Blog

By trying to avoid the 70s, the Fed courts the 30s

In Fed Doesn’t Aim to Push Inflation Beyond 2% we read: [Yellen] said none of her colleagues want to relive the 1970s, when low unemployment eventually led to several bouts of runaway inflation, followed by severe recessions. “We’re not going to make that mistake again,” she said. Why doesn´t she gets into her thick head that it was not “low unemployment” that led to runaway inflation? That´s such an elementary error that an economics PhD head of the Federal Reserve does not deserve to keep the job, especially because the consequences of her error are huge. In terms of inflation… Read More

Share

Mark Carney, "a special one"?

Mark Carney has continued to behave poorly over the terms of his employment as Governor of the Bank of England. The UK went to a lot of trouble to create eight year terms for the head of its central bank as part of a plan to boost its independence. Straight up from the start Carney was negotiating something personal for himself. He only wanted to serve five years for sure, and would think about serving the full eight in due course. He thus guaranteed there would be speculation about his term after three years, and so it proved. Odd behaviour for someone who is… Read More

Share

This was never just a recession

Maybe to start with, but not for long. What does a recession look like? Take, for example, the 1981/82 recession, which was deep. Real output falls strongly, but reverts to the long-term trend. The present cycle looks very different. Real output also fell strongly, but never recovered. That´s what happens when the outcome is a depression! The picture illustrates: Are we looking at these pictures as if they pertained to different phenomena? Apparently not. Even at the Fed, analysis goes from a high degree of concern to unfettered jubilation in a very short period. Recently, Yellen asked some pertinent questions… Read More

Share

“There were 77 countries under consideration, and 49 of them were in recession in 2009. Economists—as reflected in the averages published in a report called Consensus Forecasts—had not called a single one of these recessions by April 2008.”—Financial Times. One can rely on Western macroeconomists and central banks annually serving up forecasts of economic growth and higher interest rates, often with a side-dish of inflation-sermonizing. The Fed’s outlook as of September is for 1.9% to 2.2% real GDP growth in 2017 and that PCE-core inflation will budge up 30 to 40 basis points or so, possibly hitting the Fed’s 2.0%… Read More

Share

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

Share

Monetary Policy is blocking the Portfolio Channel

In August David Beckworth posted an excellent chart illustrating the monetary tightening that had been underway since mid-2014. We knew that the end of QE3 had resulted in a passive monetary tightening: from that moment, the USD rose strongly and NGDP growth slowed. Also, Base Money turned flat from a strongly positive growth. He illustrated these tight money trends by showing the Fed’s holdings of marketable Treasury securities as a percent of all marketable Treasury securities. The chart showed up well the warning signs flashing in late 2007 and early 2008 as the liquidity squeeze gathered pace prior to Fed causing the… Read More

Share

When Sweden almost did it!

This adage applies perfectly to the Riksbank: Even if you are “free”, nothing stops you from being “stupid”. In 2008, piggybacking on what most central banks did, the Riksbank allowed the economy to “freeze”. By that, I mean the Riksbank let nominal spending (NGDP) growth to turn negative. In level terms, as the chart indicates, the level of spending dropped. So did the real output. However, differently from other central banks, the Riksbank soon began “thawing” the economy at a rapid clip. Nevertheless, shortly before the economy reached its “natural”, “thawed-off” state, the Riksbank, maybe because it felt it was… Read More

Share

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

Share

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

Share

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

Share