BNY Mellon Suggests A Brighter Future—And Why Not? Because of the Fed and Anti-Business Cranks?

A Benjamin Cole post

Of the many lamentable aspects of modern macroeconomics is the cowardly defeatism, that only slow growth is possible, and if not that, then advisable.

So welcome is a recent white paper issued by banker BNY Mellon, which ponders a future in which the U.S., China, Japan, and India (the “G4”) come close to fulfilling economic growth potential—and not through heroics, but just by rising to past growth trends.

The return to mediocre G4 growth would add $10 trillion to their projected GDPs by 2020, and another $8 trillion in related growth outside those four nations.

One key paragraph in the BNY Mellon report catches the eye:

Under Shinzo Abe, Japan now has its most stable government in almost a decade and a central bank that has twice surprised the markets with its determination to defeat deflation.”


I have agonized in this space a few times how long the “right-wing” or business class would abjectly genuflect to gold and tight money. This self-destructive monetary peevishness must certainly appeal only to ideologues, theoretical academics, pundits and traders who have shorted markets—and to no one in the real business world.

I have found in interviews with economists in institutional real estate circles that the worship of tight money is absent. And now banker BNY Mellon says that the Bank of Japan’s aggressive QE program is a good thing. How long until the tight-money fanatics are seen for what they are: anti-business cranks.

The Fed Is The Monkey Wrench?

So, we read that the People’s Bank of China has been practicing a type of QE all along and is now lowering rates and considering more QE, and of course the Bank of Japan is in the QE camp. After foot-dragging and destroying the economies of a few nations, the ECB is in QE too.

That leaves the Fed, which has quit QE and blindly painted itself into a corner by endlessly rhapsodizing about raising rates. So now a Fed return to QE would look like a “flip-flop” or institutional ineptitude or uncertainty.

Would you like another $18 trillion in global GDP?

Tell the ECB, the PBoC and the BoJ to pour it on, to go to QE hard and heavy, print way more money.

But mostly tell the Fed.

Bernanke´s “amnesia” caused the depression

Here´s what Bernanke knew long before becoming Fed chairman:

Bernanke (with Gertler & Watson) 1997 (on oil shocks)

Substantively, our results suggest that an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy. This finding may help to explain the apparently large effects of oil price changes found by Hamilton and many others.

Bernanke 1999 (on Japan)

Needed: Rooseveltian  Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—- namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

Bernanke 2003 (on Friedman)

As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth

The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”?

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation

The charts show the facts he confronted and actions taken after becoming chairman.



In June 2008 he “forgot” about his views on interest rates as an indicator of monetary policy and thought monetary policy was easy because the FF rate was “only” 2%! At that time the FOMC let it be known that the next rate move would likely be UP!

He “forgot” that the impact of an oil shock in the real economy resulted from the tightening of monetary policy, the stance of which was better indicated by nominal spending growth rather than the interest rate.

When the crash materialized due to the errors above, he “forgot” to adopt the “Rooseveltian Resolve” he had suggested to the BoJ!

PS: Scott Sumner once again reminds us that “Inflation doesn´t matter (NGDP growth does)

“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.

“U.S. Chides Europe, Japan for Overreliance on Monetary Policy”

A Benjamin Cole post

Some days, a Market Monetarist will feel the task ahead is Sisyphean, at best. Or, as Pogo once said, “We have met the enemy, and he is us.”

The WSJ tells us today that, “The Obama administration chastised Europe and Japan for excessive reliance on monetary policy to revive stagnant growth….”

You know, the Obamians have a point. Look at the rate of inflation in Japan…well, er, uh, okay, so without the recent consumption tax hikes, the Japanese are actually close to deflation, where they have been for 20 years.

Okay, scratch that and look at Europe….except much of the continent is in deflation too.

If Japan and Europe are guilty of  “excessive reliance on monetary policy” what does it look like when a central bank is too tight?

Well, my common sense would tell me that when a central bank is too tight you get slow growth and deflation or very low inflation. Um, like Japan and Europe.

And the United States.

P.S. Yes, every modern democracy needs an economic housecleaning, except politically it is impossible.

The United States points fingers—and we have a USDA, a huge and ossifying VA and defense complex, a silly ethanol program, a gigantic Social Security program, Medicare, food stamps for fatties, and while every major city or wealthy neighborhood in the country severely restricts real estate development, and pushes out factories?

You have to make monetary policy with the facts on the ground, not in economic utopia.

Fed: “limited and tentative”

Robert Samuelson writes “Where is the Federal Reserve headed?”:

Yellen recognizes the dismal choices and strives to cultivate confidence as a way of blunting the conflicts. At her recent news conference, she emphasized that the Fed, though it wants the freedom to tighten policy, will not be hurried into premature or sharp rate increases. Even after the initial change, she said, “our policy is likely to remain highly accommodative.” Money will continue to be cheap. Investors need not make market-disruptive changes in their portfolios.

So far, this soothing strategy has succeeded. Whatever happens, there remains a larger historic question: How did an agency that seemed so powerful and commanding in one era become so limited and tentative in the next?

I not only liked but also loved the “limited and tentative” description.

I believe Samuelson´s question has a simple and straightforward answer. It happened when the Fed, after the change of guard from Greenspan to Bernanke, forsook nominal stability to pray at the altar of inflation targeting.

That this would happen if Bernanke got the job was inevitable. In January 2000, long before even becoming a Fed Governor, let alone its Chairman, Bernanke wrote (with Mishkin and Posen) an op-ed in the WSJ titled “What happens when Greenspan is gone?”:

U .S. monetary policy has been remarkably successful during Alan Greenspan’s 121/2 years as Federal Reserve chairman. But although President Clinton yesterday reappointed the 73-year-old Mr. Greenspan to a new term ending in 2004, the chairman will not be around forever. To ensure that monetary policy stays on track after Mr. Greenspan, the Fed should be thinking through its approach to monetary policy now. The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue; even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been.

We think the best bet lies in a framework known as inflation targeting, which has been employed with great success in recent years by most of the world’s biggest economies, except for Japan. Inflation targeting is a monetary-policy framework that commits the central bank to a forward-looking pursuit of low inflation; the source of the Fed’s current great performance; but also promotes a more open and accountable policy-making process. More transparency and accountability would help keep the Fed on track, and a more open Fed would be good for financial markets and more consistent with our democratic political system.

On the last sentence on “transparency and accountability”, one would think exactly the opposite happened from reading this op-ed at the WSJ today:

The calls in Washington to “audit” the Federal Reserve are not for a narrow, bean-counting review of the institution’s financial statements. The audit’s goal is more fundamental: to assure that the checks and balances in a democratic government also apply to central bankers. It means figuring out how our elected representatives can effectively oversee unelected monetary “experts.”

If Bernanke had only understood that Greenspan in practice had been (more or less) committed to nominal stability, understanding that real, or supply, shocks should be treated carefully, he wouldn´t have let nominal spending tank in 2008.

However, Bernanke should have understood because in a 1997 paper with Mark Gertler and Mark Watson, they concluded:

Substantively, our results suggest that an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy. This finding may help to explain the apparently large effects of oil price changes found by Hamilton and many others.

Bernanke mentions Japan as an exception to the success of inflation targeting. He missed an important lesson there because Japan was, in fact, the first victim of an “no holds barred” IT regime. To make a long story short, after the inflation explosion in Japan in the mid-1970s (when inflation reached 25%), inflation became Japan´s public enemy #1. An inflation target was never made explicit but every housewife in the land new that the BoJ pursued “price stability”.

With that background, in 1989, when the Ministry of Finance introduced the first installment of the consumption tax, prices jumped. Immediately the BoJ clamped nominal spending. This was repeated after the second installment in 1997, with even more dire consequences!

In short, Bernanke´s “best bet” was the wrong bet. Instead of “powerful and commanding” the Fed became “limited and tentative”. But the solution presents itself clearly. Have the Fed pursue an explicit NGDP Level Target. Very quickly it will once again become “powerful and commanding” and the “instrument rules” advocates like John Taylor will have to change their tune! More significantly still, Krugman´s “liquidity trap” meme will fade!