"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

Wednesday, July 23, 2014


Tightening macroprudential policy.

Ignore the Naysayers: Dodd-Frank Reforms Are Finally Paying Off by Mike Konczal

schadenfreude, The Armstrong Lie & I'm the Worst

The Armstrong Lie

Yeah, I'm the worst.

Negative Outlook?

meme events and inflation

[rough draft. need meme links and clean up.]

Meme events inspire me to make link lists. There's Piketty's K21. The Floor system and the billion dollar coin. German trade surpluses.

And now the Philips Curve with anchored inflation expectations. A commenter noted how people with debt and little savings are constrained in their spending. They may see higher inflation with food and gas prices going up, but what does this translate into as expectations. Fox News may convince your Republicunt uncle that inflation is raging but what does this mean for his savings and investment decisions?

Aggregate Demand, Aggregate Supply, and What We Know (Wonkish) by Krugman

James Tobin and Aggregate Supply (Implicitly Wonkish) by Krugman

The Neo-paleo-Keynesian Counter-counter-counterrevolution (Wonkish) by Krugman

Unanchored by Menzie Chinn

Phillips curves with anchored expectations by Robert Waldmann

Further thoughts on Phillips curves by Simon Wren-Lewis


Nominal wage rigidity. What do inflation expections do? What's the mechanism. Does it effect demand via investment and savings. Those with debt can't really adjust much and don't effect demand much unless they go bankrupt. Aggregate effects? The elderly Fox News crowd can adjust behavior. Give less to Sarah Palin and Ted Cruz?

Tuesday, July 22, 2014

trade deficit

Dean Baker: 
The $500 billion trade deficit, coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment. That would give workers enough bargaining power to secure real wages. So yes, trade is a big deal.
Investment in Equipment (and Software): What Are Neil Irwin and Tyler Cowen Thinking? Tuesday Focus: July 22, 2014 by DeLong

anchored perceived inflation

I asked in comments for DeLong to add Waldmann's post on "anchored perceived inflation" and he did.

Menzie Chinn has a related post.

And here's DeLong's post on Chris House and Krugman from a week ago.

Phillips curves with anchored expectations by Robert Waldmann (from July 1st)

Fed as Dr. Benway

Steely Dan got their name from the talking dildo that appeared in Beat writer William Burrough's Naked Lunch. The book also has a character named Dr. Benway.

In a recent post J.W. Mason quoted Dr. Benway in reference to self-induced economic problems.
“Now, boys, you won’t see this operation performed very often and there’s a reason for that…. You see it has absolutely no medical value. No one knows what the purpose of it originally was or if it had a purpose at all. Personally I think it was a pure artistic creation from the beginning. 
“Just as a bull fighter with his skill and knowledge extricates himself from danger he has himself invoked, so in this operation the surgeon deliberately endangers his patient, and then, with incredible speed and celerity, rescues him from death at the last possible split second….
He imagines Larry Summers as in the Benway role:
Interestingly, Dr. Benway was worried about technological obsolescence too. “Soon we’ll be operating by remote control on patients we never see…. We’ll be nothing but button pushers,” etc. The Dr. Benways of finance like to fret about how robots will replace human labor. I wonder how much of that is a way of hiding from the knowledge that what cheap and abundant capital renders obsolete, is the capitalist?
EDIT: I'm really liking the idea of Larry Summers as Dr. Benway. It fits the way all the talk when he was being pushed for Fed chair was about how great he would be in a financial crisis. How would everyone known how smart he was -- how essential -- if he hadn't done so much to create a crisis to solve?
but I think the Federal Reserve Bank would be more accurate. As Frances Coppola tweeted:
Working my way through FOMC minutes from 2004 to 2008. Fascinating. The FOMC members primary concern is always exactly the same.
Their concern is always that core inflation will "fail to moderate" - even when staff projections are that it will fall.
But they are always really upbeat about growth, even when staff projections are that growth will fall. They ignore their own staff.
And they ignore markets, too. Investors were pricing in lower rates due to falling growth expectations from Jan 2007 onwards.
But the FOMC? Nah. Main risk in their view was inflation (even though it was falling). They kept interest rates elevated.
 Investors were rational in 2007, but turned irrational in the face of Obama. As Robert Waldmann writes:
I am assuming that, like inflation expectations, inflation perceptions have delinked from reality recently. I really really should find data on perceived inflation (which is out there somewhere). I also have to come up with a story for why this happened just in time to save us from deflation. 
I give the credit to Fox news. A large fraction of people in the US rely on Fox News (often indirectly as repeated by friends and relatives). They are out of touch with reality — there expectations and perceptions are what Roger Ailes wants them to be. He thinks inflation is bad even though in a depressed economy in the liquidity trap it is good. Therefore Fox News convinces people that inflation has been and will be high. The representative consumer is only partly living in the Fox bubble so perceived and expected inflation are moderate. Then finally actual inflation is low but positive.

federal exchanges set up for the states' benefit or state exchanges run by the feds

Sarah Kliff: Separate circuit court rules in favor of Obamacare subsidies: "The Fourth Circuit Court of Appeals...

ruled Tuesday afternoon that Obamacare subsidies could be offered through federally-run insurance marketplaces.
It is... clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of their importance when drafting the bill," the Fourth Circuit Court ruled. 
We'll have more coverage soon...."


Aggregate Demand, Aggregate Supply, and What We Know (Wonkish) by Krugman
Still, we try. New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on “accelerationist” Phillips curves in which unemployment determined the rate of change rather than the level of inflation. 
So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations. 
The point, however, is that the price-setting side of the models has never been an integral part of Keynesian doctrine, and the surprising resilience of inflation hasn’t undermined the core insights. 
And it remains true that Keynesians have been hugely right on the effects of monetary and fiscal policy, while equilibrium macro types have been wrong about everything.

And Robert Waldmann's Fox News inflation-distortion bubble which isn't exactly anchored expectations. It boosts expected inflation rates.

fiscal stimulus

More Monetarism and the Great Depression.
The “spending hypothesis” attributes the Great Depression to a sudden collapse of spending which, in turn, is attributed to a collapse of consumer confidence resulting from the 1929 stock-market crash and a collapse of investment spending occasioned by a collapse of business confidence. The cause of the collapse in consumer and business confidence is not really specified, but somehow it has to do with the unstable economic and financial situation that characterized the developed world in the wake of World War I. In addition there was, at least according to some accounts, a perverse fiscal response, cuts in government spending and increases in taxes to keep the budget in balance. The latter notion that fiscal policy was contractionary evokes a contemptuous response from Scott, more or less justified, because nominal government spending actually rose in 1930 and 1931 and spending in real terms continued to rise in 1932. But the key point is that government spending in those days was too low to have made much difference; the spending hypothesis rises or falls on the notion that the trigger for the Great Depression was an autonomous collapse in private spending.

Glasner on market monetarism

Monetarism and the Great Depression by David Glasner
Scott is totally right, of course, to point out that the fall in interest rates and the increase in the real quantity of money do not contradict the “money hypothesis.” However, he is also being selective and unfair in making that criticism, because, in the three slides immediately following the one to which Scott takes such offense, Foote actually explains that the simple IS-LM analysis presented in the previous slide requires modification to take into account expected deflation, because the demand for money depends on the nominal rate of interest while the amount of investment spending depends on the real rate of interest. Here are the slides: 
Thus, expected deflation raises the real rate of interest and causes the IS curve to shift to the left but leaves the LM curve where it was. Thus, expected deflation explains a fall in both nominal and real income as well as in the nominal rate of interest; it also explains an increase in the real rate of interest. Scott seems to be emotionally committed to the notion that the IS-LM model must lead to a misunderstanding of the effects of monetary policy, but Foote actually shows that it can accommodate a correct understanding of the role of monetary policy in the Great Depression. 
The Great Depression was triggered by a deflationary scramble for gold associated with an uncoordinated restoration of the gold standard by the major European countries in the late 1920s, especially France and its insane central bank. On top of this, the Federal Reserve, succumbing to political pressure to stop stock market speculation, raised its discount rate to a near record 6.5%, adding to the pressure on gold reserves, thereby driving up the value of gold, and leading to expectations of further deflation. It was thus a rise in the value of gold, not a reduction in the money supply (and thus no shift in the LM curve), which was the source of the monetary shock that produced the Great Depression. IS-LM is not necessarily the best model with which to describe this monetary shock, but the basic story can be expressed in terms of the IS-LM model. 
So you may be asking yourself why, if I don’t think that Foote’s exposition of the IS-LM model seriously misrepresents what happened in the Great Depression, did I say at beginning of this post that Foote’s slides really annoy me? Well, the reason is simply that Foote seems to think that the only monetary explanation of the Great Depression is that of Milton Friedman: that the Great Depression was caused by an exogenous contraction in the US money supply. That is totally wrong. What caused the Great Depression was an international disturbance to the value of gold, caused by the independent actions of a number of central banks, most notably the insane Bank of France, which was maniacally trying to convert all its foreign exchange reserves into gold, and the Federal Reserve, which was obsessed with the suppression of a non-existent stock market bubble on Wall Street. It was a bubble only because the combined policies of the Bank of France and Fed wrecked the world economy and drove into Depression. The decline in the nominal quantity of money in the US, the great bugaboo of Milton Friedman, was truly an epiphenomenon. But as Ron Batchelder and I have shown, Gustav Cassel and Ralph Hawtrey had already diagnosed and explained the causes of the Great Depression fully a decade before it happened. Unfortunately whenever people think of a monetary explanation of the Great Depression, they think of Milton Friedman, not Hawtrey and Cassel. Scott Sumner understands all this, he’s even written a book – a wonderful book – about it. But he’s gets all worked up about IS-LM. I could not care less about IS-LM, it’s idea that monetary cause of the Great Depression was discovered by Milton Friedman that annoys the [redacted] out of me.


Blair's Legacy by Chris Dillow

Monday, July 21, 2014

Pam from True Blood

"Oh. My. God. I’m a Republicunt.”

Pam in last night's True Blood.

anchored perceived inflation

Anchored Perceived Inflation or How Fox News Helped Obama by Robert Waldmann
I am assuming that, like inflation expectations, inflation perceptions have delinked from reality recently. I really really should find data on perceived inflation (which is out there somewhere). I also have to come up with a story for why this happened just in time to save us from deflation. 
I give the credit to Fox news. A large fraction of people in the US rely on Fox News (often indirectly as repeated by friends and relatives). They are out of touch with reality — there expectations and perceptions are what Roger Ailes wants them to be. He thinks inflation is bad even though in a depressed economy in the liquidity trap it is good. Therefore Fox News convinces people that inflation has been and will be high. The representative consumer is only partly living in the Fox bubble so perceived and expected inflation are moderate. Then finally actual inflation is low but positive.

Sunday, July 20, 2014


Follow up to My Washington Post Piece on Secular Stagnation by David Beckworth
I have an new article in the Washington Post where I make the case against secular stagnation. My argument is based on three observations. The details of these arguments and evidence for them are spelled out in the piece, but here is a quick summary.
First, the prima-facie evidence most secular stagnation advocates point to is misleading. They see the long-decline of real interest rates since the early 1980s as supporting their view. Their real interest rate measures, however, do not account for a trend decline in the risk premium.* Once that is done there is no downward trend in real interest rates. And this measure--the 10-year real risk-free interest rate--is the one at the heart of the secular stagnation story. 
This long-run measure of the natural interest rate is currently negative, but only because of the current slump--its deviations tracks the CBO's output gap--and appears to be simply deviating around a roughly 2% trend. Based on this evidence, there is no reason to believe it has permanently turned negative.
Second, claims about a trend decline in technical innovation and productivity growth are overstated. It is getting increasingly hard to measure economic activity with GDP in an increasingly digitized economy. This means productivity gets under measured. Moreover, there is reason to be believe we are on the cusp of a rapid growth spurt as noted by Erik Brynjfolsson and Andrea McAfee in The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. If so, the return to capital will rise and so will investment demand This should put upward pressure on the natural interest rate.
Third, the demographic outlook is not so dire. Baby boomers are no longer the largest U.S. cohort and around the globe the outlook for the prime-age working population is improving. This too implies a higher return to capital, more investment spending, and upward pressure on the natural interest rate.
One thing I did not get to fully explain in the article is why the growth of productivity and the labor force should affect the natural interest rate. To do this, we need to first recognize there was a trend and cyclical component to the 10-year real risk-free interest rate. This is equivalent to saying there is a long-term and short-term natural interest rate, with the latter gravitating around the former. So we need to distinguish how these different components are determined. Also, I left out a third determinant of the natural interest rate: household time preferences. My assumption in the article is that this part is relatively steady and all the interesting developments come from changes in productivity and labor force growth.
So with all that said, below is an explanation of long-term and short-term natural interest rate determinants. It is drawn from an earlier post:
[T]he long-term nominal natural interest rate is determined by trend changes in the expected productivity growth rate, the population growth rate, and household time preferences... Productivity matters because it affects the expected return to capital and expected household income. Faster productivity growth, for example, translates into a higher expected return on capital and higher expected household incomes. In turn, these developments should lead to less saving/more borrowing by firms and households and put upward pressure on the natural interest rate. The opposite would happen with slower productivity growth. Population growth matters because it too affects the expected return to capital. More people means more workers and output per unit of capital. For example, the opening up of China and India's labor supply to the global economy, meant a higher expected return to the global stock of capital over the past decade. That should put upward pressure on interest rates and vice versa. Finally, for a given level of expected income, a change in households time preferences means a change in their desire for present consumption over future consumption. This, in turn, affects households' decision to save and borrow. If households, say, start living more for the moment there would be less saving, more borrowing, and upward pressure on the natural interest rate. 
Some like Paul Krugman and Larry Summers believe these determinants have changed enough such that the long-term nominal natural interest rate has been negative. I am not convinced and hope to explain why in a subsequent post (if you cannot wait, see my views in this twitter discussion). In my view, then, the important question is whether the short-run nominal natural interest rate has been negative since the crisis started. 
So what do we know about the short-run nominal natural interest rate? It is shaped by aggregate demand shocks that create temporary deviations of the economy above or below its full-employment level (i.e. output gaps). For example, a large negative aggregate demand shock that temporarily weakens the economy will put downward pressure on interest rates. This happens because firms do less investment spending and therefore less borrowing in anticipation of lower future profits. It also happens because households, particularly credit and liquidity constrained ones, save more and borrow less in anticipation of lower future incomes. In short, aggregate demand shocks that create output gaps will also push the short-run nominal natural interest rate in a procyclical direction. This is a natural process that allows the economy to heal itself. What is not natural is when interest rates are prevented from fully adjusting to their market-clearing levels. That happens when interest rates are pinned down at the ZLB. See this earlier postfor a graphical representation of this ZLB problem.
I hope that helps. Be sure to read the article at the Washingont Post.

PS. Josh Hendrickson and John Cochrane provide critiques of the formal modeling of secular stagnagtion by Gautti Eggertson and Neil Mehrotra.

"Good I'm sick of running from these wimps."

[The street gang The Warriors are running from the Baseball Furies as they make their way home to Coney Island.]

Ajax: "Did we lose these fucking clowns or what?"

Swan: "Look."

Ajax: "Holy shit."

[More running.]

Swan: "Cochise with me."

[Cochise and Swan split off from Ajax and Cowboy. The Furies follow the latter. Cochise and Swan circle back around the Furies and chase them from behind.]

Cowboy: "I can't make it."

Ajax: "Are you sure."

Cowboy: "Yeah I'm sure."

Ajax: "Good, I'm sick of running from these wimps."

FOMC during the bubble defltation

Frances Coppola tweets:

Working my way through FOMC minutes from 2004 to 2008. Fascinating. The FOMC members primary concern is always exactly the same.

Their concern is always that core inflation will "fail to moderate" - even when staff projections are that it will fall.

But they are always really upbeat about growth, even when staff projections are that growth will fall. They ignore their own staff.

And they ignore markets, too. Investors were pricing in lower rates due to falling growth expectations from Jan 2007 onwards.

But the FOMC? Nah. Main risk in their view was inflation (even though it was falling). They kept interest rates elevated.

Saturday, July 19, 2014

education "reform"

Education "reform" is a lot like welfare "reform."

Divide and conquer. Scapegoat.

Neoliberals support a safety net they say, but they make the "efficiency" argument over government, budgets and the private sector. They give in to business's Kalecki move to have investment and employment depend on them.

It's why Republicans focus on community banks at the FMOC rather than government and the unemployed.

Friday, July 18, 2014


Gaza reminds me of John Carpenter's Escape from New York, just a giant open air prison camp on the Mediterranean with the west side manned by Egypt's military dictatorship and the rest by Israel.

Escape From New York
Escape from New York is a 1981 American science fiction action film co-written, co-scored, and directed by John Carpenter. The film is set in a then-near future 1997 in a crime-ridden United States that has converted Manhattan Island in New York City into a maximum security prison. Ex-soldier Snake Plissken (Kurt Russell) is given 22 hours to find the President of the United States, who has been captured by prisoners after the crash of Air Force One. 
Carpenter wrote the film in the mid-1970s as a reaction to the Watergate scandal, but proved incapable of articulating how the film related to the scandal.[citation needed] After the success of Halloween, he had enough influence to get the film made and shot most of it in St. Louis, Missouri.[3] The film is co-written with Nick Castle, who already collaborated with Carpenter previously by portraying Michael Myers in the 1978 film Halloween
The film's total budget was estimated to be $6 million.[2] It was a commercial hit, grossing $25,244,700.[2] It has since become a cult film.


Germany is Weltmeister by Roger Cohen
Perhaps German success is the result of the immensity of past German failure. I think that has something to do with it, even a lot. Whatever its roots, German success is important and instructive. 
If you talk to business leaders of the German Mittelstand, the small and medium-sized companies at the heart of the country’s economy, you are transported to another world. You sit in stark boardrooms, so devoid of indulgence they resemble classrooms, with unassuming people leading billion-dollar companies, and they speak of loyalty, 10-year plans, prudence and quality. If one word induces a look of horror, it is debt. The notion of making money with money, of financial engineering rather than engineering itself, is alien. 
Joachim Löw, the German coach, spoke before the final of the careful building of his youthful side: “We can play on top of the world for a good few years yet, with some young players coming in to reinforce the team.” Inevitably, the idea of Germany “on top of the world” for a long time conjured up images the phrase would not evoke for another country. Even a victory dance by members of the German team turned into a national debate because it was seen by some as unseemly mocking of the gaucho Argentine. The president of the DFB apologized. 
Germany is now soccer’s “Weltmeister,” a composite word composed of “world” and “master.” It deserves the honor. Its society has much to teach others. But restraint will be its watchword.


market monetarism

Understanding the Crank Epidemic by Krugman
James Pethokoukis and Ramesh Ponnuru are frustrated. They’ve been trying to convert Republicans to market monetarism, but the right’s favorite intellectuals keep turning to cranks peddling conspiracy theories about inflation. Three years ago it was Niall Ferguson, citing a bogus source. Ferguson was widely ridiculed, by moderate conservatives as well as liberals — but here comes Amity Shlaes, making the same argument and citing the same source. The “reform conservatives” have made no headway at all. 
Why this lack of progress? 
The answer is that inflation paranoia isn’t a simple misunderstanding that can be corrected by pointing to evidence. It’s deeply embedded in the modern conservative psyche. Government action must, by definition, have disastrous results; and whatever market monetarists may try to say, their political comrades will continue to lump monetary policy in with fiscal stimulus and Obamacare. And fiat money can’t work — Francisco D’Anconia said so, and it must be true. So it’s always the 70s, if not Weimar, and if the numbers say otherwise, they must be cooked. Evidence has a well-known liberal bias. 
Even the rare conservative willing to admit that we don’t yet have high inflation won’t admit that this suggests something wrong with models that predicted a huge inflation surge. No, it’s just a miracle
So market monetarism isn’t going anywhere, politically. It was conspicuously absent in the Eric Cantor-sponsored book of supposed new ideas — and Cantor himself was knocked out of Congress by a faith-based Randite (which doesn’t make sense, but sense also has a well-known liberal bias.) 
Sorry, guys, but you have no home.
 And he doesn't mention Taylor's push to end the Fed's independence.

"You're the Worst"

AV Club reviews You’re the Worst: “Pilot”
You’re the Worst can be forgiven for a few of these missteps because it nails the subtext of its premise: Jimmy and Gretchen may think they’re the worst, and they sometimes do things that earn that title, but in reality, they’re not so bad. They put up plenty of defenses because they’re bitter and scared, and they act toxically because their lives are filled with uncertainty, but that makes them more normal than they realize. Their folly is rooted in believing they’re alone in that struggle, which ultimately leads them into each other’s beds. Jimmy and Gretchen aren’t the worst, they’re just human. So far, anyway.
  • Falk threads a very tight needle with Edgar as he allows his humor come from his eccentricity, which is a result of his PTSD, rather than the PTSD itself. Borges also sells the writing really well, especially his delivery of his “real problems” line: “Like, the nightmares, and the crying, and how I want to do heroin all the time.”
  • Edgar and Jimmy have my favorite exchange in the pilot: “I was defending our country.” “Oh, please. You weren’t defending anything except for the business interests of evil men.” “Jimmy, our country is the business interests of evil men!”
  • Jimmy’s rant to Killian about the difficulties of adulthood is pretty great: “I’m an adult. Do you know what that means? It means that I’m beset upon at all times by a tsunami of complex thoughts and struggles, unceasingly aware of my own mortality, and able to contemplate the futility of everything, and yet still rage against the dying of the light.”
  • “Getting married doesn’t remove you from the burden of having to act like a human being.”

Thursday, July 17, 2014

Will Voters Make Mitch McConnell Pay for His About-Face on Medicare? by Brian Beutler
So the record here is crystal clear. It's almost as clear as his position on the Affordable Care Act, which is that it should be repealed "root and branch." But in Kentucky, that would mean eliminating the state's popular insurance exchange, Kynect, and its successful Medicaid expansion. So McConnell is also trying to disclaim that position as well, suggesting—again, not credibly—that Kentucky could keep all of Obamacare's goodies even if Republicans repeal the law in its entirety. That swindle would be impossible to perpetrate under most circumstances, but McConnell's managed to pull it off because the Grimes campaign doesn't really want to make Obamacare an issue, even when they can use it to press their own advantage.

If you follow domestic politics closely, this is pretty disorienting. Its reminiscent of Mitt Romney's first debate with President Barack Obama, when he disavowed the fiscal agenda that defined his candidacy. At the time, Obama aides cited that about-face as one of the reasons Obama performed so poorly that night.

That strategy backfired on Romney as the campaign wore on. The question now is whether it'll backfire on McConnell—if not for what it suggests about his forthrightness than for what it says about his effectiveness as a potential majority leader.

Repealing Obamacare and implementing the Ryan budget is what the GOP exists to do. And if the top Republican in the Senate won't defend his party's positions politically, there's every reason to suspect the party itself wouldn't be able to execute on the vision, if ever given the chance.

asset price "inflation"

"Asset price inflation" is not inflation by Noah Smith

Wednesday, July 16, 2014

Fed and community bankers

Irwin tweets:
Lawmakers obsessed with getting a community banker on Fed board. Fed watcher/monetary types utterly indifferent on this.
Maxximilian Seijo:
Republicans keep asking about community bankers rather than the unemployed.
Should Janet Yellen Be Giving Us Stock Picks? by Neil Irwin

asset prices and monetary policy

Seems like Richard Fisher has been reading @Neil_Irwin without understanding him:

To get a sense of some of the effects of excess liquidity, you need look no further than Neil Irwin’s front-page, above-the-fold article in the July 8 issue of the New York Times, titled “From Stocks to Farmland, All’s Booming, or Bubbling.” “Welcome to … the Everything Bubble,” it reads. “Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.” Irwin’s comments bear heeding, although it may be difficult to disentangle how much these lofty valuations are distorted by the historically low “risk-free” interest rate that underpins all financial asset valuations that we at the Fed have engineered. 
I spoke of this early in January, referencing various indicia of the effects on financial markets of “the intoxicating brew we (at the Fed) have been pouring.” In another speech, in March, I said that “market distortions and acting on bad incentives are becoming more pervasive” and noted that “we must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again.” Then again in April, in a speech in Hong Kong, I listed the following as possible signs of exuberance getting wilder still: 
The price-to-earnings, or P/E, ratio for stocks was among the highest decile of reported values since 1881;
The market capitalization of U.S. stocks as a fraction of our economic output was at its highest since the record set in 2000;
Margin debt was setting historic highs;
Junk-bond yields were nearing record lows, and the spread between them and investment-grade yields, which were also near record low nominal levels, were ultra-narrow;
Covenant-lite lending was enjoying a dramatic renaissance;
The price of collectibles, always a sign of too much money chasing too few good investments, was arching skyward. 
I concluded then that “the former funds manager in me sees these as yellow lights. The central banker in me is reminded of the mandate to safeguard financial stability.”[1] 
Since then, the valuation of a broad swath of financial assets has become even richer, or perhaps more accurately stated, more careless. It is worrisome, for example, that covenant-lite lending has continued its meteoric revival and has even surpassed its 2007 highs.
But while central banks can set the short-term interest rate, over the long run rates reflect a price that matches savers who want to earn a return on their cash and businesses and governments that wish to invest that savings — whether in new factories or office buildings or infrastructure.
In this sense, high global asset prices could be the result of a world in which there is simply too much savings floating around relative to the desire or ability of businesses and others to invest that savings productively. It is a reassertion of a phenomenon that the former Federal Reserve chairman Ben Bernanke (among others) described a decade ago as a “global savings glut.” 
But to call it that may not get things quite right either. What if the problem is not too much savings, but a shortage of good investment opportunities to deploy that savings? For example, businesses may feel that capital expenditures are unwise because they won’t pay off. 
Mr. Bernanke himself has been wrestling with the possibility that the original framing of a global savings glut got the problem in reverse. “I may have made a mistake in trying to assign a name,” Mr. Bernanke, now at the Brookings Institution, said in an interview. “A glut means more than is wanted. But it doesn’t necessarily arise because people want to save more. It can be because they invest less. 
“It’s entirely possible that if you look at the world, you have slow-growing advanced economies, China cutting back on capital investments, that the rate of return is just going to be low.” 
If this analysis of the world is correct, investors have an unpleasant choice: consign themselves to returns lower than the historical norm, or chase ever more obscure investments that might offer an extra percentage point or two of return.
Robert Shiller
Until the recent crisis, economists were talking up the “great moderation”: economic fluctuations were supposedly becoming milder, and many concluded that economic stabilization policy had reached new heights of effectiveness. As of 2005, just before the onset of the financial crisis, the Harvard econometricians James Stock (now a member of President Barack Obama’s Council of Economic Advisers) and Mark Watson concluded that the advanced economies had become both less volatile and less correlated with each other over the course of the preceding 40 years. 
That conclusion would have to be significantly modified in light of the data recorded since the financial crisis. The economic slowdown in 2009, the worst year of the crisis, was nothing short of catastrophic. 
In fact, we have had only three salient global crises in the last century: 1929-33, 1980-82, and 2007-9. These events appear to be more than just larger versions of the more frequent small fluctuations that we often see, and that Stock and Watson analyzed. But, with only three observations, it is hard to understand these events. 
All seemed to have something to do with speculative price movements that surprised most observers and were never really explained, even years after the fact. They also had something to do with government policymakers’ mistakes. For example, the 1980-82 crisis was triggered by an oil price spike caused by the Iran-Iraq war. But all of them were related to asset-price bubbles that burst, leading to financial collapse. 
Those who warn of grave dangers if speculative price increases are allowed to continue unimpeded are right to do so, even if they cannot prove that there is any cause for concern. The warnings might help prevent the booms that we are now seeing from continuing much longer and becoming more dangerous.

stats and forecast; interest rates and wage inflation

The importance of CBO’s new interest rate projections by Nick Bunker
In its 2013 long-term budget projections, CBO forecasted that the long-run average annual interest rate would be 3 percent. This year’s forecast has lowered that projection to 2.5 percent. This new projection is not only lower than previous forecasts but also lower than the average range of 3.1 over the period of 1990 to 2007. Thankfully, CBO goes through the different factors that influenced their lower projected interest rates. And these factors are interesting in their own right.

NYT Says 12.4 Percent Growth in China Is "Sputtering" by Dean Baker
"Some economists inside and outside the government say China has a choice: slow down lending and accept steady declines in economic growth each year, or continue heavy lending and risk a sharp drop in economic growth someday when the financial system begins to teeter. But nobody knows when that might happen." 
If that sounds very scary then it's worth reading through to the last paragraph: 
"Retail sales are growing strongly, up 12.4 percent in June from a year earlier, according to the government figures released Wednesday, nearly matching a pace of 12.5 percent in May." 
As the article explains, real wages for factory workers are rising at more than an 8.0 percent annual rate. If that pace of real wage growth continues, the country should not have to worry about a lack of demand in the years ahead.
It's always everywhere a dilemma. The possibility of other solutions is foreclosed.

Cochrane, axiomatization, and formalism

Ancient Economists: Two Views by J.W. Mason

Another Complaint about Modern Macroeconomics by David Glasner

John Cochrane on the Failure of Macroeconomics by David Glasner

Morning Plum: Once again, Republicans tell Tea Party to get lost
Late yesterday, the GOP-controlled House overwhelmingly passed a temporary $10.9 billion fix to the Highway Trust Fund, replenishing it until next spring. The White House had warned insolvency could grind state infrastructure projects to a halt and cost as many as 700,000 jobs. As Glenn Kessler explains, this figure is probably overstated. But economic firms such as Moody’s Analytics were warning that failure could imperil the recovery just when it may be poised to accelerate. 
The House GOP fix is loaded with gimmicks, and it defers the tougher decisions over how to keep the fund going over the long term. But it avoids a short term disaster, so the White House is supporting it grudgingly. I’m told the Dem-controlled Senate will likely pass it. “We’ll probably end up passing theirs,” a Senate Dem aide emails. 
Conservative groups such as Heritage Action had warned darkly that Republicans must not “bail out” the HTF. Yet the HTF fix passed the House by 367-55. As the New York Times observes, this was “another in a series of defeats for conservative groups” who think “responsibility for highways and bridges should return to state and local governments.”

Tuesday, July 15, 2014

corporate personhood

In some of the instances detailed by the Justice Department’s statement of fact, the proportion of dubious loans in a given mortgage pool went as high as thirty or forty per cent. That is what the firms who did the sampling told Citi, anyway. On reading one of the due-diligence reports, a trader at the bank wrote in an internal e-mail, “We should start praying…. I would not be surprised if half of these loans went down…. It’s amazing that some of these loans were closed at all.”
In this case, and in many others, the bank went ahead and securitized loans from the pool whose quality had been called into question. The mortgage-backed securities that Citi created were sold for billions of dollars, and all too many of them subsequently endured heavy losses as individual home owners defaulted on their loans—just as the Citi trader had predicted they would.
Where is that trader today? Where is his boss, and his boss’s boss, and his boss’s boss’s boss? About the only thing we know is that they aren’t in the dock. Nobody is, unless, of course, you follow the example of the Supreme Court and ascribe some sort of full-blown personhood to a corporation, in this case Citigroup. “Today, we hold Citi accountable for its contributing role in creating the financial crisis,” Associate Attorney General Tony West said, “not only by demanding the largest civil penalty in history, but also by requiring innovative consumer relief that will help rectify the harm caused by Citi’s conduct.”
Ahem. The best possible spin on the settlement is that it represents a belated but promising step-up in the effort to hold some individual bankers accountable. Holder insisted that nothing in it precludes the bringing of criminal charges. Perhaps the inter-agency group of investigators and prosecutors that brought this civil case will now press ahead and use the evidence they uncovered to go after the traders and supervisors who were responsible for the “wrongdoing,” and the senior bank executives to whom they reported.


Coppola agrees on the problem with Baker.

"The US trade deficit is pretty intractable largely because the two major surplus countries - China and Germany - do not have currencies that float with respect to the USD. Germany uses the Euro, which does float, but the Euro is persistently undervalued relative to fundamentals in Germany because of the presence of weaker countries in the union. If the currency cannot adjust, then neither the trade deficit nor the capital surplus can correct unless unit labour costs fall, which means very significant falls in wages and employment costs. This is what is happening in the Eurozone periphery: it has not happened in the US thus far because of the US's willingness to borrow and the world's willingness to lend to it. 

However, there is a cost. As Philip Booth points out, China will not be able to suppress inflation forever if its currency is under-valued. Germany, too, faces high inflation relative to others in the Eurozone if its economy is  out of equilibrium: the ECB's tight money policies keep German inflation below 2%, but this forces weaker countries into outright deflation. "

Makes sense as ruling class policy: keep the labor market loose and increase the capital share and incentivize Germany to ally with us against Russia and to pay off China.

And yet she sees Baker's solution as unlikely: "This is why devaluing the dollar would not necessarily reduce the US's trade deficit, as Dean Baker thinks: China would simply adjust the yuan to maintain its desired exchange value, and Germany would tighten fiscal policy to stop a fiscal deficit developing as a consequence of a falling trade surplus in a low-demand economy. The only way to resolve the currency problem is for China to allow the yuan to float and Germany to abandon austerity. Hell might freeze over first. "

Inflation should be building in Germany and China.

Monday, July 14, 2014

positive outlook

Here’s why Larry Summers is wrong about secular stagnation by David Beckworth

Steve Liesman Embarrasses Rick Santelli On CNBC

the Great Clusterfuck and deflation


Unemployment, aggregate demand, and search/matching by Nick Rowe

I don't quite understand it, but Krugman says Keynesians expected more deflation/disinflation from the aggregate demand shocks in the U.S. and Japan. (What about Europe?) What if QE explains it?

Neoclassical and New Keynesian models seem to be poorly with distributional issues. Maybe it was something to do with that.

Nadine Gordimer

Nadine Gordimer, Novelist Who Took on Apartheid, Is Dead at 90

The Constition

The U.S. Constitution was created to form a government that wouldn't devolve into a tyranny along the lines of the monarchies of contemporary Europe.

But the more conservative of the framers were worried about the mob and wanted to put checks on the majority.

As Piketty's K21 and the last 40 years shows we should be more concerned about the opposite problem, the ability and tendency for the power and wealth of the minority to self-replicate, reinforce and grow - metastasize - at the expense of the majority.

Watch John Oliver completely destroy the idea that hard work will make you rich
The facts about economic inequality in America are pretty staggering. The top 1 percent of Americansbrings home close to 20 percent of income. Income inequality is the highest it's been since 1928. And Pew found that by a 60 to 36 percent margin, Americans believe they live in a country with a system that unfairly favors the wealthy. 
So the big question is: Why do Americans allow this to happen?

The answer, in John Oliver's estimation, is the American sense of optimism. He notes that a shockingpercentage of Americans feel the economic system unfairly favors the wealthy, but still believe that they will be wealthy if they put in the hard work. 
"I can clearly see this game is rigged, which makes it so sweet when I win this thing," Oliver says.