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The Reagan Deficits, Growth, Long-term Yields, Inflation & the Exchange Rate. Implications for today?

The tax cut signed in December and the two-year budget deal passed on February 9, which served to focus attention on trillion dollar deficits, have affected markets. According to one analyst, reflecting the conventional wisdom: What if you ask the man on the street? Say you were one of those local news programs and left your air-conditioned office and went out on the street and interviewed people randomly, and asked them: “Why is it bad when we run big deficits?” I assure you that not one person would be able to answer your question. The answer, of course, is: it… Read More

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“Just one of those things”

John Fernald, Robert Hall, James Stock and Mark Watson (JF, RH, JS, MW) write “The Disappointing Recovery in U.S. Output after 2009”. The summary: U.S. output has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery. Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth. The slowing trend reflects two factors: slow growth of innovation and declining labor force participation. Both of these powerful adverse forces were in place before the recession and, thus, were not the result of the financial crisis… Read More

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The last filmy slips of fabric have been stripped away, and macroeconomists must now view the once-romanced US Congress in flagrante delicto with a real paramour: Mr. Big Bucks Deficits. The Congressional Budget Office, the Budget Committees, the Tax Committees, the endless pompous pettifogging about national debts—all tossed overboard on the Washington IOU Love Boat. Worse, Congress is not having a mere wild love affair—they have brought Mr. Big Bucks Deficits to the altar. So Now What? From here, a premise of Federal Reserve monetary policy must be that it takes place alongside $1 trillion annual deficits. For many, the… Read More

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Janet Yellen says farewell and the stock market sheds tears

Many things happened on February 2, the date the employment report for January came out. Before going into that, it´s worth looking at some history. In January 2012, the Fed instituted a formal 2% inflation target. Curiously, from the January 2012 FOMC meeting, extending to the June 2013 FOMC meeting, the Fed anticipated that inflation would undershoot the target! FOMC Meetings from Jan12 to June13 The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. In July 2013, they must have realized that was a dumb thing to say, changing…...

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Share Price Drop is not about NGDP Expectations

tldr: Don’t worry When developing our NGDP forecasting methodology, which uses only data from the NGDP/NGDI time series as well as market prices, we ran a number of validation trials. These trials sought to show that the methodology was invalid. We did simulation studies, we did out of sample tests and weren’t able to find a problem, though the most impressive result came when we ran the system in a simulated daily forecast update against the ’87 stock market crash. The “Black Monday” crash of October 19, 1987 saw the S&P 500 drop 20% in a single day. However, nothing… Read More

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"Drive slowly, grow longer"

Maybe Janet Yellen set it off with her comment in December “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this.” It was picked up in Davos: DAVOS, Switzerland—The world is enjoying its broadest, strongest growth in years, and everyone has an explanation, from the U.S. tax cut to the recovery in oil prices. Let´s check. World industrial production may be a good proxy for overall world economic activity. The chart indicates that it is not only the advanced economies such as the US, EZ or UK… Read More

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  The US Senate Banking Committee Jan. 17 voted thumb’s up on Jerome Powell, President Trump’s appointment to the Chair of the Federal Reserve. Barring calamity, Powell should take over in February. With that, a lawyer will supplant Janet Yellen, a dyed-in-the-wool conventional macroeconomist, as leader of national monetary policy. Lamentably, going to a lawyer is arguably a change for the better. The Fed Wants Higher Unemployment In the last two years, Fed staffers have consistently posited the US economy is facing “labor shortages” and is “beyond full employment,” even as wages rise like redwoods in the Sahara. And on… Read More

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When the Reagan Boom ended, the Great Moderation began

On July 1 1985, the New Republic published an article by Michael Barker titled “The end of the Reagan boom” Excerpts: What’s going on here? Only a year ago, the economy was racing along at the fastest clip in more than 30 years. Personal income was up, inflation was down, and to many Americans, if seemed positively churlish to deny that President Reagan had succeeded in “laying the foundations for a decade of supply-side growth.” … now, seven months after the election, just when we thought it was going to be “morning in America” for at least another four years,… Read More

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Let´s avoid bad choices

Greg Ip discusses asset bubbles and how they could make Jerome Powell´s life at the Fed difficult: Any central banker watching the stock market today should get a queasy sense of déjà vu. A housing boom preceded the last recession. A tech stock bubble ushered in its forerunner. Today, stock and property prices are once again setting records, in absolute terms and relative to household incomes. That may leave the Federal Reserve and Jerome Powell, nominated to succeed Janet Yellen as Fed chair next month, confronting some agonizing trade-offs in the next year or two: What if low inflation calls for low interest rates but… Read More

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“Inflation on demand”

The title was inspired by Olivier Blanchard´s presentation at the Brookings gathering on January 8 on “Should the Fed stick with the 2% inflation target or rethink it”. Blanchard proposes increasing the target to 4%. He also comments that Bernanke´s recent “temporary price level targeting”, which Blanchard calls “inflation when you need it”, so that real interest rates can be lowered when you are at the ZLB. That´s “Inflation on demand”! In addition to a higher inflation target, the Brookings gathering also discussed an inflation band (Rosengren), a price level target (John Williams) and nominal GDP targeting (Jeffrey Frankel). After… Read More

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