“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.

Donald Trump, Courtesy Of The Federal Reserve

A Benjamin Cole post

America’s chattering elites cannot say enough bad things about GOP presidential candidate Donald Trump, the billionaire celebrity real-estate developer. He is decried as xenophobic, economically clueless, a buffoon.

Among his cardinal sins, Trump bashes Chinese imports and 13 million illegal immigrants, most of whom are in the U.S. seeking work, but who lack protection of law.

Meanwhile, the Federal Reserve has suffocated the U.S. economy for at least eight years, while all along some Fed officials rhapsodized about zero inflation. Tens of millions Americans lost jobs or left the labor force.

So what see the American middle- and working-classes? They see Wal-Mart full of Chinese goods, foreign cars clogging the roads, weak job markets, feeble economic growth, and (at least) 13 million Third Worlders who want American jobs. The Rust Belt is so old it is passé to mention it.

Then average Americans hear from established party leadership how wonderful immigration is, and that even illegal immigration must get a free pass as it is impossible to do anything about it, and that free trade makes your life better. Why, a wall across the border would cost $6 billion, too much money. (BTW, federal outlays in last fiscal year were $3.59 trillion).  The GOP party hails tight money.

Then Mr. and Mrs. America see Donald Trump.  Egads, the question is not, “What is propelling Donald Trump?” but rather, “Why hasn’t Trump effectively won this election already?”

If a central bank chooses asphyxiation as the norm, are voters wrong to seek the protection of socialism from unfettered free markets? Or a candidate who talks about what they see?


Trump should be winning easily, but he has kneecapped himself at every turn. Instead of legitimately questioning the role of illegal immigrants in U.S. job markets, Trump denigrates the motives of Mexicans border-hoppers, most of whom only want jobs. Trump pointlessly belittles women, a huge voting block, to say the least. He alienated natural ally of Fox News. He wantonly castigated Sen. John McCain’s war record. Trump’s latest miscue, of course, was to advise Moslem immigrants be kept out of the United States. And lastly, Trump has dropped only faint come-ons to the big GOP-bloc of evangelical voters, a mysterious blind spot.

And yet Trump still dominates the GOP field.


Because Trump gets it: Tight money, large-scale immigration and free trade have not resulted in higher living standards for a big swath of Americans, certainly not if the Fed is going to perma-suffocation as their default mode. You have to be blind not to know illegal immigrants work for the wealthy, as maids, nannies, gardeners, in restaurants, and for agri-business. The middle class can’t afford such luxuries, and rarely owns farmland. Immigrants have crowded the U.S. unskilled and semi-skilled job markets—a world invisible to the chattering classes.


The Fed has helped bring about Trump, but unfortunately Trump seems to understand little about monetary policy, even though he is a real estate-developer. He might understand city zoning and its effects on housing costs, but again he has not said as much. It is sad to see such an irreverent and potentially positive national character gut his own campaign through ugly, hurtful, pointless and divisive barbs at one voting group after another.

It is even sadder to consider that the other contenders for America’s highest office offer less.

PS Yes, Kevin Erdmann’s pioneering work on housing costs is very important. Yes, Trump is a bit of a “Trumpenstein”—the right-wing has scare-mongered for generations about overseas threats and terrorism. So, Trump says he will answer the terrorists with steel. But at the core of Trump’s appeal is that he appears to offer a solution to weak job markets (suffocated by the Fed).

The US is going to fall behind the Euro 19

A James Alexander & Mark Sadowski post

Things are changing. It is looking like Euro Area NGDP growth could soon overtake that of the US, with similar consequences for RGDP.


Mario Draghi and most of the ECB is keen to do more monetary easing. The QE programme seems to be working on NGDP despite his struggles to raise the inflation rate.

Janet Yellen and most of the Federal Reserve thinks monetary conditions are too easy and, using the discredited Philips Curve, believes that low levels of economic slack mean inflation is about to accelerate.

Both central banks use false Phillips Curve models, it’s just that they think they are in different places on the Curve. The Europeans think they have plenty of slack. Massive slack, or rather high unemployment shows something is wrong with the economy and monetary policy can do something about that by raising nominal income. When there is less obvious slack, as in the US, monetary policy should be set to provide stable levels of nominal GDP growth. The US is clearly failing here.

The result is improving economic prospects for the Euro 19 and worsening ones for the US.

The likely further deceleration of NGDP in the US is predicted by the anaemic growth in the US monetary base. The further acceleration of NGDP in the Euro 19 is seen in the strengthening growth in the Euro monetary base.


The market also has to anticipate future changes in the monetary base, and as can be clearly seen there have been numerous false starts, especially in the Euro Area. However, the evil Trichet has gone and the austro-Germans on the board of the ECB significantly weakened in authority and influence. The bias is firmly in favour of more easing, and the market should continue running with that.


Sadly, the Euro Area economy has a lot of ground to make given those horrible NGDP and Base Money growth rates over the last seven years.


Central bankers on target with their targets

A James Alexander post

There has been an illuminating exchange between Scott Sumner and Nick Rowe with John Handley who has been defending bravely New Keynesian models. New Keynesians wonder why QE at the ZLB hasn’t been effective in raising inflation. To me the best the reply is: central banks don’t want to raise inflation.

The central banks seem to define inflation as inflation two years out, that is expected inflation, based on their own “official” expectations. And, therefore, central bankers are on target with their own targets.

The evidence is clear in the charts and tables below, unanimously modelling a return of inflation.

So they just patiently, or often impatiently, wait for near term inflation to behave as their models predict so they can move rates as they plan: up in the US and the UK, hold flat in Japan and the EuroZone.  And the central bankers are slaves to these models.

The markets understand all this: that it is the two-year out inflation outlooks that drive monetary policy. For the Fed and the BoE monetary policy may even be a little too loose, certainly if they don’t raise rates in line with their guidance. The Bank of Japan seems to think it can just stand pat. And that maybe the EZ is a little worried that its two year out projection is a bit too low, and so is muttering about using some more tools.

All four central banks use mainstream New Keynesian models. So what is wrong? Inflation never seems to rise to the two-year out expectations. We have been there many times over the last several years as “inflation” keeps disappointing these determinedly mainstream models. So the market is really asking: at what point will the mainstream economics realise there is something wrong with their models? While the markets wait to find out, nominal growth will continue stalling, fearing that these New Keynesian slaves wont’ change their models but find a reason to raise rates – see our very last chart from the Bank of England desperately searching for an inflation pickup.

Market Monetarists understand that it is the two year out inflation targets that keep depressing near term inflation, and depressing nominal and real growth as a result. The answer is to target nominal growth expectations not strict inflation targets.

Flexible inflation targets would be better, but inflation is a poor economic measure. No one really knows when overall prices rise or fall, it is too difficult to observe. And there is total confusion about individual or particular baskets of goods and services price changes being due to quality changes or not, to mix changes or not.

Just target total nominal incomes, spending or output and forget about inflation. Five percent nominal growth will give enough flexibility for economies to ride the real economy cycles and not cause real economy mayhem due to downwardly sticky wages.

The Federal Reserve Board of Governors forecast in September 2015: PCE “inflation” will be at 2% in late 2016, assuming it raises rates in line with its guidance.


Federal Reserve “guidance” on rates from the same report


The ECB staff projection in September 2015 forecast  HICP “inflation” will be at 2% in late 2016, assuming it raises rates in line with its guidance.


ECB “guidance” on rates from the same report.


The Bank of Japan’s macroeconomic model in October 2015 forecast  (All Items Less Fresh Food) “inflation” will be at 2% in late 2016, assuming it raises rates in line with its guidance.


The Bank of England’s macroeconomic model in August 2015 forecast CPI “inflation” will be at 2% in late 2016, assuming it raises rates in line with its guidance.


Bank of England interest rate “guidance” from the same report.


Evidence of just how watchful central banks are about inflationary pressures coming up on the blind side and biting in the back is the chart from the same BoE August 2015 inflation report. The chart heading reveals a lot about the thinking at the BoE. A “slight pickup in consumer goods inflation” is evidenced by a “rise” from an actual negative rate of 0.25% to a positive 0.05%. Whereby the official CPI projection has some appropriately wide fan charts to show the degree of error, when it comes to spotting future pressures the error charts disappear.