What Central Bankers Have Forgotten: Voters Like Prosperous Free Markets

A Benjamin Cole post

As a lot, central bankers are not entrepreneurs or real estate developers, and are very risk-averse, and are minutely concerned with the strict control of prices (as measured) as opposed to robust prosperity.

And maybe not even: Most central bank staffers are in sinecures, paid on a seniority basis, and will get nominal pay raises on a schedule. For central bankers, prosperity equals deflation, even better if coupled with recession.

In short, central bankers are divorced from the economies over which they have such influence.

Voters Not Divorced

But most voters live and breathe in the real economy. They know when job markets are tight or loose, when there are boom times, or when the economy is dead.

It is indisputable that in economic downtimes, voters do not embrace free enterprise. In the Great Depression, the U.S. federal government ballooned, with voter encouragement. The last Great Recession in the U.S. helped usher in Obamacare.

If policymakers and central bankers want voters to hail capitalism and free enterprise, they need to create boom times in Fat City.  Shoot for tight labor markets, and lots of sniveling and whimpering about labor shortages. Then voters will love free enterprise.

And what would the United States look like if there were chronic labor shortages? How would lefties justify more and more welfare?

Gee, would that be such a bad outcome?

I mean, for anybody but central bankers?

John Williams in “whack-a-mole mode”

The first Federal Reserve official to speak in the wake of this week’s central bank monetary policy meeting said Friday the Fed should raise interest rates twice this year.

“We are getting closer and closer to the time to raise rates,” Federal Reserve Bank of San Francisco President John Williams told reporters following a hometown speech. “My own forecast would be to raise rates two times this year, if the economy performs as I expect.” He added he would like to see those initial increases at 25 basis points each.

As he has on many occasions, Mr. Williams cautioned that whatever happens with a policy that now has short-term rates pegged at near-zero levels will be driven by how the economy performs. And while he is upbeat about the outlook for growth and hiring, he said there are still reasons to be cautious about raising the cost of borrowing in the U.S. economy right now.

“My own view is there are still significant headwinds to this economy,” he told reporters.

In the text of remarks delivered Friday, Mr. Williams also said he was wary of acting before gathering more evidence that “inflation’s trajectory is on the desired path.

“Until I have more confidence that inflation will be moving back to 2%, I’ll continue to be in wait-and-see mode regarding raising interest rates,” he said.

He couldn´t have been clearer!

Preparing spirits for another “postponement”!

First, the unemployment goalpost was at the 6.5% mark, then at 6%, falling to 5.5% before being revised to 5%.

With that, the “fatidic” date moved from mid-2014 to early 2015 to June 2015, to September 2015. But that will probably be changed again:

Next week, Federal Reserve officials publish new quarterly forecasts, and all eyes are going to be on where they set the job market’s Goldilocks rate.

That’s the estimated unemployment level officials figure is neither too high nor so low that it starts to drive wages and prices higher. To quote Goldilocks, it’s “just right.”

Fed officials in March estimated this “natural rate” of unemployment at 5 percent to 5.2 percent. Unemployment stood at 5.5 percent in May. A new paper by Fed board staff shakes up this view by suggesting the number could be as low as 4.3 percent.

Moving Goalpost

It´s long past the time the Fed changed its “tune-up”!

The Fed Can Suffocate The Economy Under NGDPLT Too

A Benjamin Cole post

Recently there has been a hubbub in Market Monetarist circles that prominent Democratic economist Larry Summers, generally a Keynesian type, tipped his hat to nominal GDP level targeting, or NGDPLT.

Well, at least in preference to inflation targeting or IT.

Said Summers at latest report, “I didn’t quite endorse NGDP targeting. I said that I would prefer a shift to NGDP targeting to a shift up in inflation targets.”

Why The Summerian Reservation?

That Summers endorsement of NGDPLT was hesitant and oblique may not be surprising. He is, after all, a Keynesian, and believes in federal deficit-spending.

But Summers may also have entirely human and sensible reason for his backhanded support of NDGPLT—that is, a central bank can just as well suffocate an economy under NGDPLT as under IT.

Indeed, the U.S. Federal Reserve has kept the U.S. economy growing at a fairly steady nominal rate since 2008. The problem is, the economy is blue in the face from monetary asphyxiation.

Remembering Milton

Forgotten today is the Milton Friedman of October 1992, when CPI inflation was 3.2%, and real GDP was expanding at about 4.0%.

Yet the title of Friedman’s October 1992 op-ed in The Wall Street Journal, after the Fed had dropped interest rates from 10% to 3%? It was: Too Tight For A Strong Recovery

That 1992 Friedman op-ed speaks worlds about the inflation-obsessed state of modern economists.

Market Monetarists of 2015

Yet some Market Monetarists recommend straitjacket nominal growth rates, succumbing to the present-day peevish fixation that inflation—even moderate inflation—cannot be endured.

We can hope someone will further flesh-out Summers’ sentiments regarding NGDPLT. But whatever Summers’ take, I hope Market Monetarists  do not mimic the inflation-nutters.

It doesn’t really matter if inflation is 1% or 4%.

What matters is robust real growth.

Monetary policy for the present depression, not for the next recession

At Bloomberg View, Clive Crook has a pretty depressing piece – “Monetary Policy for the Next Recession”:

By pre-crash standards, the big central banks have made and continue to make amazing efforts to support demand and keep their economies running. Quantitative easing would once have been seen as reckless. The official term of art — unconventional monetary policy — tacitly acknowledged that.

But QE isn’t unconventional any longer. It mostly worked, the evidence suggests. The world avoided another Great Depression. Yet even in the U.S., this is a seriously sub-par recovery; growth in Europe and Japan has been worse still. Now imagine a big new financial shock. It’s quite possible that all three economies would fall back into recession. What then?

And concludes:

What if ordinary monetary policy isn’t enough? What if central banks can’t discharge their inflation-target mandate without a hybrid fiscal-and-monetary instrument? QE has already posed that question — it’s a hybrid too — but in a much more subtle way. When the discussion turns to the Fed sending out checks, the issue is impossible to ignore.

It needs to be addressed. Independence for central banks only makes sense if they have the means to do the job they’ve been given. At the moment, they’re dangerously under-equipped.

He shouldn´t be enquiring about monetary policy for the next recession. All should be focused on monetary policy for the present depression”.

It´s amazing how many have been sold on the idea that the Fed is “out of ammo” or, equivalently, “dangerously under-equipped”.

The fact is that the Fed is not working it´s “firehoses” as it could. The only plausible answer to the “puzzle” is “because it chose not to”!

The charts below depict inflation (headline & core PCE) over different periods. This is followed by the chart depicting nominal spending (NGDP) growth (the Fed´s “firehose”) over the same periods.



The “Great Inflation” goes hand in hand with high and rising NGDP growth, i.e., the Fed is “inflaming” the economy.. Thereafter there is the “Volcker-Greenspan Adjustment” leading to the “Great Moderation”, which extends to 2007, a period during which, for much of the time, the Fed provides the “right” amount of “liquidity”.

Bernanke´s Fed thought that amount was “too much”. First, it “closed the taps” and then opened them up but with much less “water pressure”, insufficient for the “spending grass” to grow to heights it had reached during the “GM”!

This very simple story is sufficient to guide monetary policy. First to enable the economy out of the depression and then keeping it from falling into another!


Pity the “magic acronym” was uttered by someone as fickle as Bullard!

Just a few examples of Bullard´s fickleness in chronological order:

In “The core is rotten” (2011):

In my remarks tonight I will argue that many of the old arguments in favor of a focus on core inflation have become rotten over the years. It is time to drop the emphasis on core inflation as a meaningful way to interpret the inflation process in the U.S. One immediate benefit of dropping the emphasis on core inflation would be to reconnect the Fed with households and businesses who know price changes when they see them. With trips to the gas station and the grocery store being some of the most frequent shopping experiences for many Americans, it is hardly helpful for Fed credibility to appear to exclude all those prices from consideration in the formation of monetary policy.

In “Faulty reasoning” (2012):

The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor,” Federal Reserve Bank of St. Louis President James Bullard said in a speech in St. Louis. “This is an unwarranted pessimistic signal for the [Federal Open Market Committee] to send,” given that the economy is recovering and forecasters can’t really tell what will happen that far down the road.

In “Bullard needs psychiatric meds” (2014)

On October 9:

In a speech that offered an upbeat assessment of the economy, Federal Reserve Bank of St. Louis President James Bullard said Thursday he is worried about what he sees as disconnect between what central bankers think will happen with monetary policy, and the view held by many in the market.

Right now, “the markets are making a mistake” and expect the Fed to maintain its ultra-easy policy stance longer than Fed officials themselves currently expect, Mr. Bullard said. When it comes to these expectations, “I would prefer that those be better aligned than they are.”

On October 16:

The Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling U.S. inflation expectations, Federal Reserve Bank of St. Louis President James Bullard said Thursday.

It would keep the program alive,” and the Fed’s options “open as to what we want to do going forward,” Mr. Bullard said during an interview on Bloomberg TV.

In Bullard “Trail & Track” Nov 6 2014:

He´s an “off” “on” switch type of central banker. On October 9 he “switched off”, on the 16th he “switched on” and “switched-off” again today:

Federal Reserve Bank of St. Louis President James Bullard said in a television interview Tuesday that he is upbeat about the economy and doesn’t think any new central bank stimulus is needed to help keep the U.S. on track for 3% growth.

In “In a hurry” (Feb 2015):

Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank needs to change its policy statement to give it more room to maneuver with interest rate increases, in comments that also expressed hope the first rate rise will come soon.


The Federal Reserve should consider new policy options, including directly targeting a non-inflation-adjusted level of economic growth, after more than six years of sustained monetary easing failed to spur a boom, Federal Reserve Bank of St. Louis President James Bullard said Thursday.

The Only U.S. Macroeconomics Graph You Need

A Benjamin Cole post

That the United States economy today is far less inflation-prone than the 1970s is hardly in dispute. But for some reason—ideology, or generational perhaps—we have now a Fed that is monomaniacally obsessed with inflation, and thus overly timid of promoting robust growth. Or even of trying.

B Cole_Only graph

Since the 1970s, we have seen international trade balloon in the U.S., with the attendant global supply lines. We have seen the destruction of Big Labor, Big Auto, Big Steel, Big Aluminum, big anything. Who has market power today?

Meanwhile, retailing has been transformed by the incredible global sourcing and efficient distribution of a Wal-Mart, Target or the ubiquitous dollar stores—not to mention now-robust informal retail markets courtesy of Craigslist and the Internet.

Moreover, since the 1970s whole industries, such as transportation or finance, have had price shackles thrown off. Remember regulated airline, train and trucking fares? How about fixed stockbroker commissions? Passbook rates?

Top federal marginal tax rates have been cut from 90% in the 1960s to under 40% today—capital is abundant, or even glutted. No good idea in business today goes unfunded. This is different from a couple decades back, when many complained that one “had to have connections” to get bank or VC funding.


The proof is in the pudding. The last time the U.S. saw double-digit inflation was in the 1980s, and early at that. The last time the U.S. had a reported annual CPI rate above even briefly above 5% was…twenty-five years ago.

Today, if there is demand for something in the U.S—cars, say—it is not only the Big 3 who answer the call. It is Honda, Toyota, Mazda, Nissan, Hyundai, Kia, Volkswagen, BMW, a few others and what is left of the Big 3, those being GM, Ford and Fiat-Chrysler.

The Upshot

The Fed and the inflation-fixated are fighting the last war. The game now is to keep demand growing and robust. Prices will take care of themselves. That is called competition, and we have never had so much competition before in the U.S.

Print more money.

Surprise! Martin Feldstein, unwittingly, makes the case for nominal stability

In the WSJ, MF writes “The U.S. Underestimates Growth”:

…This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.

But John Cochrane gives a “convenient” interpretation of MF in “Feldstein on Inflation“:

The basic idea is that inflation may be overstated, because it doesn’t do a good job of handling new products. As a result, real output growth may be a bit stronger than measured.  Marty runs through a lot of sensible conclusions.

He doesn’t talk about monetary policy, but that’s interesting too. So what if inflation really is (say) 3% lower than we think it is, and therefore real output growth is 3% larger than it really is?
That would mean we are a lot closer to “normal” of course.

It´s not Friedman´s Chicago any longer!

Note: Nominal Stability a.k.a. NGDP Level Targeting

“Normalizing” Monetary Policy should be with reference to money, not interest rates

Mike Belongia and Peter Ireland have written a nice essay on Japanese-style deflation:

One can make sense of the inflation data by looking at both interest rates and the money supply. It may be true that during normal times, when long-run inflationary expectations remain anchored, lower interest rates can signal that monetary policy has become more accommodative, putting upward pressure on prices. It seems far more likely over the past two decades in Japan, however, that the direction of causality has been reversed. Instead, interest rates are low because expected inflation has fallen: bond-holders no longer need a higher interest rate to compensate for rising prices that, if present, would erode the purchasing power of their saving. Slow money growth therefore represents the driving force behind both low inflation and low interest rates.

And conclude:

Strangely, central bankers around the world appear to have forgotten this simple lesson. Despite seeing the clear example provided by Japan, policymakers at the Federal Reserve have paid less, not more, attention to measures of broad money growth since the mid-1990s. That’s a pity. By emphasizing in public statements that they are both willing and able to use monetary policy to control the growth rate of money, Federal Reserve officials could easily reassure Americans that the United States need not ever suffer from “Japanese-style” deflation.

The corresponding US charts follow:

Japan style deflation_1

Japan style deflation_2

As Benjamin Cole loves to say: “Print more money”! Meaning that “normalizing” monetary policy should refer to money growth, not the FF target rate.

Monetary Policy Creates Financial Instability?

A Benjamin Cole post

Paul Krugman may be persona non grata in my house, but I must begrudgingly admit when the NYT blogger makes a good point:

“Let me also add that if it’s really that easy for monetary errors to endanger financial stability—if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history—this is an overwhelming argument for draconian bank regulation. Modest monetary mistakes will happen, so if you believe that these mistakes caused the global financial crisis you must surely believe that we need to do whatever it takes to make the system less fragile. Strange to say, however, I don’t seem to be hearing that from (John) Taylor or anyone else in that camp.”—Paul Krugman.

Krugman plays a little fast and loose here, and also ignores University of Chicago scholar John Cochrane, who has in fact called for major reforms, such as bank lending 100% backed by equity. No more 30-to-one leverage.

And inflation did sag after 2008, indicating monetary policy was too tight, as Market Monetarists have said. There was a “mark on the inflation rate,” such as Western economies sinking into deflation. I noticed that mark.

Still, Krugman has a point. We keep hearing monetary policy is too loose, and have heard that for 30 years. Yet the developed world is in deflation or close, led by Japan. Then we had a global financial collapse.

So, the record suggests the inflation-hysterics have it exactly backwards. If monetary policy has threatened financial stability, it has been because it has been too tight. We are in ZLB now—that is not a sign of decades of easy money.

Krugman has a point about banks, too. How is it in the U.S. we have such a feeble financial system? Why has the right-wing no interest in measures that would create strong banks? Being “against Dodd-Frank” is not a policy. If Dodd-Frank is no good, then embrace John Cochrane, or please devise a policy that would make for strong banks.

And, as I always say, print more money.

Because, not printing more money will have unintended and unforeseeable but catastrophic consequences on financial stability. Well, you can take out the word not, but the insanity level remains unchanged.