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If only we had a good estimate of market expectations…
One could do all sorts of compelling analyses, if one had a good, high resolution estimate of the market’s underlying NGDP forecast. For example, on the day before GDP for t-1 is released, let’s say you know what market prices imply/implied about the level of GDP in t-1. Of if you like better, you were blinded to all things not of the market, at least so far as the economic outlook. A bad GDP release can move markets, so this would give you a good market breakeven forecasts for NGDP (and thus for many other variables released before NGDP, which isn’t really a huge release). These could be a cheap forecast for the public to follow, potentially on a daily or even minutely basis.
This is all just speculation though, as no one has a good estimate.
Don’t be a Sophist! Vote Gary Johnson
If you are an American citizen, and plan to vote tomorrow, I urge you to vote for Gary Johnson, Libertarian Party candidate for president.
Although I don’t agree with Johnson on everything (I’m a bit of a Malthusian), I do think that he is the best choice.
As I see it; a vote for Johnson tells the two big parties that Americans want more freedom, faster economic growth and less foreign intervention.
For folks on the left, It tells politicians that that you don’t want the NSA spying on innocent citizens and that you aren’t thrilled with the Orwellian NDAA. It says “I’m an adult and should be allowed to use or not use nonaddictive plants, with no reachable lethal dose”. For social conservatives, it is a loud and clear way to vent your anger at the overreaching blue states who impose their morality the on Christian-conservative parts of the country. For capitalists like myself, its a vote for faster growth, more technology, higher stock prices and private missions to Mars. In a country as big and diverse as America, the optimal framework is one which leaves a lot of decisions to local governments and local conditions, this is just what a more libertarian minded approach would give us.
If you live in a strongly Red or strongly Blue state, why not vote for Johnson? Remember, you’re vote doesn’t count unless you live in one of the 7 or 8 swing states.
If you are in a swing state, things get more complex, but you can still vote for Johnson without throwing your vote to whomever you hold to be the greater evil. Here is what I plan to do, because I vote in Pennsylvania this year, a state which matters.
As I would like to vote for Johnson, but do prefer one of the two main candidates, I am making an agreement with a friend who likes the Johnson ticket but ultimately prefers the other viable candidate. We both swear to vote for Johnson, thereby offsetting the impact of our votes on the eventual outcome. I urge swing state readers to do this if you can arrange it by tomorrow night.
Perry on price gouging
If I thought I could sell at $10 per gallon, I would load my two door Honda with gas cans and head north. Unfortunately, the price mechanism (truth) has been outlawed in the the crippled sections of the Mid Atlantic, and thus I and thousands of other would-be gas haulers will stay home.
Mark Perry lays out the logic: ‘Maximum temperature law’ to prevent ‘temperature gouging’ makes as much sense as laws to prevent ‘price gouging’
What exports can tell us about the ‘fiscal cliff’
A leading reason I question the Keynesian fear of rapid government spending cuts, is that there are lots of quasi-exogenous downshifts in GDP components that don’t lead to recession, at least when you have your own central bank, or dominate the ECB (Germany). For example, the great recession undercut exports in (nearly?) all countries, but [edit:the drop in exports] had no predictable impact on NGDP and thus the business cycle. This suggests that some other force was steering NGDP (could it be monetary policy?) and as a result, that the U.S. might be able to print its way through the fiscal cliff if need be. After all, when we are talking about the ‘output gap’, a drop in spending is a drop in spending, be it from the lost wages of a laid off worker in an export industry or government.
Take a look at this graph:
The graph shows the share of exports in nominal GDP for a selection of economies which held up well (Australia, Poland and Israel) in the great recession or at least recovered quickly thereafter (Germany, Sweden). It is striking that exports never recovered to the prerecession share of NGDP in Israel and Australia, countries which did not even go into recession in 2008-2009. This means that the economy was able to shift quickly from exports to domestic consumption, presumably because the central banks were essentially level targeting. Given that Australia was mostly exporting commodities, and Israel, a set of diverse high tech goods (if memory serves), it seems unlikely that exporters simply began selling to the domestic market. Rather, other industries picked up the slack.
This ‘real shock’ aspect of an export collapse makes me even more confident that the economy can easily handle a rapid fiscal tightening. A drop in export demand is a real shock, you lose part of your ability to realize comparative advantage. If the iron ore market tanks, then Australia can’t just ramp up production at the Vegemite factory and quickly make an equivalently valuable quantity of output (this sentence shows how tenuous real output measures are). However, if you layoff government funded nurses and weapons engineers (the as the U.S. may do soon), they can easily get jobs in the private sector, so long as the Fed level targets NGDP, keeps the flow of economy-wide spending rising at a steady rate.
In all likelihood, the fiscal cliff would lead to a marked slowing in NGDP growth, and maybe even a short recession, given the timidity the Fed has showed us these last 4 years. So we are back to asking congress to play the role of AD manager.
Should economists vote?
I was tearing through twisty country roads today, listening to the Joe Rogan Experience podcast. Joe’s latest guest is the reporter Amber Lyon. Lyon is quasi well known for showing the world some of the shady things CNN was doing to hide the ends the Bahrain government is taking to quell the insurrection. I found myself disagreeing with many of the conversation threads but was struck by an idea the guest put forward.
Lyon said that reporters shouldn’t vote. Not so much because the system is rotten, but because then the reporter has a ‘dog in the fight’ and cannot be objective. This sounds wise to me, and leads me to wonder: why should it not also hold for economists? We would like to think we are perfectly mailable, able to compartmentalize our lives. I don’t think that is how humans work though. We are animals after all; programed by evolution to choose sides, to be in a tribe. So perhaps economic practitioners who write for the public or teach—sell themselves as objective—should stop voting.
Sumner on Yahoo Finance
Check out Sumner’s new blog article at Yahoo Finance. Send it to your friends. An outlet like Yahoo Finance is a great way to spread NGDPLT into the business economist arena, where interest rate driven models and reasoning from price changes abound.
America Downgraded…
Apparently a firm by the name of Egan-Jones (never heard of them either) downgraded the U.S. federal government from AA to AA-. They think that QEIII harms the economy. Way to harsh my mellow guys. Apparently Egan and Jones think the SRAS curve is vertical, and that the extra AD will just cause inflation. Of course I think they are wrong, and instead see QEIII increasing tax revenue while probably still failing to wholly make up for 4 years of unprecedentedly low inflation.
Tax revenue is first and foremost a function of nominal GDP. Changes in the path of nominal GDP drive revenue up or down in a nonlinear way, just look at the marked drop in U.S. tax revenue after the Volker disinflation or after the 2001 slowdown. Looks like we can expect QEIII to lift nominal tax revenue, so long as it boosts NGDP. As far as maintaining purchasing power, inflation expectations are still low.
This upstart ratings agency has it all backwards, which is a shame as we could use more competition in bond rating. Monetary easing is the only way to restore U.S. tax revenue growth. Cutting federal spending and tweaking rates doesn’t move the parameters of the tax function much. Unless the U.S. congress really overhauls the tax code, say with a VAT, there is little lawmakers can do to control revenue, short of hiring better central bankers. I often blush when I hear a finance minister or treasury official give a bold proclamation about how budget X will do Y to the fiscal balance, especially in countries which don’t have independent or NGDP stabilizing monetary systems (most big, rich countries). Budget calculations are conditional on aggregate spending, and NGDP can always move higher or lower than the finance department reckoned, throwing off the core assumption. This is why Euro Zone government’s keep embarrassing themselves by missing deficit targets. They have no idea where NGDP will be.
But back to the U.S. downgrade. The U.S. government has given bond investors fantastic returns over the past four years, and bonds as measured by the TLT fund (below) are still trading at sky high valuations.
Since 2009 U.S. consumer prices have climbed at the slowest rate since the 1930s. As a result American treasury investors have made bank, indeed bond investors who loaded up on treasuries in 2007 has made far more than they ever dreamed. Moreover, as the U.S. dollar has done fairly well—though for all the wrong reasons—most foreign investors have also cashed in with U.S. debt. If QEIII moves the dollar back toward its prerecession range, 10 year yields back around 3% and inflation between 2-3% (a best case scenario); the Fed would have…brought us back to a set of relative prices which prevailed when unemployment was 6%. That is, when the U.S. credit rating was AAA at all of the serious ratings agencies, plus these Egan-Jones fellows.
So please disregard all the nonsense about QEIII harming America. QEIII is a big step in the right direction.
Thoughts on QEIII
I’m glad that I haven’t shown y’all the negative posts I’ve written and not published in recent months, because QEIII makes me super stoked. More stoked than I have been since nearly getting a job with an enzyme maker. QEIII is going to put hair on the economy’s chest and I want to be long equities and out of treasuries and that boring old dollar.
In general, I believe that a loose form of the efficient markets hypothesis holds, and that policy makers shouldn’t try and out guess traders. This said, markets are at least briefly inefficient (someone needs to trade them to efficiency after all) and I think that today was a great buying opportunity. I personally went from 100% USD on Monday to 50% long certain companies on Wednesday, before going 100% long after learning that QEIII would be open ended.
Open endedness is the key and I think market’s probably underreacted to the statement. If QE becomes like a new Fed Funds rate, then we could be back to 5-6% NGDP growth for a while and the economy could turn heads in the speed of its recovery. This is of course a big if, and I will pay to express by bullish view in the markets. Can’t wait to see what happens in coming weeks.
Also, it goes without saying that you should check out Lars and Scott today for their insightful readings. I look forward to the responses of other market monetarists over the weekend, though I generally dread reading the interpretations of the “push down long rates !!!” crowd. Monetary policy is not about interest rates.
P.S. Here are some plots which show the awesome power of monetary policy
Odd Moves in the Markets
This blog is not dead, I swear. Though living in Pennsylvania may be slowly killing me, or at least weighing on my will to write.
Here are a few observations from today’s market moves:
1. Stocks went up a lot in Europe and the U.S.
2.Yields fell in troubled EMU markets, and rose in the U.S.
1 and 2 imply that markets forecast stronger growth.
3. Commodities…generally fell. WTI, Brent, and copper all fell somewhat. Consistent with either slightly lower growth/supply expectations, or just noise.
These moves are incoherent to me. Combined with the fact that everyone more or less knew on Wednesday what Draghi would say Thursday, lead me to believe that markets are not terribly impressed with the new ECB move. I don’t understand why commodities didn’t rally when stocks did so well, perhaps one can get an odd result like this when the tail risk of a Fall (autumn) 2008 type event is meaningfully lowered, which seems to be all that the new ECB program is good for.
In other news, Sweden’s Riksbank cut the repo rate a quarter point. This was wise. They needed to do something to bring the crown back into a more grounded range against the Euro, to scare of some of the haven buyers and to stoke domestic demand. With Finland and Denmark in recession, Sweden once again looks like the smartest country since Switzerland (two of the top three most secretly arrogant democracies). I’d like to see them cut rates one more time this year, but that might be hoping for too much. I wish I had been short the SEK now, seems an obvious trade looking back. I closed my short Euro position at 1.25, though if it goes back toward 1.30 I’ll probably go short again, always bet against politicians…
Clarida Doesn’t Understand Macro
Check out this clip on Bloomberg.
Richard Clarida (the man in the interview) along with Jordi Gali and Mark Gertler did a lot of the leg work in building the New Kenyesian paradigm. It is disheartening to hear him say such wrongheaded things. Inflation is low in the U.S., unemployment is high. Obviously there is an AD problem. Clarida’s own models say that economic performance could be boosted by lifting inflation expectations. This makes me want to buy treasuries.
