Getting down to business

A James Alexander, Benjamin Cole, Justin Irving, Marcus Nunes post

After a six-year run, during which Historinhas helped spread the Market Monetarist approach, this blog will undergo a metamorphosis, becoming NGDP-Advisers. The blog will continue but be augmented by new products that will be available via subscription.”.

In watching the U.S. and global economy since 2008 (and before) it has become obvious there is a dearth of financial advice that is informed by Market Monetarism, or even close attention to nominal gross domestic product (NGDP).

A recent Economist magazine study of the International Monetary Fund’s national economic forecasts from 1999 to 2014 found, “Over the period, there were 220 instances in which an economy grew in one year before shrinking in the next.  In its April forecasts the IMF never once foresaw the contraction looming in the next year.” Not once! Something is wrong in economic forecasting.

NGDP-watching is not a forecasting cure-all. However, Historinhas and the Market Monetarists have time and again been proven right on macroeconomic matters when the establishment was wrong. When old-school monetarists feared hyperinflation from unconventional easing measures, Market Monetarists correctly saw the real risk was still tight money. When Keynesians predicted recession from cuts in government spending during the 2013 US fiscal cliff episode, Market Monetarists anticipated the monetary offset and were proven right. When central banks in Europe raised interest rates in 2011, Market Monetarists called this for the debacle that it became.

It is time to bring these insights from the world of blogging, into the realm of macro forecasting, time to unseat the hopeless “experts”.

The bedrock of our approach is a healthy fear of market efficiency, though our approach still has important advice for investors. Many have missed historic bond rallies since 2008, so certain were established advisers that an inflationary surge, or even hyperinflation, was pending. Equity investing is equally tricky.

Central bank monetary policy sometimes feels like a game of blackjack, random. Time and again in its history, the Fed has tried to tighten (in recent years), or loosen (in earlier eras), yet been beaten back when markets question their view of economic reality. It is hard to forecast how stubborn a central bank will be in such situations and when it will inevitably buckle, but our approach frames the issues correctly, allowing all investors to understand where their risk lies.

At NGDP Advisers, we hope not only to continue our examination of the global economy, but also to recognize realities and advise accordingly. We’ll yell from the cliff tops ‘what should be’, but we’ll also help you get ready for what ‘will be’.

Please join us at, the best is yet to come. The Historinhas blog will stay up but dormant, and recent and all future posts will be freely available here 

Kashkari should have joined the Treasury, not the Fed!

The title of his speech is revealing: Nomonetary Problems: Diagnosing and Treating the Slow Recovery, where he says:

I must acknowledge up front that most of the policy prescriptions I will identify are outside the scope of monetary policy. Monetary policy is largely doing what it can to support a robust recovery, and what remains are fiscal and regulatory policies. If we are able to apply our research expertise to identify potential solutions, I believe it is appropriate to do so and then leave it to other branches of government to decide whether or not to pursue them

If, as he says “I joined the Federal Reserve because I want to help tackle the most important economic policy challenges we face as a country”, he´s wasting his time at the Fed!

The view of central bankers that the problems they face are “nonmonetary” is prevalent. Just to give one example (among many):

Throughout the “Great Inflation” Arthur Burns argued that inflation was a nonmonetary phenomenon (Unions, Oligopolies, Oil Producers, etc.).

Now, the view remains the same “throughout the “Great Stagnation”!

Lael, a “courier pigeon”?

Last month, John Williams wrote an “out-of-the-mainstream” letter. He was quickly reined in and three days later “toed the line”.

Now, we are told that Lael Brainard will give a speech in Chicago on September 12:

One of the most influential Fed doves has announced that she will speak on Monday, Sept 12 on the US economy in Chicago at noon local time (1 pm ET).

The location is the Chicago Council on Global Affairs and they say she will discuss “the economic outlook for the United States and monetary policy implications” and will be in conversation with Michael Moskow, who was CEO of the Chicago Fed.

Maybe it’s been in the works for a while, maybe she’s been dispatched to reel in hike expectations for September 21. Either way, that’s going to be a critical speech.

The fact that she´s regarded as an “influential dove” increases the “likelyhood” of a September hike if she so indicates. It will certainly be interesting to read.

The “Guessing Game” Goes On

Caroline Baum had a nice piece yesterday: “The Fed’s baffling fascination with unreliable information”:

The idea of relying on expectations as a means to an end always seemed more viable in theory than in practice. So I was glad to find some support for my reservations from the economics community: specifically, a blog post by William Dupor, an economist at the Federal Reserve Bank of St. Louis, on the subject of inflation expectations.

Titled “Consumer Surveys, Inflation Expectations and the FOMC,” Dupor notes that “survey-based measures of inflation expectations” are mentioned in each of the statements released at the conclusion of the last 12 meetings of the Federal Open Market Committee. (My search revealed a reference to “survey-based measures of inflation expectations” in both FOMC statements and minutes dating back to January 2014.)

Perhaps it’s a coincidence, but market-based measures of inflation expectations set a near-term peak in January 2014 and have been declining ever since, much to the Fed’s consternation.

I always viewed the inclusion of survey measures as a case of confirmation bias: It gave policy makers the answer they wanted to hear. It allowed them to dismiss the sharp decline in market-based measures of inflation expectations, derived from the spread between nominal and inflation-indexed Treasuries, as a distortion due to liquidity preferences. Based on survey measures, they could take comfort that monetary policy was on the right track.

Now, the Fed clings to the labor market. This Bloomberg piece is telling:

An overlooked line in Federal Reserve Chair Janet Yellen’s speech last week could hold the key to whether Friday’s U.S. jobs report clinches an interest-rate increase this month.

While the focus was on Yellen’s statement that the case for an interest-rate increase “has strengthened in recent months,” she followed with new language that the central bank’s decisions depend on the degree that data “continues to confirm” the outlook. That, and other recent remarks by Fed officials, suggest that job gains need to be merely solid — rather than extraordinary — to warrant raising borrowing costs for the first time in 2016.

If what you want is “comfort”, go lie in the sun, but don´t pin your hopes on irrelevant information.

If ‘push comes to shove’ tomorrow, sell stocks, buy dollars and, maybe with a short delay, buy 10-year bonds


The Jackson Hole 2016 gathering just started. The Conference Title is Designing Resilient Monetary Policy Frameworks for the Future.

However, the session directly linked to the Conference Theme – Evaluating Alternative Monetary Frameworks – is a letdown of massive proportions.


10:55 a.m. Evaluating Alternative Monetary Frameworks 
Author: Ulrich Bindseil 
Head of Directorate General Market Operations
European Central Bank
Discussants: Jean-Pierre Danthine
Paris School of Economics
Simon Potter 
Executive Vice President, Markets Group Federal Reserve Bank of New York

Ulrich Bindseil: 12 years ago he wrote…ending:

If the Fed would have been fully independent from the US Government at least directly after WW1, it would probably have had far less incentives to deny the validity of well established central bank technique, namely that short term interest rates are the operational target of monetary policy.”

Jean Pierre is a Finance person and Simon Potter is an econometrician (time series) and forecaster.

Hope I get pie in the face!

“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.

US Economists Bark Up The Wrong Tree

A Benjamin Cole post

There is a rough consensus among US macroeconomists that topics for discussion are the bad minimum wage, the virtues of free trade, and inflation.

Housing shortages are rarely mentioned, and as for decriminalizing push-cart vending, that is a topic for oddballs.

So I was encouraged that a name economist, John Cochrane, tipped his hat in his blog to an April working paper by Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of Berkeley entitled, Why Cities Matter.

Long story short, the pair conclude U.S. GDP could be nearly 10% higher if the most-expensive cities, such as San Francisco, San Jose and New York, went gung-ho on housing production. Their argument is that the most-productive workers are concentrated in the “hip” cities (my words). But the hip cities simultaneously have artificially tight housing that is limiting the number of people that can live in these productive metropolises.

Everybody loses, except property owners in the hip cities.


No doubt some can take issue with the Why Cities Matter paper, but it is nice to see “serious” economists discussing the issue of property zoning and tight housing markets, instead of another re-hash on the glories of free trade and evils of minimum wage laws.

In fact, if Why Cities Matter is even roughly true, property zoning easily eclipses free trade and minimum wage as the outstanding macroeconomic issue of the day.

Let me say from personal observation: The West Coast suffers from obviously tight and expensive housing, and incredibly stipulative property zoning. It is a much bigger issue than minimum wages (slated to move back to 1972 levels in California, after adjustment for inflation) or international free trade.

Will the U.S. econo-blogocracy begin daily rants against the property-owning class that aids and abets property zoning, thus shrinking the national economy?

Probably not.

And as for decriminalizing push-cart vending? Meet me at the Oddballs Convention. If there were phone booths left, we could hold the meeting in one.

“We´re almost there” – A narrative

For the past two years, the Fed has insisted that the time for “policy normalization” has come.

At the very start of this year, none other than Vice Chair Fischer said that four rate hikes in 2016 were “in the ballpark”. We´re almost halfway through the year and nothing has yet happened, and it appears the “highly touted” June hike is “off the table”, and July has become much less likely.

It seems that the Fed has no idea about the monetary policy it is actually practicing. So, let´s help them find out!

Go back a quarter century and picture the 1990-91 recession. That episode came to be called “strategic disinflation” (“SD”). When you look at the chart, you see that inflation in both its “headline” and “Core” guises came down permanently.

Almost There_1

How did the Fed do it?

What it did was to significantly lower NGDP growth. Thereafter it sanctioned NGDP growth at a lower level than before the “SD”. That level was stable and kept NGDP evolving very close to a level trend path. Inflation came down and stayed down!

Almost There_2

The next chart tells the whole story.

Almost There_3

In the late 1990s, monetary policy was first too expansionary and then, too contractionary, But the Fed managed to put things right, i.e. put NGDP back on trend. Throughout, inflation remained contained.

Almost There_4

Note that headline PCE inflation fluctuates widely to the beat of oil and commodity shocks but core inflation remains subdued throughout.

Then we arrive at the Bernanke/Yellen Fed. It appears that for reasons that are hard to explain, inflation, once again became a “big issue”. The 2008 Transcripts are clear on that point. If you read the June 2008 Transcript, which takes place just before NGDP tanks, you find that:

The tightening expected over the next year is not anticipated to begin soon. As shown in exhibits 23 and 24, options on federal funds rate futures contracts currently imply that market participants expect that the FOMC will stand pat at both this and the August FOMC meetings. Although considerable tightening is priced in over the next year, this is not unusual at this stage of the monetary policy cycle.

Exhibit 11 presents the near-term inflation outlook. As you can see in the top left panel, the recent data on consumer prices have come in a little lower than we had expected at the time of the April Greenbook. As shown on line 3, core PCE prices rose only 0.1 percent in April, and based on the latest CPI and PPI readings, we expect an increase of 0.2 percent in May. As a result, we have marked down our estimate of core PCE inflation in the second quarter by 0.3 percentage point, to an annual rate of 2 percent. Total PCE prices (line 1) have risen at a substantially faster pace than core prices; but here, too, the current-quarter forecast is a little lower than in our previous projection, both because of the lower core inflation and because the sharp increases in oil prices have been slow to feed through to finished energy prices.

Despite this recent news, we expect inflation to rise sharply over the next few months. In part, this reflects our judgment that core prices were held down in the first half by some factors that will not persist into the second half. In addition, as shown to the right, we expect increases in food and energy prices to push up the twelve-month change in the total PCE price index more than 1 percentage point over the next several months, to about 4½ percent.

Regarding inflation, every single participant with the possible exception of Mishkin, showed grave concern. This is reflected in Bernanke´s summary:

My bottom line is that I think the tail risks on the growth and financial side have moderated. I do think, however, that they remain significant. We cannot ignore them. I’m also becoming concerned about the inflation side, and I think our rhetoric, our statement, and our body language at this point need to reflect that concern. We need to begin to prepare ourselves to respond through policy to the inflation risk; but we need to pick our moment, and we cannot be halfhearted. When the time comes, we need to make that decision and move that way because a halfhearted approach is going to give us the worst of both worlds. It’s going to give us financial stress without any benefits on inflation. So we have a very difficult problem here, and we are going to have to work together cooperatively to achieve what we want to achieve.

The last thing I’d like to say is on communications. Just talking about communications following this meeting, I’d like to advise everyone, including myself, to lean, not to lurch. That is, we are moving toward more concern about inflation, but we still have concerns about economic growth and financial markets. We should show that shift in emphasis as we talk to the public, but we should not give the impression that inflation is the entire story or that we have somehow decided that growth and financial problems are behind us, because they are not. So if we can convey that in a sufficiently subtle way, I think we will prepare the markets for the ultimate movements that we’re going to have to make.

Unfortunately, and that was to be expected, the “public” gathered that inflation, if not the entire story, was the major part. In the Minutes of that meeting we read that “likely the next move in interest rates will be up”!

Was the downshift in NGDP an error or was it the outcome of an explicit strategy? In 1990, the Fed wanted to bring inflation down permanently, and did. In 2008, you could think that the Fed was again very concerned with inflation. In fact, it appears that it thought that the ongoing trend level of NGDP was “too high”, risking a loss of inflation control. That view is consistent with the facts. After bringing NGDP growth down forcefully (deep into negative territory for the first time since 1937), the Fed never allowed it to go back to the “long-term trend level”, like it had done after the inflation adjustment of the early 1990s, or after the policy mistakes of the late 1990s, early 2000s.

Note that the Fed closely controls nominal spending (NGDP) growth. It´s smack on the trend level path the Fed wishes it to be.

The next chart helps to explain why the Fed has been “worrying”. Having kept NGDP at the “desired” level, potential NGDP is converging to that level. In the chart we see the original trend path from 1998, the CBO estimated potential from January 2007 and the latest estimated level from January 2016, together with actual NGDP.

Almost There_5

“Slack” is fast diminishing (if you believe the CBO potential calculations). Not surprisingly the Fed is getting nervous, and worried that inflation will soon be “pressured”.

What it misses is that the near zero level of the policy interest rate is the outcome of its “decision” to keep NGDP at a low level path. If it starts “promising” to hike rates, NGDP will fall below the desired path (as seems to be happening since mid-2014 with NGDP growth trending down). This “survey results” is interesting:

Almost There_6

By not having a clear idea of the monetary policy it is pursuing (keep NGDP on a stable low trend path), the Fed thinks, because the policy rate is “too low”, that it is being “highly accommodative”. What that conceptual error implies is that the Fed is locked inside a “loop”, well described thus:

Cry Wolf_1

What it needs to do is break away from the “loop”. It can do that by explicitly stating that NGDP is on the desired path, in which case interest rates will “forever remain very low”, or, it can recognize that 8 years ago it made a big mistake and explicitly target a higher level of NGDP, which will force a temporarily higher NGDP growth rate, which will be accompanied by an increase in interest rates!

Don Trump: Meek Inheritor Of The Forgotten Reagan Protectionist Legacy?

A Benjamin Cole post

When it comes to trade and protectionism, President Ronald Reagan (1980-1988) dwarfed in real life anything GOP candidate Don Trump has imaginatively proposed.

Trump wants a 45% tariff on China goods?

Hoo-haw. President Reagan slapped a 100% tariff on Japanese consumer electronics. And a 50% tariff on Japanese heavy motorcycles, as a favor to Harley Davidson, hog-makers. Forgotten today, Harley was about to go under. Reagan rode to the rescue, and Harley Davidson survives to this day. I guess if you like American-built huge motorcycles, protectionism has its merits.

Little was safe from Reagan’s protectionism, including sugar, textiles, roller bearings, machine tools, autos from Japan (limited by amount, not tariff. But that was OK because it went by the name of “Voluntary Export Restraint”!), steel, garments, lumber, forklifts, color TV tubes, and other items.

Sheldon Richman, writing for Cato Institute in 1988 (before latter-day hagiographers), reported, “Treasury Secretary James A. Baker III boasted last September (1987) that the administration ‘has granted more import relief to United States industry than any of [its] predecessors in more than half a century.’”

Richman concluded, “Ronald Reagan by his actions has become the most protectionist president since Herbert Hoover, the heavyweight champion of protectionists.”

The number of nations hit by trade restrictions reached into the dozens. Indeed, Reagan was such a ferocious protectionist that Milton Friedman wrote that the one-time actor was “making Smoot-Hawley look positively benign.”

William A. Niskanen, who was for a while acting chairman of President Reagan’s Council of Economic Advisers, reported, “The share of U.S. imports subject to some form of trade restraint increased from 12% in 1980 to 23% in 1988.”

Trump in contrast, has suggested tariffs on just one nation, and that as bargaining position.

Forgotten today is that Reagan conducted a global trade-war.

Plaza Accords

Moreover, Reagan didn’t just go crazy with tariffs—he repeatedly pressured other nations into increasing the value of their currencies, or, put it mildly, sought to cheapen the dollar.

As in September 1985, when the Reaganauts engineered the “Plaza Accord,” an international monetary straitjacket which mechanically depreciated the U.S. dollar against the Japanese yen and German mark.


Today, the punditry is in full-shriek mode at Trump-o-nomics. We are lectured The Donald’s trade policies will result in snowballing recessions or economic Armageddon.

But in the 1980s, the United States flourished behind rising walls of aggressive Reagan protectionism, much more pervasive than anything proposed by Trump.

Did Reagan’s wide-ranging trade-killing measures improve the domestic economy (in addition to saving Harley Davidson’s big motorcycles)?

It does not seem likely, but today Reagan is lionized by many, and the 1980s remembered as a period of prosperity.