Author Archive

What is the Proper NGDP Trend?

8/Jan/2016 2 comments

Market Monetarism has always been rather back-of-the-envelope. I think this is a good thing; as I seem to recall the political cheerleader Paul Krugman saying: ‘no one is convinced by results which require complex methods’. All the millions of hours academics have put into DSGE models, and still, policy makers and pundits rely on ad hoc non-models, or old, simple frameworks like the Phillips Curve.

One of the problems with being back-of-the-envelope though is that it’s hard to authoritatively know what the proper NGDP trendline, the target that the Fed should strive for, should be today.  It’s going to be some weighted average of the old trendline, and the current, 2010-2014 trendline, accounting for prerecession economic decisions which assumed a steady NGDP path, and post recession decisions, which presumably anticipated a 4% NGDP path, with no catch up to the previous trend. I don’t have any ideas here, beyond simply going 100% with the new trendline, for lack of a better choice. In my opinion though, it doesn’t make sense to look at the old trendline anymore, surly it is less informative than the new line.


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Screwed either way

6/Nov/2015 Comments off

The jobs number came in strong, +270k. Readers will know I don’t place much weight on these monthly jobs numbers. Firstly, the data are noisy, even without measurement error. Secondly, the first print is poorly measured. This figure could be revised downward 50k and no one would be surprised. Thirdly, a job is not a homogeneous measure. It’s possible for the economy to add low paying jobs within a context of weak wage and nominal income growth. We want wages to rise. Still, a high number is better than a low number.

It feels like we’re in a situation where we just can’t win. If the economy adds jobs, for supplyside and wage-adjustment reasons, then the Fed will raise rates. If the labor market weakens, well then the labor market has weakened and the Fed will take half measures, which no one wants. Note that oil prices are down smartly, and the dollar up, on this data release. Traders are increasing their bets that rates go higher in December.

A 0.25% rate hike isn’t going to cause a recession by itself, but the Fed is under great pressure to make the interest rate line do a 45 degree angle on the chart. People think we should have a sustained rise in rates because that’s just what happens in a recovery. Once the Fed takes that first step, it will take a fairly big market downturn to get them to back off. I believe the outlook for the economy is quite poor. We’re set to have the yoke of weak-nominal-growth around our necks for the foreseeable future.

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What the Fed should do

30/Sep/2015 4 comments

The U.S. economy needs the Fed to stomp on the accelerator. The Fed needs to try negative interest rates and/or level targeting (prices, NGDP or wages) to give economy enough monetary momentum to allow interest rates to rise. It’s really important to get rates to rise because of rising incomes, because the comically ill-informed Financial Times readership is growing restless with rates at ~0%. The Fed will be under enormous pressure to raise rates if they’re still at 0% in Fall 2016.

If you want short term interest rates to be around 3% in 2018, you need a sustained NGDP growth of, maybe 5 or 6%. In the mean time, we should aim for 7% NGDP growth in 2016. Basically, we need a mild, upward income shock to stoke confidence, give households and corporations a chance to reorder balance sheets which in many cases carry lingering obligations taken on in the early 2000s, when NGDP in Q2 of 2015 was expected to be about $22 trillion, not $18 trillion.

I just look at inflation, look at the numbers of working-age people not in the labor force, the numbers of reasonably talented people doing low-value jobs, and figure there’s still some missed opportunities arising the inflexibility of wages and prices. I’m saying we should pour some gasoline on the economic fire, and see where inflation, savings, wealth and especially personal income go.

It’s hard to imagine the Yellen Fed doing any of this. My preferred way is certainly off the table. I’d just announce targets for NGDP in 2016, 2017 and 2018 and start doing QE and penalizing reserves at the Fed. Just keep printing and saying crazy things in public, and NGDP will rise, allowing you to pull in interest rates with a lag. The other way, call it the Swedish or European option, would be to take interest rates far into negative territory, basically as a signal of where you want NGDP to go. You take rates way, way down, spark a fire, and then ride them up as NGDP growth soars (7%-6%) and the economy takes off. Eventually you get ahead of NGDP growth and pull it back down to 5%. This probably would leave short term interest rates above 2%.

Like I said, neither of these will happen. The Fed is more or less happy with where the economy is, certainly Yellen doesn’t want to be the one to cause a mess with some experimental policy. 200k jobs a month and 1.5% inflation is fine with them. They’re not going to be fired, and will probably be praised by posterity, economists are cautious, why take a risk? More likely the Fed will cause a small recession ‘2011 ECB-style’ by raising interest rates too soon and in an inappropriate signaling context, than that they’d pull a Japan and unleash a radically more aggressive, ambitious and goal-focused policy.

I really don’t see them raising rates before April 2016, if they do, the markets will force them to back off.

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Peter Hitchens on the migrant crisis

6/Sep/2015 1 comment

I was trying to write something about the scowling, hairy-backed young Muslim men currently colonizing Germany and Austria. Then I came across this Peter Hitchens editorial and gave up writing, he says it all:

We won’t save refugees by destroying our own country

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Banks don’t get Market Monetarism

21/Aug/2015 2 comments

The people who run banks and other lenders see 2008 as mostly a result of poor underwriting. They figure “if we and our peers and competitors had been more careful, it wouldn’t have happened”. If you suggest “maybe the Fed had something to do with it” you get weird looks.

This si because almost everyone, PhD economists, MBAs, former engineers/science guys, you name it, thinks recessions are natural disasters, earth quakes, tsunamis. The Fed, in this strange world, is the hero who comes in to save the day, fire fighters are a good analogy. The Fed only gets blamed in so far as it screws up the response. People don’t realize that ‘oarsman’ is a better analogy. If a ship hits an iceberg, its ultimately the oarsman who’s at fault. It might have been choppy seas &c. but ultimately his decisions led the ship astray.

The Fed should get all the blame and all the credit for the state of the nominal economy. Banks didn’t cause the recession, they just failed to build portfolios that were robust to a catastrophic and unforecastable drop in nominal spending.

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Trump-Sanders 2016

13/Aug/2015 2 comments

I just watched the Vox interview with Bernie Sanders, the first time I’d ever held my nose and consumed media from Vox for more than a few accidental seconds. 

I grew up about a mile from Bernie Sander’s house, in Burlington, Vermont. Bernie lives in a nice, if otherwise unremarkable house (a little nicer than my neighborhood, but hardly extravagant), about a 10 minute walk from the Burlington bike path, and maybe 15 minutes from Lake Champlain. I recall seeing Bernie in the grocery store frequently. One time I got on the local TV news after I threw him a soft-ball question when he spoke at my high school. Needless to say, it’s strange to see him making this seemingly credible run for President; almost as strange as when Howard Dean (my mother’s first boss) made his run.

I grew up in a vaguely conservative household, a demographic remnant of Vermont from before the New York lefty invasion. It was routine to complain about what an embarrassment Bernie was to the state. But when I listen to his rhetoric, he’s basically saying “I want to make America more like Germany or Denmark”. It’s not such a bad vision. You’d need a nation of Germans or Danes to pull it off, but you could pick worse goals.

I’m done with libertarianism. Not because I disagree with the core ideas so much, I think Rothbard and v. Mises had some compelling points (not on monetary policy of course), and believe Milton Friedman’s vision would have been perfect for the United States of 1980 or 1990 or even 2000. I’ve basically just grown tired of the smug, sanctimonious status signaling that libertarian economists throw off theses days. I guess I’m whatever Tino Sanandaji calls himself.

What I like about Bernie, and what makes him stand apart, at a fundamental level, from internet libertarians and normal politicians, is that he sees the nation state as a club good. An asset that’s to be managed so as to balance out the interests of the club owners (citizens) as much as is possible. For example, 0.5% of citizens might really want faster population growth, so their companies can sell more goods and so land becomes scarcer, increasing the value of their holdings. They push for more immigration. But then you might have, say 30% of the population who want to form households and have children, immigration makes it harder for them to do this, because it makes housing expensive, lowers wages and strains government resources. 30% v.s. 0.5%, should be an easy choice given what each wants.

Bernie really does seem to see the welfare of the bottom 90% or 95% of Americans as his priority. This stands in stark contrast to libertarians—at least since Rothbard and Friedman died[1]—who see Americans as 320 million individuals, with no group interests, nationless, rootless. Republican and Democrat politicians see Americans as dangerous chattel, to be manipulated, farmed and social engineered for the benefit of donors and certain interest groups. I’m not trying to be overly dramatic; America remains one of the best places to live. But it’s in a lot of trouble and needs major reforms, foremost of which are an Israel-style border fence and vastly more limited and selective legal immigration framework.

I don’t agree with Bernie on much. He’s wrong on many economic issues, puts too much faith in price controls and the like. I also couldn’t disagree with him more on social issues. Yet I find myself curious to see what a leftwing, pro-labor politician could do. I’m not saying it’s optimal, I’m saying it’s an interesting possibility.

The post title is sort of joke. It’d be an awkward pairing, Trump and Sanders. Yet I can almost imagine it happening, if the oligarch class are able to engineering a Hildawg vs ¡Jeb! election. Trump making a deal with Sanders to steal the election from the major parties in the name of economic nationalism. Anyway, I endorse Trump and hope the Dems pick Bernie. 

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The golden age of the car

8/Aug/2015 2 comments

There’s never been a better time to be a car enthusiast.

Western Civilization might be well into its spiral ’round history’s toilet bowl, but goddamn are there some compelling offerings from the world’s major automakers!

I recently had the fortune to ride in an ultra high performance 4-door sedan. Ultra high performance as in 0-60 mph in 3.7 seconds, that is faster than the old Tesla Roadster’s 3.9 seconds. Granted this car carried a $100k price tag, but that sort of performance would have cost $200k or $300k a decade ago.

More realistically, today I test drove the new 2016 Maza MX-5, a car which can be had for $25k, and is best bought at $32k (mabye $330 a month for a 3-year lease with zero down).  It was an absolute dream to drive, with the top down in the late summer Texas sun. The gears could be shifted with a generous bend of the wrist, the clutch was nearly effortless. I was with a saleswoman, and the car was new, so I didn’t dare take it above 3700 rpm. Even still, it felt fairly speedy, and was eminently satisfying to take on highway exit turns. A great car. Looked sexy too.

I got into my 2014 Civic Si Coupe after the dealership sales bollocks to drive home. At first my Honda felt loose and bloated. The shifter needed some elbow and shoulder to change gears, the clutch felt like a leg press machine after the Mazda. Yet before long I was passing plebians in the right lane at 5500 rpm on Texas’ generous concrete highways. I wondered how it was that I could easily afford a low-end sports car like this, and deign to replace it with a slightly less low-end model.

The reason of course is that we are in the golden age of the auto. If you live in America, outside the Northeast or California (with their massively overburdened roadways and dysfunctional maintenance regimes) you owe it to yourself to get a sweet car, they’re so affordable. The auto industry is hyper competitive, GM, Ford, Honda, Mazda, and even Chrysler are at each others throats trying to produce affordable performance cars. Toyota, Nissan, Volkswagen, and a few others are also in the mix with these others trying to accommodate every taste in auto (but for affordable performance). The new F-150 is apparently a masterwork, and the Silverado is good too, for the money especially. I don’t follow trucks much, but apparently that segment is at new highs in terms of quality and performance per dollar.

Americans might not be able to afford the exorbitant costs of family formation: out-bid the underclass to access a low-crime neighborhood, pay the priestly class off with college loans, or earn a decent share of NGDP in an open-borders labor market; but we can certainly self medicate with nice cars. My lease and insurance costs me less per month (about $370) than many people spend on lunch, and less than some people spend on bar tabs, let alone total alcohol spending. For something so central to American life as a car, it’s really quite a bargain. And it’s all because the auto industry is highly mature, made honest by ruthless competition.

With oil prices ranging around $50 per barrel, it only costs me about $35 to fill a 12-gallon tank with 93 octane, I don’t even think about fuel costs.

In this age of Donald Trump I find myself increasingly sympathetic to moderate economic nationalism, so it is with some sense of dissonance that I point out our golden age of cars was brought about by low tariff international trade. It’s basically a mix of Japanese v.s. Anglo v.s. German engineering genius which has brought us to this point of hyper competitive car company offerings (honorary mention to the Koreans). Americans writ large might still be better off if we had higher tariffs (higher relative wages for median ability workers), but it’s easy to imagine that cars might not be quite as sweet as they are today under such a regime. A trade off with all things.

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