growth becomes positive once again.

Unfortunately, the Fed this time around chose an inadequate level of spending growth. The result is that the economy got stuck in a “Great Stagnation”, defined by a level of real output and employment well below the previous trend level!

To get out of this trap, the monetary policymakers have to start thinking outside the “interest rate box”! From all the nonsense we hear from them, that is not likely.

John Taylor was wrong, but so is DeLong

Brad DeLong writes “The Trouble With Interest Rates”, where he strongly and rightly critiques views of John Taylor and concludes:

There is indeed something wrong with today’s interest rates. Why such low rates are appropriate for the economy and for how long they will continue to be appropriate are deep and unsettled questions; they call attention to what MIT’s Olivier Blanchard calls the “dark corners” of economics, where research has so far shed too little light.

What Taylor and his ilk fail to understand is that the reason interest rates are wrong has little to do with the policies put in place by central bankers and everything to do with the situation that policymakers confront.

However, what DeLong fails to realize is that the “situation that policymakers confront” is closely tied to the policies that the central bankers put in place previously!

In the linked Blanchard article, written on December 1 2008, we read:

Third, governments must counteract the sharp drop in consumption and investment demand. In the absence of strong policies, it is too easy to think of scary scenarios in which depressed output and troubles in the financial system feed on each other, leading to further large drops in output. It is thus essential for governments to make clear that they will do everything to eliminate this downside risk.

Can they credibly do it? The answer is yes. With interest rates already low, the room for monetary policy is limited. But the room for fiscal policy is wider, so governments must do two things urgently. First, in countries in which there is fiscal space, they must announce credible fiscal expansions; we – the IMF – believe that, as a whole, a global fiscal expansion about 2% of world GDP is both feasible and appropriate.

Coincidentally, as Blanchard had just finished typing his words, the next day the Fed announced:

that it will extend three liquidity facilities, the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), and the Term Securities Lending Facility (TSLF) through April 30, 2009.

I call that QE0 and in fact, according to our proprietary MAST Index, it marked the end of the financial panic!

What´s wrong with Interest Rates_1

Also coincidentally, soon after, on February 17, President Obama

signs into law the “American Recovery and Reinvestment Act of 2009”, which includes a variety of spending measures and tax cuts intended to promote economic recovery.

Even more coincidentally, the deficit quickly goes to the 2% of GDP suggested by Blanchard, and remains at that level for the next three years.

What´s wrong with Interest Rates_2

The panic ended and fiscal stimulus was introduced, but the real economy only began to improve when monetary policy, gauged by NGDP growth turned! Note that the removal of fiscal stimulus, which began in mid-2012, did not affect the NGDP growth-determined pace of the recovery.

What´s wrong with Interest Rates_3

Initially, going into the crisis, monetary policy was very tight. During the past five years, it has remained tight, even if much less so.

Note: The Market Advised Sentiment Tracker (MAST) tracks the coordinated movements of a basket of financial market prices. As such it will respond to rumors, statements by Fed officials or any unexpected asset price move. It is a proprietary index of NGDPAdvisers, a macro consultancy that will begin activities early next year.

Carney achieving his goals, strangling the UK recovery

A James Alexander post

In mid-2015 Mark Carney stated that the next move in UK rates would be up and that it would come into sharper focus at the turn of the year. This was interpreted as monetary tightening by Market Monetarists  and some others.

Market prices moved: Sterling, bond prices, UK domestic stock markets as monetary policy impacted future expectations immediately and precisely (ie not in any long and variable fashion). The playing out of the flight path that Carney set in motion is now being seen in the backward-looking actual data.

NGDP does not get released in the first estimate of GDP, but the second. The trend seen in some low-level aggregates that we highlighted with the first estimate has been confirmed. UK NGDP is way off trend at 3.40%, down a touch from the poor 3.42% recorded in 2Q15. And we already know that this nominal sluggishness is dragging down RGDP. The deflators obviously tell the same story. No inflation here.

JA Deflator

Perhaps just over 2% RGDP is all that the UK can expect but the downside risks due to a 1%, and falling, deflator are heavy – due to downwardly sticky prices as highlighted by a German ECB Board Member recently. And as yet there are not many signs Carney is alert to these dangers, even if he has pulled back a bit from his monetary tightening language, money itself remains tight as NGDP bobbles along below trend.

It’s hard to understand Carney, but by standing pat in the face of this nominal slowing he is ensuring its continuance, that’s the nature of monetary policy – doing nothing is doing something.

Sabine Lautenschläger enters the cave of the Bavarian lions

A James Alexander post

In no other country in the euro zone, [is] the public so intensely [engaged] with each monetary policy measures of the ECB as passionately as in Germany. This applies to the Bavarian public, which is particularly known for distinct opinions and clear announcements. Nowhere rate cuts, buying programs and negative (deposit) interest rates were so criticized as in Bavaria. Since I am a friend of clear words, I would stay in the cave of the Bavarian lions to represent goals, risks and side effects of the current monetary policy of the ECB.
[a few minor edits to Google Translate]

She went to defend ECB monetary policy, but what came out of news reports didn’t look promising. She was reported to have come out against further QE because things are not so bad on the outlook and monetary policy takes time to work. Well the outlook is poor even if there are some signs that in real time the Euro Area economy is picking up.

The old “long and variable lags” are a common mistake of many macroeconomists, that elevate some campaigning remarks once made by Milton Friedman against excess money growth into some sort of universal truth. Broad money growth may correlate with economic growth over long and variable lags, but not monetary policy, and not base money growth. We now know monetary policy is the market reaction to it, the setting of the SatNav, and not the often tortuous journey itself.

However, reading the excellent Google Translate version of the German-only speech shows her giving a surprisingly balanced speech.

The start was the usual claim, that:

The independence of central banks is a relatively young, but now an undisputed achievement.

Well, maybe, maybe not. The crushing of inflation may be a success but is also the crushing of nominal growth and a double-dip recession in the Euro Area an achievement?. More people should dispute this as an “achievement”. Perhaps she meant it is a negative achievement.

Then she entered into a fairly extensive discussion of the pros and cons of lower rates and low inflation. She nodded to savers who were complaining about low rates, but replied well that there would be less savings if economic growth collapsed.

Low interest rates are [nothing] that excites me – also because of the risks and side effects associated with them. However, the low interest is currently necessary and justified. I understand the concern [of] German savers who look with little enthusiasm on the yield of their passbook – I belong there also. Higher rates would stifle economic recovery and bring permanently low inflation, sustained economic downturn and more unemployment – and this would [restrict] the ability to save still much broader.[This almost verbatim Yellen´s answer to Ralph Nader]
[a few minor edits to Google Translate]

After dismissing the short-term impacts of lower energy prices on inflation, rather thinking they might somehow be expansionary, she moved on to outline the heart of Market Monetarism, the “musical chairs” problem.

Now many citizens are not overly concerned if the inflation rate is low [for] long. Here is but sometimes overlooked that not only high, but also such a low inflation rate has costs and entails risks.
A moderate inflation acts as a lubricant of economic growth by facilitating the adjustment of relative prices and, above all, wages. Price and wage adjustments are among the most important tools that companies have to improve their competitiveness. But studies show that companies reduce their salary payments only very rarely in absolute terms, but rather on clear rounds for their workforce. This works quite well in times of normal inflation of about 2% – as Germany has demonstrated in the first decade of this millennium. But if too low inflation[,] and the contention is that wage increases do not grow to the sky[,] the adjustment process is delayed. So low inflation abducted [ie blocks] sometimes necessary adjustment of relative wages and prices. The result is a rigid wage structure, higher unemployment and lower economic growth.
[a few minor edits to Google Translate]

The rest of the speech was not so good as this. We get the usual lecture on low rates reducing pressure on sovereign countries to reform, the danger of bubbles and mythical redistribution effects. Although on the last point she fights back well, lecturing the Bavarians on the need for a healthy Euro Area economy, the destination of 50% of the regions exports.

And she finished with the usual nonsense about monetary policy having limits, the need to wait and see and the fact that current data isn’t so bad. The last point may carry some weight, even.

However, Rome wasn’t built in a day. The lecture on nominal wage rigidity was a refreshing break from the past. Whether she really believes it doesn’t matter, the fact that it was in the speech is a great thing in itself, and those Bavarian lions had to listen.

Quite a contrast to the other German on the ECB Board, Jens Weidmann:

And we need to be aware that the longer we stay in ultra-loose monetary policy mode, the less effective this policy will become and the more the attendant risks and side-effects will come into play.

“Ultra-loose”, really? If it were ultra-loose why would financial markets price government bonds of the Euro Area’s strongest economy’s at negative rates six years out. Yes, six years out! How can Weidmann, also the head of the Bundesbank, make an elementary mistake like this. It is forgiveable for journalists and financial types, but not from a senior monetary policy maker. If he really thought that monetary polices were ultra-loose and inflation about to take off he could make a killing betting against such a foolish, foolish market. To help him out, and this is not investment advice, he should buy this

Also, disappointingly, he shows no respect for the independence of the central bank. He spends 80% of his speech lecturing politicians on how to do their jobs and just 20% on monetary policy. It was the usual list of macroeconomic imbalances, product and labour market imbalances, bank leverage, fiscal policy etc, etc. It’s ironic but there seems no symmetry when it comes to central banks throwing stones, especially the ECB, especially Bundesbankers. Central bankers are perfect of course, never themselves causing any problems, and certainly never saying “sorry”, or at least until years, or even decades later. I expect he would be outraged if a politician gave a speech on the economy and spent 80% lecturing the ECB on its responsibility.

And the 20% Weidmann spent on monetary policy he got wrong. Monetary policy is not ultra-loose. He shouldn’t let himself be blinded by low-interest rates but look at nominal growth expectations, 3% is tight by any standards, even by Euro Area standards.

The early days of the Volcker Adjustment – A reply to Bob Murphy

Bob Murphy has a post, which starts with a parody:

Suppose someone asks you, “What was the stance of US monetary policy in mid-1980? Pretend you are a Market Monetarist answering.”


First thing, we would not look at interest rates; that is a totally misleading indicator. As Sumner tells us in this post, “Interest rates tell us nothing about the stance of monetary policy.” In context, he is saying that the Fed interest rate cuts in the early 1930s were still consistent with very tight policy.

Instead, let’s look at NGDP and unemployment: (and puts up a version of this chart)


And says:

Oh man, there’s a smoking gun, right? The unemployment rate skyrockets in the middle of 1980, while NGDP growth (blue line) collapses. (The blue line is the level of NGDP, so you can see that it falls way below the previous trend starting in 1980.) Think of all the employers who had signed wage contracts during the late 1970s, and all the consumers who took out home mortgages, expecting NGDP to grow at a brisk pace. The rug was pulled out from them by the tight-fisted Volcker, right around mid-1980.

I said parody, because to a market monetarist it would be: “Let´s look at NGDP growth and inflation”.

Changing the chart above to accommodate (beginning the chart in mid-1979 to coincide with Volcker becoming Fed Chairman and extending to mid-1985 that more or less defines for Volcker “mission accomplished):


We gather that monetary policy (NGDP growth) was being tightened as the US went into the 1980 recession (Jan-Jul 1980). However inflation was still rising so, in a sense, monetary policy was not “tight enough”.

Coinciding with the end of the 1980 recession monetary policy becomes “expansionary”. NGDP growth rises and inflation still increases for a while. In mid-1981, monetary policy tightens significantly, with both NGDP growth and inflation coming down. At the end of the 1981-82 recession, NGDP growth increases and inflation continues to decline, indicating monetary policy is neither “tight” nor “loose”, but “just right” to stabilize the economy.

Most people knew, when Volcker came along, that it wouldn´t be easy to conquer inflation. Over the previous 15 years of high, rising and volatile inflation, inflation expectations had become entrenched. Moreover, since the early 1960s, it was the rate of unemployment that “governed” monetary policy. Also, as clearly stated by Arthur Burns during his tenure as Fed Chairman from 1970 to 1978, inflation was not a monetary phenomenon, being the result of, depending on the circumstances, union power, oligopolies, powerful oil producing countries.

To Burns, monetary policy could only try to mitigate the effect on unemployment of those real (or supply) shocks.

So, when Volcker´s early tightening resulted in a 2-percentage point rise in unemployment, from 5.7% to 7.7% while inflation (due to lack of credibility given the go-stop style of monetary policy over the previous 15 years) continued to rise, the Fed “backtracked”. The attack on inflation one year later proved successful, although costly in terms of unemployment. Lesson: It´s not easy to break inflation expectations!

As the next chart shows, the cost was high, but temporary, because the economy regained its previous real output trend level path.


From then, until the end of Greenspan´s tenure, the economy experienced a “Great Moderation”. With the mistakes made by Bernanke, and continued with Yellen the economy has been downgraded to “Secular Stagnating”!

The Fed is “data-independent”

Otherwise, they wouldn´t be so vocal about “the time has come”. Especially given the information coming from the inflation data. With oil price high or low, inflation was falling and remains too low!

Data Independent_1

What is clear is that nominal growth has been too slow, keeping both real growth and inflation below what could be, at point a instead of point b.

Data Independent_2

Only a monetary policy dummy could make a remark that allowed the Fed to come out looking good!

Ralph Nader wrote Yellen a sexist letter complaining about low interest rates and its effects on savers and got this response:

Would savers have been better off if the Federal Reserve had not acted as forcefully(!) as it did and had maintained a higher level of short-term interest rates, including rates paid to savers? I don’t believe so.

Unemployment would have risen to even higher levels, home prices would have collapsed further, even more businesses and individuals would have faced bankruptcy and foreclosure, and the stock market would not have recovered.

True, savers could have seen higher returns on their federally-insured deposits, but these returns would hardly have offset the more dramatic declines they would have experienced in the value of their homes and retirement accounts. Many of these savers would have lost their jobs or pensions (or faced increased burdens from supporting unemployed children and grandchildren).[many did lose jobs and many faced increased burdens]

If instead Nader had asked Yellen why the Fed allowed nominal spending to fall continuously from early 2006 and then crash after mid-2008, she would be dumbstruck and at pains to give a coherent answer!


The Fed´s gone AWOL and says “Mission Accomplished”?

Tim Duy´s bottom Line:

Bottom Line:  The Fed is set to declare “Mission Accomplished” at the next FOMC meeting.

Indeed, many policymakers have already said as much. Absent a very significant change in the outlook, failure to hike rates in December would renew the barrage of criticism regarding their communications strategy that prompted them to highlight the December meeting in their last statement.

Once they have communicated their intentions for subsequent rate hikes, they will turn their attention to the issue of normalizing the balance sheet. Even though officials have not committed to a specific path, I am working with a baseline of 100bp of tightening between now and next December, or roughly 25bp every other meeting. I expect that by the second quarter of next year they will begin communicating the fate of the balance sheet.

Whether they should hike or not remains a separate issue. Over the next twelve months we will learn the extent of which the Federal Reserve can resist the global downward pull of interest rates. Other central banks have been less-than-successful in their efforts to pull off the zero bound – not exactly a hopeful precedent.

How come “Mission Accomplished” if over the past five years nothing of relevance has changed? Don´t tell me about the “low” (maybe too low for them) rate of unemployment. That´s at least two stages removed from “relevant”. They´re only grasping at the first straw that floated down.

NGDP growth is running below average (3.8%), RGDP growth is right on average (2.1%) and core inflation is below average (1.5%)


In fact, the “Mission” was accomplished five years ago when the FOMC, after pulling the economy up by it´s hairs, decided that´s the pace they wanted it to keep!

They should be careful because the beast is showing signs of fatigue again. It needs more “fuel”, not less. But find a “better grade” one!

A Good Economics Reporter! Alex Rosenberg of CNBC. When Did Ralph Nader Get Extra-Stupid?

A Benjamin Cole post

In the Market Monetarist community, there is a lot of bemoaning “the media.”

Well, meet Alex Rosenberg of CNBC.

While other reporters weigh in on inflation and the U.S. Federal Reserve Board’s ponderous decision-making, Rosenberg (correctly) points out the markets say inflation is about dead.

“The Federal Reserve now looks set to raise rates in December, partially based on expectation that inflation is set to finally rise to its 2 percent target. There’s only one potential problem. There’s actually a way that markets can see where investors think inflation will go. And they do not exactly see eye to eye with America’s central bank.”

Rosenberg adds,

“Over the next five years, annual inflation is expected to run at less than 1.3 percent. Even over the next ten, investors are looking for no more than 1.6 percent per year.”

Hot dang! Of course, Rosenberg is referring to the TIPS market, and deducing inflation expectations from inflation-protected U.S. Treasuries compared to plain-vanilla Treasury IOUs.

It gets better:

“So while the Fed continues to bang the drum on its 2 percent inflation target, and is now apparently trying to prevent inflation from rising above that in the future, it is striking to note just how quickly the bond market’s expectations of inflation have been decreasing,” writes Rosenberg.

The CNBC’er does such a good job, I will stand aside and just quote some more:

“Over the past year, almost no inflation has been seen, with prices actually falling year-over-year during some months. And while this is partially a reflection of falling oil prices, inflation has generally been declining for the past quarter of a century.”

Now that is some great reporting, econo-punditry. Where have they been hiding this guy? Well, he is “new,” as they say. His bio says he has a BA from Brown, minted 2011. He did something for NBC Universal before. CNBC calls him a “producer,” but he obviously one of the nation’s better econo-pundits already.

On The Other Hand…

From the elevated insights of Rosenberg, we descend to the befouled chambers of Ralph Nader, who a couple generations ago made his mark as a consumer activist. Nader on Oct. 30 (he should have waited a day) wrote a public letter haranguing Fed Chair Janet Yellen for keeping interest rates low, and so harming ordinary savers.

“We want to know why the Federal Reserve, funded and heavily run by the banks, is keeping interest rates so low that we receive virtually no income for our hard-earned savings while the Fed lets the big banks borrow money for virtually no interest.”

This is a blog, not a book, so I run of pixels to list all the reasons why Nader is making an ass out of himself. We could start with Rosenberg, who correctly points out inflation has been dying for decades. So interest rates come down too—duh.

Or that savers are also employees, employers and investors, and tighter money could wreck the economy, as it did in 2008. Or that higher short-term interest rates could lower long-term interest rates (by lowering growth and inflation expectations), so investors in bonds—that is, savers—would get lower yields. Or that even if yields on long-term bonds went up, then savers who bought bonds would suffer capital losses (bond values would go down).

The helmet-haired Yellen soiled herself by responding to Nader, but the Federal Reserve enjoys any discussion, however poorly premised, about why rates should go up, so she seized the opportunity.

How do we get CNBC’er Rosenberg to run the Fed?