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Giving Credit Where It’s Due

The US economy is probably going into recession. Manufacturing production is down from the late-2018 highs, retail spending growth, wages and payroll gains have slowed. Most importantly, nominal GDP growth has slowed while markets have taken a bearish turn, sending the NGDP outlook below 2%. While it is true that the S&P 500 is near an all-time high, the index has oscillated around the current level for more than a year, and stocks by themselves are only a noisy indicator of the near-term NGDP growth. TIPS, and conventional bond spreads are in the toilet, with spreads between the long and… Read More

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Andy Haldane once a bright young thing at the Bank of England, and currently its Chief Economist, is maturing into something of a conventional member of the old guard. This is important, as he is even an outside candidate to replace Governor Mark Carney as head of the UK central bank. He has a reputation as a champion of the poor and disenfranchised, arguing during and after the financial crisis that the London “Occupy” protesters had been morally and intellectually correct. On July 23 he gave a terribly detailed speech about the slow but ultimately successful recovery in the unemployment rate and… Read More

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The Dynamic AS/AD model is a good guide to understanding the economy over the last 25 years of low & stable inflation

Two charts help to set the stage. To better understand them, the AD curve should be viewed as a rectangular hyperbola. That means that the elasticity along the curve is unity. In that case, along the curve, NGDP growth is constant, say 5%. In other words, a fall in real growth is exactly offset by a rise in inflation. It also means, from a monetary policy perspective, that velocity (or money demand) changes are exactly offset by changes in money supply. In Chart 1, I illustrate the case of a (negative) demand shock. In that case, NGDP growth falls (to… Read More

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Monetary Policy Informed by Fear!

Antonio Fatas writes “This time might not be different”: The US does not seem to be able to sustain a low unemployment rate. Once we reach “full employment” (or even before), unemployment bounces back as we hit a turning point. I have written about this pattern in my previous post: All cycles display a V-shape evolution for unemployment. Unemployment reaches its lowest point around 12 months before the recession and, in most cases, unemployment is already increasing in the months preceding the recession. What is interesting is the absence of a single episode of stable low unemployment (or full employment). It… Read More

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In search of precision – What´s the ideal inflation indicator?

From the April/May FOMC Minutes: At least part of the recent softness in inflation could be attributed to idiosyncratic factors that seemed likely to have only transitory effects on inflation, including unusually sharp declines in the prices of apparel and of portfolio management services. Some research suggests that idiosyncratic factors that largely affected acylical sectors in the economy had accounted for a substantial portion of the fluctuations in inflation over the past couple of years. Consistent with the view that recent lower inflation readings could be temporary, a number of participants mentioned the trimmed mean measure of PCE price inflation,… Read More

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In monetary-policy circles, hardly a day passes without somebody somewhere declaring, sometimes in the form of a florid proclamation, that a central bank must have “credibility.” Otherwise, it is ominously posited, we slide soon into the Weimar Republic, although some later variants suggest the modern-day Japan scenario. That is, no one trusts the central bank to inflate enough. If this version of monetary policy is true, then at the end of the day the long-faced serious monetary-policy community slides into bed and embraces (this is the G-rated version) the much-ridiculed behavioral economists. An economy will or will not have inflation… Read More

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Chronic and large US current-account trade deficits lead to vulnerable and bloated domestic asset values—no, that it is not the proposition of Trump Administration China-bashers, but rather the conclusion of the globalist International Monetary Fund. The short story: Big and sustained current-account trade deficits axiomatically produce large capital inflows to the US. That Niagara of inflowing capital seeks a home in stocks and bonds, and moreover, can leverage up to buy real estate. But the resulting lofty asset values are unstable, and risk a “Hyman Minsky moment.” That type of moment is economist-talk for when the investment-market decides Fat City… Read More

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Call me “something”

The three charts below depict some alternative situations. The first illustrates the effect on real output and prices of a positive (productivity) supply shock with unchanged (constant AD) monetary policy. The second shows the effect on real output and price of an AD shock, flowing from an expansionary monetary policy that pushes AD up, while the third chart illustrates what has been a frequently used simplifying textbook assumption, to wit, that supply is demand determined. The next charts show the real-world counterparts. They all come from the last quarter of the 19th century when the economy was on a gold… Read More

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Blogger Kevin Erdmann has issued a rarity: an important book that should re-shape the macroeconomic and monetary-policy debates and policies. The book is— “Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy” published by Rowman & Littlefield. In a nutshell, Erdmann argues that the West Coast of the US, New York City and Boston have become powerful generators of jobs, but those same regions have suffocated new housing production through endless regulation, NIMBYism, crony-development schemes, and property zoning. The predictable result is an explosion of housing prices and rents. It was this choking off of… Read More

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Sweden´s Riksbank jumps ahead of the pack and raises the Policy rate

The last time they took the lead in raising rates was in 2010-11. The stated reason was they were worried about high asset (house) prices. Today, they “innovated”: The Riksbank said that its decision follows an assessment that “the employment rate is historically high, companies are reporting major shortages of labor and cost pressures are rising.” As the charts show, in 2010-11 the damage was big. Aggregate nominal spending (NGDP) was on the “road to Nirvana”, but the Riksbank raising rates aborted the process. Note that currently, NGDP has flattened. Maybe the Riksbank wants it to come down a bit!… Read More

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