Karl Smith on the ECB
Check out Karl Smith’s latest reporting on the ECB
If such US immigration reform succeeds it would allow millions of Europeans to flee ever rising unemployment on the continent for the prospect of a better life in the United States.
“For the past 200 years the most effective strategy at improving economic conditions for working class Europeans has been to ship them off to the United States. With our lack of action today we hope to continue that tradition” a Facebook friend of mine who is not a senior ECB official was quoted as saying.
I think 310+ million people is more than enough for this country, but open borders might be the only hope for the starving youth of Spain. Come hither my Iberian brethren! And make sure to bring your cook books and wine making knowledge.
HT: Tyler Case
Yet more wisdom from Taleb
Working furiously on side projects and my tax return. This of course also means engaging with what Steven Pressfield calls Resistance. For me today, resistance means browsing, reading about nootropics (remember I’m trying to do my taxes) and of course checking facebook in a desperate quest to find something to take me away from my work. Happily, Nassim Taleb has allowed me at least a few moments respite from doing anything productive. Taleb’s latest facebook post is so spot on that I forgive him for unleashing his outlandish nastiness on poor Steven Pinker:
In the past journalism was an act of courage, revealing truths in the face of powerful establishments and risking jail or even death. Today (except in such repressive regimes such as Syria or Russia and except for war correspondents) it is becoming the refuge of disconnected cowards.
In my entire career I have never seen a financial journalist go to “the other side”, that is pull the trigger or engage in risk taking or in any situation in which one can be exposed to harm from one’s opinion. This can be generalized to journalists in general, who rarely, if ever, switch to doing, all the while pontificating on “Steve Job’s mistakes” or similar purported errors of others, or praising Geithner and other powerful frauds. Jazi Zilber wondered why journalists seemingly so knowledgeable about politics never become politicians. It is the same problem: modern journalists are designed to be either cowards, or have a need to escape reality.
Yet the tragedy is that doers are in contact with the world through journalists.
(SKIN IN THE GAME (BOOK VII), comment)
I am a stout believer that we must tear down the old media, salt the earth and rebuild it with a decentralized system of bloggers, podcasts and freelance writing. Media companies, with their necessary evil of editing and style standards, might then compete for talent and hopefully be held to some standard of honesty through the churn of bankruptcy proceedings.
Much of Taleb’s freshness comes from bring the best aspects of the Mediterranean and Dhimmi weltanschaungen to the comparatively bland lands to the North. However, sometimes he forgets to at least pretend to be reasonable, and treat honest brokers like Pinker as people with feelings.
Some things never change
Paul Krugman is again on the warpath against doing anything about the U.S. deficit. Nothing new here.
Here is a link to the interview I’m talking about.
Krugman says that there is no case for lower spending now, and that we had better wait three or five years before cutting. I grant he is right that the U.S. federal government could hold off for a while yet, but that seems like a second, or even fourth best policy option when we have technologies like printing presses and asset markets.
Another thing to keep in mind when discussing any hypothetical future policy to be undertaken by America’s federal government is that Americans reelected George W. Bush and then turned down an opportunity to elect a hyper-achieving Mormon. I guess they get some credit for dodging Palin in the senate but can the public really be trusted to elect a new emperor president with enough guts to shutdown counterproductive NATO bases and cut funding for expensive end-of-life treatments? Nixon went to China and Obama could cut federal spending now. It is the right thing to do and would make democrats out of millions of disillusioned Republicans. Krugman should say so, as he knows what happens when the central bank has a nominal target and a framework for open ended QE.
Oddly, Krugman cites workers “loosing touch with employment” as a reason not to cut spending today. This doesn’t pass the proverbial smell test. The U.S. has added about 150,000 jobs a month for half a year, or about 30k more per month than America needs to bring the unemployment rate lower. It would seem to me that, even if we lived in a Keynesian world, the economy is strong enough to weather at least some meaningful deficit reduction—$300b off 2014?—without more unemployment. This could be done in this hypothetical Keynesian world by simply cutting unemployment benefits, or at least breaking the link between job search and unemployment payments to encourage people to take lesser jobs rather than stay at home, work on the black market, or wait for the perfect job. Cutting unemployment benefits is controversial, but the link between higher jobless benefits and higher unemployment is perhaps the most robust finding in labor economics! I know we can do better.
Krugman of course is just saying whatever he thinks will help the left. But kindly remember that all 50 states are bigger than Iceland, so you can still try to build your social utopia at the state level with all that NGDP which would be freed up from federal use. My home state has sort of already done this by building a broad welfare system of its own.
Ultimately, Krugman is not a honest broker, and of course I am hardly the first to say it. Despite his intelligence, he is visibly rooting for a team, which is revoltingly unscientific and should cost him more credibility than it has. One could say that the great Milton Friedman was also rooting for a team to a certain extent, but he was always so kind and didn’t contradict earlier things he had said without acknowledging the shift in his thinking.
Adding market expectations to our models
Scott Sumner’s blog taught us to look at market prices as functions of of underlying market forecasts, with NGDP expectations playing a leading roll. If you watch markets closely, you’ll soon see that there are different types of “days” on the markets. Some days are really obvious revisions to the U.S. (and world) NGDP forecast. If—in USD terms—the yen rises while the euro, GBP, S&P 500, longer term yields and commodity prices fall, then we have an obvious case of lower NGDP expectations. If yields drift a bit lower while stocks drift a bit higher and the various commodity contracts—say WTI, Brent and copper—take rather small steps in opposite directions, then the market has little new to say about future NGDP on that day.
I think I’m closing in on a way to capture the market’s underlying NGDP forecast.
Here is what I propose, as a start:
Take daily time series data, closing prices, on 5-year U.S. government bonds, 5 year TIPS spreads, the broad trade-weighted dollar index, the S&P500, WTI front month contract prices and LME front month copper prices.
We should all agree that an ‘exogenous’ change in the market NGDP forecast, will yield a change in all of these market prices. Say, something like the Fed cutting rates more or less than expected, ditto QE. If you don’t believe that, then either you are allowing your ego-investment in decades of New Keynesian thinking to cloud your judgement, or you haven’t read Nunes and Cole’s new book. (I haven’t either, but I will and can only assume the content would lead one to this understanding)
So my idea is to take the first principal component of these time series, and treat it as in some way proportional to future NGDP. Lars did something similar a few months back. The resulting component wouldn’t be interpretable as an NGDP forecast, but we could aggregate it to quarterly frequency and use it to drive an NGDP forecast equation. We would need many equations actually, to find the “NGDP expectations curve” (which would be like this inflation curve) and in turn find the expected NGDP path. I deliberately included only 5 year bond yields, to weight the factor on 5 year NGDP expectations, though maybe 2 or 3 year rates would be better.
Here is a graph of the proposed shadow forecast.
And here is a graph of the same series, from 2007 to December 2012.
I’ve pondered just what this component might mean, and so far my best verbal description, is that the component is directly proportional to the expected present value of all income earned in the next five years. Exactly what geographical entities the series applies to are not clear, though it is surely dominated by the U.S.
I’ve played around with forecasting NGDP from this series. So far it is a respectable indicator of contemporaneous NGDP (when I convert the series to quarterly frequency) as well as NGDP up to 3 quarters ahead, after which it loses performance quickly, which is not surprising given how NGDP expectations have been buffeted in recent years. I don’t think those results are worth showing yet, but am confident there is a lot to be done with this, one way or another. My goal is to eventually build a website which somehow maps market prices to expected NGDP, in real time. It should be possible for a bank or forecasting firm to build a comprehensive line forecast products based on market data, which would allow clients real time forecast updates and perhaps finally give us an intellectually honest forecast methodology.
Regardless of how NGDP expectations are ultimately found (Scott has a link to an Evan Soltas article on another approach), we need a good estimate. If Market Monetarism is the best family of macroeconomic models for our age, then it follows that the best macroeconometric models will probably be built around market NGDP expectations in one way or another.
What Do Markets Think of the Fiscal Cliff?
I’m not too worried about this fiscal cliff. My guess is that it won’t even lead to a recession, if we do ‘go over’, but rather a marked slowing in RGDP for a quarter or so. I think the economy would look as it did before QEII.
In a situation like this, the thing to do is to look at the markets to get a sense of what they foresee. However reading markets is not so straightforward in this situation. Unlike monetary policy, which is more or less neutral in its impact on the composition of aggregate demand (where the ‘money goes first’), fiscal policy is by definition nonneutral. If the government cuts the military’s equipment budget, then military contractors stand to lose more than others.
Because it is big corporations which stand to lose the most (or if you are an anoying libertarian, ‘their shareholders’) from the fiscal cliff, the stockmarket might be a less useful forecasting tool than bond yields or commodity prices. At least if your reference index is dominated by government-linked corporations.
Oil prices and bond yields don’t look like they are discounting a recession. Oil prices (West texas intermediate) have held in the mid to high $80s while TIPS spreads and bond yields have been fairly steady. As of Friday afternoon, December 28 WTI front month contracts were trading around $90 and the ten year bond yield is at 1.71%.
If we would say that there is a 40% chance of taking on the full fiscal cliff, and that markets are already discounting this, I would say that the full fiscal cliff would not have the sort of disasterous consequences some fear. At least this is what the markets say to me.
Some regions would be hard-hit, but the recovery would survive.
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.
