To Yanis Varoufakis, the “EZ bed” is not comfortable!

The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs. Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease.

Our creditors’ insistence on greater austerity is subtle yet steadfast. It can be found in their demand that Greece maintain unsustainably high primary surpluses (more than 2% of GDP in 2016 and exceeding 2.5%, or even 3%, for every year thereafter). To achieve this, we are supposed to increase the overall burden of value-added tax on the private sector, cut already diminished pensions across the board; and compensate for low privatization proceeds (owing to depressed asset prices) with “equivalent” fiscal consolidation measures.

The view that Greece has not achieved sufficient fiscal consolidation is not just false; it is patently absurd. The accompanying graph not only illustrates this; it also succinctly addresses the question of why Greece has not done as well as, say, Spain, Portugal, Ireland, or Cyprus in the years since the 2008 financial crisis. Relative to the rest of the countries on the eurozone periphery, Greece was subjected to at least twice the austerity. There is nothing more to it than that.

Not so fast Yanis! I concur that largely, the EZ crisis was mostly an NGDP (i.e. monetary crisis). The charts show that clearly. (Note: the scale is the same in all charts)

Yanis Complains_1

Greece has not done as well as Spain or Ireland mostly because initial conditions in Greece were much “worse”. While Spain and Ireland were forcefully reducing their government debt ratios before the crisis, reaching debt ratios of less than 40% and 30%, respectively, Greece´s debt ratio remained at the 100% level.

Also, Greece had the highest structural deficit relative to potential GDP going into the crisis, so naturally, Greece had to be more “austere” than either Ireland or Spain. There´s also the fact that Greece´s credibility is extremely low!

Yanis Complains_2

Later, YV writes:

Following Prime Minister David Cameron’s recent election victory in the United Kingdom, my good friend Lord Norman Lamont, a former chancellor of the exchequer, remarked that the UK economy’s recovery supports our government’s position. Back in 2010, he recalled, Greece and the UK faced fiscal deficits of more or less similar size (relative to GDP). Greece returned to primary surpluses (which exclude interest payments) in 2014, whereas the UK government consolidated much more gradually and has yet to return to surplus.

At the same time, Greece has faced monetary contraction (which has recently become monetary asphyxiation), in contrast to the UK, where the Bank of England has supported the government every step of the way. The result is that Greece is continuing to stagnate, whereas the UK has been growing strongly.

Not quite true. In 2010, Greece´s Structural Deficit relative to potential GDP was about 50% higher than Britain´s, but I agree that Greece has experienced “monetary asphyxiation”. The UK is fortunate to have an independent monetary policy!

Yanis Complains_3

Bottom Line: If Greece was willing to “get in bed” with the likes of Germany, now it must try to become more like them, and if that´s not palatable…

Lars Christensen has a post on Yanis.

Thinking About Martin Feldstein Again

A Benjamin Cole post

Market Monetarists have already done a superb job explaining why NGDPLT is the best tool for a central bank, especially if measuring real GDP is guesswork—the latter point Martin Feldstein made recently in The Wall Street Journal.

Feldstein’s extraordinarily oblique point was that the CPI or other indexes overstate inflation, something he could not say out loud, so un-PC is such a sentiment. But his conclusion is much more palatable to certain classes, and that is that middle-class America is better off than ever, even if they don’t know it, as wage stagnation is a mirage.

University of Chicago scholar John Cochrane leaped on the Feldstein bandwagon to posit that maybe the CPI overstates inflation by 3%, essentially meaning Fat City for Mr. and Mrs. America. This is a reprise of Bush-era sentiments of economist and right-winger Don Boudreaux of George Mason University.

Is The Fed Suffocating The Economy?

That Cochrane likes the Fed now is not much of a surprise; he has argued that deflation is the economic cure-all, notwithstanding the 20-year long debacle with falling prices that is Japan.

Cochrane says that Feldstein’s premise today means in the United States “we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates. That is about the ideal monetary policy.”

Cochrane then exults, “We live the (Milton) Friedman optimal quantity of money.”

But others may wish to ponder if the Fed, by accomplishing less than 2.0% inflation as measured on the PCE, is actually obtaining minor deflation, and thus Japan-like results.

As widely noted, economic growth in the United States since the Fed ostensibly set its 2% PCE IT (which many suspect works out to 1.5% in practice) has been…well, Japan-like.

In 2015, the first half GDP may exhibit some real economic growth, but may not with any bad luck. Industrial production has been falling through most of the year. And the previous seven years have been anemic. If this is the Friedman optimum….*


If after seven years in the United States, and 20 years in Japan, the Friedman optimum does not work in real life, then we can dispense with deflation as reasonable monetary goal. It just does not work in the here and now.

On the contrary, I wonder how long the United States could be in boom times before we saw old-fashioned demand-pull inflation. The 1990s was pretty boomy, and inflation remained moderate. Maybe there is another lesson there, too.

As I always say, the Fed should print more money.


*Friedman may have opined about a theoretical optimum. But in practice he advised Japan to pursue QE hard and heavy, and three times criticized the Fed for being too tight; in the Great Depression; in 1957; and in 1992. Did Friedman ever advocate a real-world policy of deflation?

The IMF Tells the Bank Of Japan To Hit The Gas? What About The U.S. Federal Reserve?

A Benjamin Cole post

The International Monetary Fund on May 22 badgered the Bank of Japan to adopt a more-aggressive growth stance, even though the island nation posted Q1 real GDP growth of 2.4%, and an annual inflation rate of 2.3%—along with an unemployment rate of 3.4%.

Moreover, under the leadership of Governor Haruhiko Kuroda, the BoJ is buying about $83 billion in bonds a month, a quantitative easing program equal in size to that of the U.S. Federal Reserves’ Q3 at its peak—except that Japan has an economy one-half the size of the United States.

Nevertheless, the IMF warned the “BOJ needs to stand ready for further easing, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2% inflation target.”

Fair enough. Maybe the BoJ needs to really pour it on.

Um. What About the Fed?

So, the United States’ posted Q1 real GDP dead in the water, and many are forecasting Q2 not much better. The core PCE deflator is now running at 1.3% YOY, with headline deflation, and the Fed has not reached its 2% inflation target for seven years, except once, and that fleetingly. The U.S. producer price index has been in deflation for several months. The U.S. unemployment rate is 5.4%, and a squishy figure at that.

Yet Fed Chair Janet Yellen never misses a chance to rhapsodize about raising interest rates, and on May 21 warned that Fed cannot wait too long before tightening the monetary noose or it will “risk overheating the economy.”

BTW, also from the Fed: “Industrial production decreased 0.3% in April for its fifth consecutive monthly loss.” Capacity utilization is at 78.2%, below the long-term average.


Yellen has new definition of “overheat,” and that is any room temperature warm enough to melt ice cream. And the IMF…well, what can you say. They appear seriously confused.

Fiscal deficits continue to be the best advice!

A recent example from Simon Wren-Lewis:

 …I would much prefer additional public investment, for which there is a strong microeconomic as well as macroeconomic case. [1] Michael Spence [2] is one of a huge list of eminent economists, which includes Ken Rogoff, who think additional public investment across the OECD would be beneficial.

We should continue to urge governments to recognise this, but we also have to accept the awkward fact that they are not listening. In political terms, the need to reduce deficits trumps pretty well anything else. (Perhaps things are turning in the US, but until the Republicans start losing power I’m not counting chickens.) One of the many depressing things about the Conservative election victory in the UK is that it looks like deficit obsession is an economic strategy that can win, as long as the austerity is front loaded, which is why Osborne fully intends to do it all over again.

Why, then, did Japan not grow for the last quarter century despite doing all sorts of public investments (even building an airport over water) and running persistently very high public deficits?

Appealing to the opinion of “eminent economists” is not evidence. In 1981 a list of 364 British economists, many of them “eminent” signed a letter saying that the Howe budget would “destroy” Britain. It certainly didn´t, quite the opposite happened!

What did happen in Japan to offset any fiscal stimulus was a very tight monetary policy (don´t confuse that with high interest rates). In fact, interest rates were essentially zero. Just look at what happened to nominal spending (NGDP) after 1990. No growth and even sometimes contraction.

SWL Advice

After something has been dormant for so long it´s hard to make it move up, despite the best efforts being made by Abe and Kuroda!

The Tale Of Two Central Banks

A Benjamin Cole post

  • Haruhiko Kuroda, Governor of the Bank of Japan, on May 22 said he will maintain his bank’s QE package of about $83 billion a month—but said he will do more if necessary, if Japan’s inflation rate does not consistently hit the BoJ’s 2% target by 2016. Japan just reported Q1 real GDP growth at 2.4% YOY and headline inflation of 2.3%. The Nippon unemployment rate is 3.4%.
  • Janet Yellen, Chairman of the Federal Reserve Board, on May 22 insisted the Fed is on track to raise interest rates this year. The U.S. real GDP came in just about flat in Q1, and H1 may be flat, or close to it. The headline CPI is…negative 0.2% in April YOY. The U.S. unemployment rate is 5.4%

Add on: Kuroda’s $83 billion a month of QE is bigger than the Fed’s QE at its peak, and yet Japan’s economy is about one-half the size of the U.S. economy.


Yes, I have played a little fast and loose with the above numbers. Headline inflation is not core inflation—although the inflation-hysterics trumpet headline inflation after every oil-price spike.

The proper Fed inflation gauge is the PCE chain-type index, which is up 0.3% in April YOY.

In you want PCE core, it is up 1.3% in April YOY.

The truth remains that PCE core is well below the Fed’s 2% official inflation target.

The Feeble Feckless Fed

The Fed remains utterly cowed by the prospect of inflation even approaching its 2% IT, despite the fact the U.S. economy is far less inflation-prone than in the 1970s, or despite the fact that 3% inflation for a few years would merely offset the sub-2% seen 2008.


Of course, as Marcus Nunes tirelessly points out, a NGDPLT is much better than an IT, not least for the abject cowardice an IT seems to impart to the Fed.

We will see how the U.S. and Japan economies play out in the next couple of years.

My money is on Haruhiko Kuroda. Oh, did I mention the Nikkei 225 is up 45% YOY?

The FF target rate is just a placebo, but it can be toxic if too much is ingested at a low level of stamina

From Yellen´s most recent speech, it is clear that these “doctors” are not worth their pay. They are only concerned with prescribing a placebo (FFT)! Maybe it´s harder to provide nominal stability at an appropriate level (“dose”). And we know that “prescription” is good because it has done wonders for the patient in the past!


But Yellen expressed confidence that the recovery remains intact — even if it is not as robust as Fed officials themselves once thought. And that would be enough for the Fed to begin reversing nearly a decade of easy money.

Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner,” Yellen said in prepared remarks. “Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy.

From the charts below, it appears that if they want to play around varying the “dosage” of placebo as they were used to, they first have to get the “patient level of stamina UP”!


The “Wishin´& Hopin´” Fed

Or is it the “Expecting & Anticipating” Fed? Given the time span (7 years) of “Expecting & Anticipating”, those words have become meaningless, so the timeliness of “Wishin’ & Hopin’” is more appropriate.

And it´s “W&H” for inflation! An account.

In the early months after the crash, the FOMC was still very much focused on headline inflation. That was certainly one of the reasons monetary policy was so tight going into the “Great Recession”:

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.(Oct 08).

In later occasions the FOMC doesn´t mention energy and commodity prices explicitly (maybe because they crashed):

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. (Nov 09)

Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. (Dec 10)

Fantastic! They anticipated inflation would remain excessively low:

The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. (Dec 11)

The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. (Dec 12)

The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. (Apr/May 13)

Suddenly they acknowledge that “too low” inflation could pose risks. But instead of doing something about that they start “anticipating” that it will move back up in the medium term (are they evoking the “Holy Ghost”?):

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. (July 13)

In a November 2013 speech, Bernanke drops the risk part and only continues to “expected” that inflation will somehow rise:

The Committee additionally expected that inflation would be moving back toward its 2 percent objective over time. (Speech Nov 13)

This old chart illustrates that they have for a long time “expected” and “anticipated” wrong.

Wishin´& Hoping´_1

Since then expectations and anticipations have not markedly improved!

The Minutes of the December 2014 FOMC meeting is “fun” to read:

Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee’s 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations.

With regard to inflation, a number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee’s commitment to that objective.

With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.

After battling inflation for almost three decades, FOMC members are now in the position of having to “pray” for more inflation! Call in the shrinks!

Interestingly, now they say that the fall in oil prices will have only temporary effects. In 2008 they thought that the rise in oil prices required “tightening”!

Even more interesting is the fact that as soon as the US became an official inflation targeter in January 2012, inflation dropped significantly below target and has remained there for the last three years!

And that´s no “fault” of oil prices, which remained pretty stable (approx. $100) between mid-2011 and mid-2014.

What could possibly give FOMC members’ confidence to establish the time for the first rate hike?

“Praying” won´t cut it. They have to do something that would get aggregate nominal spending up. But that´s not likely to happen and so there will be no “confidence that inflation will travel towards the target” and, therefore, the “rate rising date” will keep being postponed!

In April 2015 they were still “keeping the faith”!

Participants generally anticipated that inflation would rise gradually toward the Committee’s 2 percent objective as the labor market improved further and the transitory effects of declines in energy prices and non-energy import prices dissipate

The chart updates the previous one.

Wishin´& Hoping´_2

And the next chart indicates the behavior of one (Cleveland Fed) estimate of long-term inflation expectations since the crisis took hold

Wishin´& Hoping´_3

Title song

Jim Paulsen Of Well Capital Management Becomes Defeatist

A Benjamin Cole post

The supply side of the United States economy can only grow by 2% a year, and so the U.S. Federal Reserve and Wall Street are “making a big mistake” in assuming the domestic economy “cannot overheat,” said Jim Paulsen, chief investment strategist, Well Capital Management on May 21 to CNBC.

In fact, there is the threat “you’re going to aggravate costs, [and] push interest rate pressures,” Paulsen warned.

It is hard to know where to begin with Paulsen’s analysis.

Global Supply Lines

First, can Paulsen name a single industry that is supply-constrained, that is now rationing output by price? If so, I want Paulsen to name that industry, so I can buy a related ETF.

Paulsen also ignores that the U.S. supply side has globalized since the 1970s. If more steel, autos, computers or architectural services are demanded in the U.S., the supply side is international. Surely, Paulsen cannot believe there is not 2% more capacity in global supply lines (most of which are begging for business, btw)?


Unit labor costs in the U.S. are up 5.8% in the last eight years, and labor income as a fraction of business income declining in the U.S. for decades. Maybe this will change, but for now labor costs are nearly deflationary.

Interest rates?

The Economist magazine recently reported there is $12 trillion in cash sitting in U.S. banks and money market funds, earning nearly zero percent interest. And Bain & Co. is predicting capital gluts as far as the eye can see, at least for the rest of this decade. How do you get higher interest rates with capital gluts?

Housing-Maybe A Worry

People in expensive single-family detached neighborhoods do not like sky-rise condos with ground-floor retail erupting next door. In a nutshell, this explains why the U.S. may have housing inflation from time to time. Local housing markets may in fact be supply-constrained. Whether such local regulations lead to national inflation, or should determine central-bank monetary policy is an interesting question. Probably, the Fed just has to live with a little inflation from this quarter.


The main economic problem remains a lack of aggregate demand, in the United States, and globally. Not only that, it sometimes takes a round of inflation to stimulate supply—think oil markets, or even housing markets. The route to greater supply is paved by inflation. Life is not perfect, and that is another example thereof.

So, the Fed should print more money.

The monetary view of the Great Recession

It´s nice every month to get the e-mail from the Center for Financial Stability announcing the update of the Divisia broad money series.

Here I use it to explain events surrounding the great recession and the slow recovery.

The charts indicate that with both broad money growth and velocity “dropping down the chute”, nominal spending (NGDP) can´t do anything except dutifully follow!

Monetary View of GR_1

Monetary View of GR_2

And over the last few years, while velocity has basically regained its pre-crisis level, broad money growth has remained much lower. The implication is that nominal spending is growing at a significantly lower pace, keeping the economy “trapped in a depressed state”.

In a criminal investigation, often the good strategy is phrased as “follow the money”. Many economists, in trying to “explain” the slow growth prefer to search for “residual seasonality“!

Update: Rereading this 15-month old post, I think it gives support to the arguments made here fo the “monetary view” of the GR:

Bottom line: The oil shock of 07-08 was a trigger for the Fed´s actions. And these actions were inimical to the health of the economy, already weakened by the fall-out of the house price bust. It is clear from the statements, minutes and now transcripts for 2008 that the Fed´s focus was on headline inflation, and since that was being significantly impacted by oil prices, the “public” anticipated monetary policy tightening (a rise in rates). No wonder NGDP dropped significantly (plunging after July 08).

One good paragraph and two awful ones!

In his conclusion to “The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp”, James Montier writes:

This paper has sought to tackle two forms of idolatry surrounding interest rates. First is the idolatry of the “equilibrium/natural/neutral” rate of interest displayed by central bankers around the world. This is a make-believe concept with no foundation in the way our financial world really works. It is scary to think that this is the topic that central bankers are debating. Talk about a massive exercise in navel gazing!

The second idolatry I’ve sought to tackle is the modern-day belief in the world’s greatest con: that monetary policy matters. There is precious little evidence that monetary policy matters for the major components of demand (investment and consumption look pretty immune to the shifts in interest rates over time).

Perhaps it is time to recall that we have another tool in our economic kit: fiscal policy. This is a political pariah of a policy, but offers a potential way out of the low growth we find ourselves facing.

The first paragraph is perfect. “Talk about a massive exercise in navel gazing”, indeed!

(Update) Picture of “navel gazing”:

Navel Gazing

But Montier loses it badly thereafter. If he only went and asked FDR, or Paul Volcker, or Kuroda, to name only a few “operatives”. In 1933, despite the large depreciation of the dollar, the trade balance went into deficit, the same happening when Kuroda got a huge yen depreciation in 2013. Volcker whacked inflation with? You guessed, monetary policy.

He´s right that “there´s precious little evidence that monetary policy matters for the components of demand. That´s the implication of the “never reason from a GDP component change” principle! What matters is AD (NGDP).

And fiscal policy, without an adequate monetary policy, certainly does not offer a way out!