Macro Issues

UK NGDP responds to easier monetary policy, pulling up RGDP

We will never know what would have happened if Mark Carney instead of having his one moment of clear-sightedness had decided to defend the pound and prevent its dramatic fall post the Brexit vote. Carney did well in the putative crisis demonstrating the immense power of central banks for good, rather than the evil we sometimes see. Ad in the fact that they can achieve these goals mostly with guidance rather than action is also very satisfying. The fact that the soon to be Chancellor of the Exchequer Phillip Hammond also sang from the same song sheet, “the initial response to… Read More

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The Euro-ization of US growth

Convergence takes many forms. One of the most remarkable is the convergence of both US nominal growth and real growth rates to those of the Euro Area. It has been coming for some time as the Fed has tightened monetary policy since ending QE3 and continually threatened to raise, and sometimes has raised, rates. And is about to do so again, to prove the credibility of the upward trajectory of its interest rate projections. Movement in the Fed’s target level of rates is not usually indicative of loose or tight money. The trend in expected NGDP growth tells us the… Read More

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The view that monetary policy is interest rate policy must cease. Otherwise bad arguments and bad policy will continue to fester. A case in point is the exchange between Sebastian Mallaby – who wrote a Greenspan Biography – The man who knew – and Ben Bernanke, who served under Greenspan and later replaced him at the Fed. Neither Mallaby nor Bernanke ‘know’ the Man who knew! One paragraph in Mallaby´s answer to Bernanke´s comments caught my eye: In his comments on my book, Bernanke stresses the experience starting in 2004, writing that “the tightening cycle that began in June 2004 was… Read More

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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… Read More

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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… Read More

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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… Read More

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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… Read More

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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… Read More

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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… Read More

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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.”… Read More

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