Market Monetarism needs people to predict recessions … and growth

A James Alexander post

Scott Sumner made a somewhat light-hearted comment in a recent post that “no-one can predict recessions”. It made me stop and wonder what was the point of Market Monetarism in that case. The essence of MM is that market forecasts of NGDP Growth should guide monetary policy, should be monetary policy. Fair enough. But does this imply, in the case of a negative demand shock, which increases money demand, an immediate increase in base money supply? Perhaps it does and we will all be very happy.

In our imperfect current world where the monetary authorities seem to mostly target less than 2% Core CPI two years out, the markets will still anticipate the impact of this goal on monetary policy and therefore on both real and nominal economic activity.

But markets are nothing more than numerous individuals, or trading robots programmed by individuals, making investment decisions. Some will certainly forecast recessions and invest appropriately. Is Scott saying that these people are inevitably going to be wrong? The Efficient Market Hypothesis (EMH) may say that it is impossible to be right all the time, to consistently beat the market, but it doesn’t and won’t stop people trying.

Indeed, people have to try to forecast the future or Market Monetarism would not work. You have to have markets for Market Monetarism. Scott has correctly advocated a specific market for NGDP Futures, but all financial markets are essentially futures markets, in the sense of forecasting or predicting future streams of revenues from assets, either income or some capital gain.

Is Scott saying no one can forecast future streams of revenues?

Perhaps he is just being careful, like most academic economists. The most famous economist of the twentieth century, J M Keynes, was of course famous also for his financial acumen. Putting his money where his mouth was, or at least putting his money to work in a highly successful way. Perhaps he made his pile by inside information, who really knows, but successful at forecasting asset price movements for money he certainly was.

Atlanta Fed Says Q3 Real GDP At 1%–Wait, 0.9%–Oh No, 0.7%

A Benjamin Cole post

It is getting harder and harder to keep a straight face and say the U.S. Federal Reserve should tighten money.

From the Atlanta Fed:

“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 0.7 percent on August 13, down from 0.9 percent on August 6. The previously reported nowcast of 1.0 percent for August 6 was revised down due to a minor adjustment in the method for nowcasting investment in computers and peripherals. Since a week ago, the nowcast for the contribution of inventory investment to third-quarter real GDP growth has declined from -1.8 percentage points to -2.2 percentage points. This decline more than offset an increase in the nowcast of the third-quarter growth rate in real consumer spending from 2.9 percent to 3.1 percent after the release of this morning’s retail sales report from the U.S. Census Bureau.”

So, let’s see, Q1 was dead, and Q3 will be dead, in terms of real GDP growth. And Q2 would have been tossed back into the water in most of the 1990s.

But Janet Yellen and the Fed are still talking about those rate hikes. They sound like a crack-head discussing the next coke fix—there is no other topic in the room.

I have a really bad feeling that what the Fed should be discussing is QE and wiping out IOER. But they can’t. It would not be PC. The Fed is trapped appeasing the utopian monetary dogmas of partisan-eccentrics, and by its own institutional hubris and rigidities.

The Fed cannot say what it should say, which is, “Man, we have been wrong, over and over and over again. The economy is weaker than we forecast, again. Ergo, we are going to gun the presses good and hard for a real long time. Way longer than ever before. Screw our forecasters, they are obviously biased.”

You will never hear a speech like that from the Fed.

Dudes, this could get ugly.

The WSJ bets on Red & Black!

In “Economists’ Forecast: Here We Grow Again”:

After a rough start to the year, economists are counting on the U.S. to bounce back in 2015 much like it did in 2014.

In “Fading Optimism on Rebound”:

Federal Reserve staffers and private sector economists are becoming increasingly glum about the prospect that the U.S. economy will rebound strongly in the second half of 2015 after a shaky start to the year.

And then there´s the Atlanta Fed Nowcast:

Red&Black