“Shake, Rattle & Roll”

Scott Sumner throws the “supply-side curve ball”:

But some Keynesians keep pretending that demand is the only problem facing the world.  It’s not; the supply side has been gradually deteriorating for more than a decade.  Brexit will make this problem even worse.

Meanwhile, Bernanke prevaricates:

Political outsiders have had quite a good year in the United States (and elsewhere), and many pundits have attributed their success to voters’ profound dissatisfaction with the economy. Certainly there is plenty to be dissatisfied about, including growing inequality of income and wealth and stagnation in real wages. But there are positives as well, including an improving labor market, low inflation, and low gasoline prices. How do people really feel about the U.S. economy?

[Unfortunately, all the “positives” are a consequence of his monetary policy errors]

And concludes:

In a highly polarized environment, with echo-chamber media, political debates often become shrill, and commentators and advocates have strong incentives to argue that the country’s future is bleak unless their party gains control. In this environment, it seems plausible that people will respond more intensely and negatively to open-ended questions about the general state of the country, while questions in a survey focused narrowly on economic conditions elicit more moderate responses. Without doubt, the economic problems facing the country are real, and require serious and sustained responses. But while perceptions of economic stress are certainly roiling our national politics, it may also be that our roiled politics are worsening how we collectively perceive the economy.

[More likely, it is the way we collectively perceive the economy that is shaking our politics]

For many years (decades in the case of the US and UK) before the “crisis”, the big developed economies (ex-Japan) were doing well. There was no suggestion of “new normal”, “great stagnation” or “depression”. The “supply-side” seemed just fine. Suddenly, almost as if central bankers were perfectly “coordinating”, those economies were walloped!

The first panel shows how central banks were de facto targeting NGDP-LT. The result was nominal stability (that includes low/stable inflation). Maybe because they thought they were targeting inflation, when oil prices pressured headline inflation they simultaneously freaked.

Shake Rattle & Roll_1

When central banks pulled up the hand brakes with force, the real economy was squeezed. As I argued here, the Fed (and the other central banks) seem to be happy with where the economies are. And if they are happy, that´s where they will stay, mired in depression. Note that the EZ central bank even acted more destructively, bashing a weekend economy over the head after it had already fallen to its knees.

Shake Rattle & Roll_2

Shake Rattle & Roll

Timothy Lee points Yellen the way

The next recession could be around the corner, and the Fed isn’t ready for it:

Around the world, markets are in chaos. Japan’s stock market plunged 5 percent on Friday, while markets in France, Germany, and the UK all saw big losses on Thursday. The US stock market is doing better than most, but it is also down since the start of the year. Oil hit a new low on Thursday of $26 per barrel.

These declines reflect growing concerns that the world economy is headed for another recession. Before 2007 we’d say “if things get bad, the Fed will cut interest rates.” But with the Fed’s benchmark rate below 0.5 percent already, a substantial cut would mean rates that are below zero. That’s an unorthodox strategy, and it might not even be legal, according to testimony by Fed Chair Janet Yellen before congressional committees this week.

The Fed needs a new strategy: Stop targeting interest rates and instead target the growth of the overall economy. Moving away from interest rate targeting would give markets confidence that the Fed has the tools to deal with the next economic downturn, which would reduce the danger of another 2008-style meltdown.

Unfortunately, there’s little sign that the Fed is laying the groundwork for a shift in strategy. Instead, Yellen seemed to be in denial about the magnitude of the challenge she is facing.

“Let’s remember that the labor market is continuing to perform well,” Yellen said to the Senate Banking Committee on Thursday. “We want to be careful not to jump to a conclusion about what is in store for the economy.”

Maybe not — but the Fed needs to be prepared for the worst.

And…

So even if the Fed adopted negative rates, it wouldn’t improve the effectiveness of the current interest rate targeting regime very much. Just as the Fed got stuck at zero percent interest rates in 2008, it could get stuck at -1 percent interest rates in 2017 or 2018. So the Fed is going to need a new framework that’s less dependent on interest rates regardless. It might as well get started.

The chart illustrates that:

  1. Don´t lose the “target trend”
  2. If you do, try to get the economy back on it as soon as possible
  3. If you demure, it will become harder and harder to do it. You´ll have to be satisfied with an increasingly partial recovery!

Tim Lee

Naturally, if you wait too long, the present trend level will become the “new normal”!

The politically correct term for depression: “new normal of slow growth”

That´s the takeaway from Matt Obrien´s “The recovery is stalling out again. Is the economy actually in … a recession?

It’s only mostly crazy. And even then, it depends on what you mean by “recession.” If you’re talking about the usual rule-of-thumb of two consecutive quarters of negative growth, then, yes, there’s probably a 5 percent chance that we’ve fallen into one. But if you mean an economic decline that actually makes unemployment go up, then, no, we don’t have to worry about the r-word.

We just have to worry about a new normal of slow growth that might dip into negative territory every now and then even during the good times. In other words, about turning Japanese.

New normal indeed! SF Fed president John Williams, for one, is “happy”:

 “I am very optimistic as to where the economy is going over the next couple of years,” Mr. Williams said. “We’ve gotten the national economy back to basically full strength,” he said, adding what is now a 5.5% jobless rate will likely move to 5% by year’s end.

How fast we have adapted!

Politically Correct Term for Depression