Macro Issues

NGDP targeting proposals are sometimes unfairly attacked. One of the main lines of attack is to strawman the proposal into some monomaniacal obsession by the monetary authority. In this attack strategy, the NGDP targeter is accused of wanting to undertake wild swings in the monetary base to move NGDP up or down enough to get it on target for the current or coming quarter. This is recently exemplified in Nathan Lewis screed which was referenced by Judy Shelton, one of Trump´s economic advisors. Rather than go through all the errors in that post, I’m going to undercut all attacks by…...

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If the market is right and Trump believes in Nixonomics, who is his Arthur Burns?

In a post The Origins of The “Great Inflation” Marcus Nunes illustrated very clearly how it was possible to ignite inflation by having fiscal and monetary policy aligned. It does not produce growth. In the early 1970s the combination of new free-spending Republican President Nixon and his own newly appointed Fed Chair, Arthur Burns, was very powerful. Burns did not understand the role of money in creating inflation. He thought it was due to mysterious forces pushing up costs. The background In the 1960s things went well with the Phillips Curve well-behaved, and the theory appeared true. However, wise heads…...

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Knowing your AHE from your AWE, via AWH – PI better, PCE best

The October payrolls engendered the usual interest from inflation hawks keen to find evidence to support monetary tightening. At the end of the day it is the total nominal personal income growth trends that matters and it is very weak. The jobs data itself was not that interesting. The coming hyperinflation was spotted in the modest growth in Average Hourly Earnings (AHE) for All Employees as it soared YoY to a heady rate of 2.8%. Well, big deal. The more reliable, because much longer-term, Production and Nonsupervisory Employees Average Hourly Earnings growth rate showed no such increase and is firmly…...

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Fact, Fiction & a Misleading Model

Fact: “I only have eyes for you” (inflation) In the August 5, 2008 FOMC meeting, the inflation worry was alive and well, maybe more so than ever! There were two options on the table regarding policy. In the first (Alternative B), the Committee would maintain its current policy stance but would underscore its concern about inflation. In the second (Alternative C) the Committee would firm policy by 25 bp. Janet Yellen was the only participant that wanted to downplay risks to inflation. Most thought that monetary policy was accommodative. Charles Evans (of Evans-rule fame) would feel comfortable with Alternative C and thought an increase…...

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That international free trade is a positive is among the most orthodox pillars of current economic thought, as blogger David Glasner recently pointed out.  Of course, the globe actually has managed trade, but in theory free trade is best. And as Scott Sumner has recently opined, even chronic $500 billion a year U.S. trade deficits do not threaten the U.S. economy, as the U.S. just sells real estate or other assets to wealthy foreigners, and the money is recycled that way. Even if the U.S. swaps homes for tee-shirts, that is a good trade, asserts Sumner. Theory And Practice, And…...

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Monetary Policy during the Greenspan years and the aftermath

While he was Fed Chairman, Greenspan was widely praised, even being called “Maestro”. The reason for that is quite clear. During his 18 years at the Fed´s helm the economy lived through what has been called a “Great Moderation”, in reference to the low and stable inflation and stable real output growth that prevailed during those years. The advent of the “Great Recession” has given rise to a wave of revisionism. The latest and deeply critical is Sebastian Mallaby´s “The man who knew. The life and times of Alan Greenspan”. Interestingly, the revisionism concentrates on the years leading to the…...

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UK’s manufacturing industry is responding to the post-Brexit monetary easing just as textbooks expect. It doesn’t primarily help them via the export channel, that channel remains a bit of a toss-up between higher priced imports and higher exports at lower prices. Devaluation boosts domestic demand The main channel is via boosting domestic demand, aggregate demand. Foreign stuff becomes more expensive, domestic stuff is bought. So for the second month running UK Manufacturing PMI for September reports stronger domestic demand: “The domestic market remained a prime driver of new business wins, while the weaker sterling exchange rate drove up new orders from abroad.”…...

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The Japanese economy has seemed a bit of a puzzle to many. Unemployment has fallen and GDP per capita has grown, but not GDP itself. There has been huge active monetary easing but inflation has not budged much. Officially, a recession was announced but it passed much of the population by without much notice. What has been going on? Are the numbers wrong? Well, in an interesting report the FT today alerted us to the Bank of Japan’s look into the country’s GDP data. The BoJ has suspected that the official statistics might be undercooking the size of the country’s economy. Sadly,…...

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What´s that stance?

The Statement at the closing of the December/15 FOMC meeting when, after seven years of the FF rate remaining in the 0 to 0.25 percent range, the FF rate was raised 25 bp, reads: Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. If policy remains accommodative after…...

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Economic Slack: A misleading guide to policy

The view of economic slack is a recurrent topic in FOMC discussions. As John Williams, President of the San Francisco Fed said recently: “I understand the desire to try to help everybody in the economy, but I think that just running an overly hot economy for too long risks creating the conditions that then could lead to a recession that undoes all of that”. An “overly hot” economy is one in which inflation will soon rear its ugly head…However, it´s hard to fathom why they might be so worried if inflation, as measured by the PCE-Core, has remained significantly below…...

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