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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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Run the economy warm, not hot, not cold

Janet Yellen in her recent speech floated the idea of allowing the US economy to run hot for a while to see if it can promote higher real growth, a “high-pressure economy”. Although I suspect she may just be talking this way in an attempt to offset the negative effects of a December rate rise it is an interesting way of looking at things and certainly worth moving towards given the low level of both RGDP and NGDP growth. I have argued elsewhere that the best way of promoting productivity growth is to see labor bid away from existing jobs to higher paying jobs.… Read More

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Of the last five Federal Reserve Chairpersons (excluding William Miller who headed the Fed for just a few quarters), three were academics and two were pragmatists. The academics: Arthur Burns, Ben Bernanke, Janet Yellen The pragmatists: Paul Volcker, Alan Greenspan Arthur Burns led the Fed to promote the “Great Inflation”, mostly by thinking the Fed was powerless to combat inflation: Burns – to whom inflation was a real phenomenon A few months after becoming Chairman in 1970, Burns thought the country was not willing to accept rates of unemployment in the range of six percent as a means of quelling inflation. From… Read More

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The "Great Moderation" Transformed

In “Was the Great Moderation Simply on Vacation?” Christopher Waller of the St Louis Fed writes: From around 1984 to the mid-2000s, U.S. macroeconomic volatility dropped to unusually low levels. Economists dubbed the period the “Great Moderation.” With the arrival of the Great Recession, many declared the Great Moderation over. However, data indicate that the increased volatility in 2007-09 may have been a temporary blip instead of a reversion back to the days of high volatility. And concludes: Therefore, while good luck likely played a role, a lot of credit should probably be given to a more structurally stable economy… Read More

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The mis-guided Fed

As a faithful Phillips Curver, Yellen believes the labor market is central do the inflation outcome. That´s why we read in the FOMC statements that: Inflation is expected to rise to 2 percent over the medium term as the labor market strengthens further. That´s a false premise. But even if it were true, the labor market doesn´t show a fraction of the strength the Fed is imputing to it. In fact, the unemployment rate is a meaningless indicator. It needs to be contextualized. For example, a 5% unemployment rate in 2016 has a very different meaning from the same 5%… Read More

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In my last post, I paraphrased Milton Friedman, and said that “disinflation and deflation are always and everywhere a monetary phenomenon.” The fact that global central banks do not agree, and think they are “overburdened” and wildly hyper-accommodative, is a worrisome development for investors. It means more monetary suffocation ahead. In yet another warning flag for investors, U.S. Federal Reserve staffers recently issued a report entitled, Understanding the New Normal: The Role of Demographics The Fed staffers conclude that demographics caused the feeble U.S. recovery since 2008, and that dead prices and interest rates are not connected to the central… Read More

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Feldstein Lives, breaths & eats inflation

And his routine and diet hasn´t changed one iota in more than 7 years! May 2009 The US last week showed its first signs of deflation for 55 years, prompting inevitable fears of further deflation in the future. Yet the primary reason for the negative rate of US inflation is the dramatic 30 per cent fall of commodity prices. That will not happen again. Moreover, excluding food and energy, consumer prices are up 1.8 per cent from a year ago. That is the good news: the outlook for the longer term is more ominous. The unprecedented explosion of the US… 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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One might take a minor liberty and say, “Disinflation and deflation is always and everywhere a monetary phenomenon.” Today, much of the developed world is in deflation, including several nations in Europe, as well as Japan, Thailand and Singapore—where they have posted 22 straight months of falling headline prices. Like Japan, Singapore’s economy has started to shrink in nominal terms, yet the central bank is not pondering easing. In the United States, the PCE index is stuck below the Federal Reserve’s putative target of 2%, a target that is supposed to be an average, not a ceiling. One might suspect… 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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