Archive | May 2013

Ben Bernanke’s Senate Testimony

I always feel that these hearings are usually nothing more than a chance for political leaders to grandstand portray their ignorance. It is usually always easy for a technical expert to come up with an answer which sounds impressive while not really saying a lot, and that most people will be unable to decipher. However, there was one great question, by Klobuchar, which deserved a follow up. (This was well covered by Yglesias):

[Mr Bernanke]… what would you have done differently under a single mandate to target inflation

and Ben Bernanke hummed and hawed and said, essentially, that he would have done nothing differently. This seems a pretty damning indictment of BB’s policy really, if, with unemployment high and inflation consistently below target, you are not going to take the opportunity to do extra stimulus to lower unemployment, what exactly is the point in a dual mandate?

The dual mandate exists because central bankers have known since forever that a little bit of extra demand, which usually creates a little extra inflation, is helpful in lowering unemployment. This is the wisdom of the Philip’s curve, which, for all its flaws, at least underlines the truth that very low inflation is nearly always correlated with high unemployment.

Of course, perhaps BB was aiming an under the radar shot at his FOMC hawks: I mean, with the board that he has, perhaps he is unable to force through policy that is expansionary enough for him to feel that he his fulfilling his legal mandate, but he could have chosen to put forwards the hawk’s argument, which would be that excess stimulus would not help unemployment fall any faster. This is a nice argument for this type of hearing, as there is clearly some empirical limit on how fast unemployment can fall – no matter how expansionary, the Fed could not restore full employment in one day. I am completely certain that it could do a hell of a lot better than it is doing, but I accept that falls in unemployment of more than 2% a year are fairly implausible. And if they attempted that they really might cause some inflation.

Nevertheless, I cannot help but think that BB’s decision to say nothing was itself an overtly political statement about his feelings on the manner. He is required to go and defend Fed policy, even if he was on the losing side of the FOMC consensus. Just as Mervyn King is forced to talk about how the committee feels there the “costs and risks” of further QE outweigh the benefits, even though we know he voted for more QE.

Finally, we can speculate on some nice follow up questions that I might have asked:

BB, do you believe that a more expansionary policy would cause unemployment to drop faster, while keeping inflation expectations steady?

He would almost be forced to answer yes, and now he would be in a really tight spot, then we could ask

BB, given that you believe that expansionary policy would bring down unemployment faster, while maintaining inflation expectations, do you believe that your policy is legal?

Could ask this instead:

BB, it is my understanding that the dual mandate exists because of the well known relationship between higher inflation and lower unemployment. Thus, logically, a dual mandate must lead to higher inflation than a single mandate whenever unemployment is significantly above its natural rate. Do you agree?

Or how about this one:

BB, which members of the FOMC do we need to impeach to enable you to legally fulfil your mandate?

Wouldn’t that have made great TV!

The Apple Tax Senate Hearings

So I did not follow these in particularly great detail, but one thing did catch my ear. Senator McCain accused Apple of pernicious practices which violated the “spirit of the Law”. I really have no time for this argument. If they are interpreting the Law in a manner which the courts uphold as justified, then they are in the clear. In fact, I would say that it is an excuse that politicians use for writing law that is so riddled with contradictions and conflicts as to be essentially garbage.

It is literally the job of legislators and lawmakers to write laws which are clear, concise, and unambiguous. It is a basic requirement of competent government, that the powers that be should be capable of writing Law that does what then intend for it to do. Claiming that a company “violated the spirit if not the letter” is just having a tantrum because you aren’t willing to admit your own incompetence. Its childish and disingenuous.

Monetary Policy Round Up

So from time to time I go round my reading list, just to pull out the best things on the Web. Its been an exciting time for Monetary Policy, as BOJ has crushed all believers in Keynesian orthodoxy.

This month Britmouse takes the prize for best post. He has been my favourite blogger on UK economics for a while. He has nailed Dr Weale, member of the BoE’s policy committee, on a cross of his own hypocrisy. Apparently any statistic will do, as long as the answer is higher rates. Since pretty much all of his posts this month have been awesome, I won’t bother listing them all, just go and take a look!

In other news, Japan has successfully exited its `liquidity trap’. After 15 years of pain and not really trying, it took….three months to produce 2% inflation and the strongest RGDP growth Japan has seen for twenty years.

Scott Sumner has continued to bash zombies. In this case it was another “Money is not easy” rant. Everyone should read Scott Sumner. He has the helpful attribute of being right about monetary economics.

The Sumner Critique has even made it into UK politics, in which Osborne gave a really quite good summary.

Lars Christensen has put together a nice graphical post on the empirical evidence for Market Monetarism in the US.

In the meantime, the Eurozone is the same sad story, unemployment rising, NGDP stagnant or falling. ECB doing nothing.

If your central bank crushes income growth…….

It is a self evident fact, given that wages are sticky, that if the sum of total income falls, unemployment must rise. What is less evident, but nonetheless true, is that Nominal GDP is tautologically equivalent to the sum of nominal incomes. What almost no one believes, but is true, is that the central bank has complete control of where it wishes to send nominal variables. Since it controls the price of money, it can always devalue money sufficiently to make it sensible to employ people again. Hurrah!

Some people believe that lowering the price of money is synonymous with inflation, but this is not the case. I lot of people envision inflation along the following lines: there is a stock of real goods, and a stock of money, and if the money supply increases faster than the stock of real goods, then we have inflation. This is an insufficient conception of inflation, in particular, this would mean that high fiscal multipliers would render money printing deflationary! Why? Because a high multiplier means that one dollar printed and spent generates more than one dollar in extra output.

To successfully conceptualise inflation, we must concentrate on money spent. If multipliers are high, then each dollar printed generates multiple extra dollars of demand, and multiple extra dollars in output. In an ideal world this would hold inflation at zero until output approached potential output, at which point extra stimulus will generate purely inflation and no extra real output. In the real world, we get some split between extra output and higher prices. At the moment in a depressed economy like Europe that split favours real output, as we approach full employment/supply side constraints, the split moves towards more inflation and less output.

The critical point is then twofold: in the current environment, monetary stimulus will not lead to inflation in the Eurozone. The second point is that we are in a severely disinflationary environment. Any time NGDP moves below trend, that is the definition of disinflation. Definitions of inflation based around the final prices of goods are a hostage to fortune, since it allows supply side shocks to prices to morph into demand side shocks. The costs of weak demand are immense, as years worth of output goes unused. The costs of supply side shocks which are correctly managed, is a slight one off rise in the price level.

Here is the unemployment graph for selected european countries, so we can all meditate on the ongoing human tradgedy, which is the cost of poor ECB policy:

Credit to SocGen via Alphaville for this one

And lets not forget that the forecast for improvement two years from now is simply the obligatory european forecasting tool of assuming that two years from now things will get better for no clearly specified reason except the general disbelief that they cannot get any worse. In 2010 the EU was predicting spain’s unemployment would peak in 2011 at 20%. That didn’t exactly go according to plan…


It’s a Good News-Bad News Situation.

So the bad news is, even the German economy is now struggling. The good news is, now that German inflation has gone off a cliff, the ECB might take some meaningful action.

Eurozone inflation goes off a cliff.

More importantly, German inflation also goes off a cliff.

We are now going to see Jens Weidman’s commitment to low inflation tested. Has his opposition to monetary stimulus been purely a cover to get the best possible policy for Germany at every stage, or does he genuinely believe that it is ineffective and the wrong policy? If the ECB `suddenly’ , after years of rising unemployment in the periphery, that monetary stimulus is appropriate, it exposes the fact that it was pretty much just ignoring the needs of the periphery to help the Germanic Bloc to force through reforms that they wanted. If it refuses to do anything as Europe slips into yet another deflationary recession, then it exposes itself as grossly incompetent, but at least not malicious.

Its a bit of a Morton’s Fork for the Bundesbank. If it now supports monetary stimulus, and it successfully raises demand in the Eurozone, it will be very hard to take it away before the periphery is out of trouble. If it refuses stimulus, it gets to watch the european economy continue contracting.

My own bet is that the ECB will do nothing, at least at first, and when the stock market realises it has wrongly assumed that, when push came to shove, the ECB would follow the other central banks, then European stocks will be crushed.

Meanwhile, in the background, the Bank Of Japan has crushed Keynesian orthodoxy. The question of whether an economy with long and entrenched deflation can get out of its `liquidity trap’ whenever it wants just by announcing that it is going to, and will print unlimited quantities of currency in order to hit its target. All hail Scot Sumner. Because he was right.

The Ongoing Train-wreck of EU governance: Bundesbank Sues ECB

Sometimes it appears that the EU is run by children. The rest of the time it is obviously true. This is one of the latter occurrences. Bundesbank President Jens Weidmann  the anti-hero of the European Depression, has thrown his toys out of the pram. After being out-voted 22-1 on the ECB governing council on instituting the ECB’s bond buying program, he stamped his feet and yelled “I’m telling Mummy”. `Mummy’, in this case, being the German Constitutional Court.

The OMO program is the one truly successful program the ECB has produced. The mere threat of its existence, announced last June, has calmed sovereign bond markets. Jens’ Weidmann apparently believed that it constitutes `direct funding of sovereigns’ and has asked the German Constitutional Court to rule on whether the ECB is violating its own mandate.

This all happened last summer, and so why am I bringing it up now? Because the German Court is finally ready to make a ruling. If the court rules against the ECB, what does that even mean? Is a supra-national organisation going to be held hostage to legal rulings of each and every state? What is Draghi to do? What will Merkel do? How will the ECB be held to account? Will it merely ask the Cyprus High court for a dissenting opinion, I am sure they would have no trouble sticking one in Germany’s eye, and then claim that in the absence of a consensus legal opinion they intend to ignore everyone.

Will Germany threaten to stop funding the ECB? A comical threat against an institution that holds the printing presses, and in fact, legally owns all of the currency in circulation. Will Germany boycott ECB rate meetings, which I would regard as very good news, as it would almost certainly lead to more policy easing.

There is going to be one very bad outcome if this court case comes out against the ECB, the return of massive uncertainty and volatility to peripheral sovereign bonds.  Does anyone want to see the Germany attempt to put another millstone around Spain’s neck?

There is nothing good to come out of this, just extra pain for a Eurozone that is continuing to implode in the absence of any serious policy easing.