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Posts Tagged ‘economy’

Aggressive NGDP Targeting gets us Recession levels of Unemployment!

October 18, 2011 6 comments

This recent note by Jan Hatzuis about NGDP targeting shows just how bad monetary policy is at getting unemployment down.  Scott Sumner is cheering this.   So is Matt Y.

If you just check out the charts, you’ll see that NGDP targeting does reduce unemployment.  The unpleasant part is: Unemployment gets down to 6% after years and years of targeting.

Now 6% seems like good days when we are at 9% unemployment.  But for most of the last 30 years, and most of U.S. history, 6% unemployment was recession level unemployment.   The only times we’ve been over 6% unemployment is when times were tough and we needed to get the economy moving.

I don’t know why people think 6% unemployment is a good target.  It’s a horrible level of unemployment that only looks good from the perspective of the aftermath of a gigantic global crisis.

We need fiscal stimulus, not more bank lending.

[Update:  Here is the paper   http://www.scribd.com/doc/69165529/Goldman-Sachs-Recommends-Fed-Boost-the-Economy

and nothing about how they might do this NGDP targeting.  Perhaps more talk? ]

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Cutting Edge Monetary Policy: Pray for a Better Economy

August 26, 2011 9 comments

Dude, your beard does not have magical powers. It's pretty cool, but not that cool.

I’ve got a great idea.  I’ll start praying to Alan Greenspan for the economy to get better, and telling people I am praying for the economy to get better.

If they think I’m not serious about this prayer, I’ll show them the exact words of my prayer.   That will prove to them I’m really, really serious about this prayer.

Then when the people know I’m really serious, they will spend trillions.

Trillions!  Imagine of all the spending they will do – and the massive hiring spree that will take place!

All this economic activity from the power of a few words.  I thought printing money was nearly free, but this – this is even better.  It’s just a few breaths of air for Ben Bernanke.

Do not think this is a joke.  This idea is Cutting Edge Monetary Policy.  This is modern monetary policy.  Really it is.

The most prominent economists in the world tell us this is what we should do.

They think that Ben Bernanke a changing a few words in a speech will cause people to spend and lend trillions of dollars more than they would have otherwise.

They really think trillions of dollars of spending are being held up because Ben Bernanke is a bit too mild with his words.

I say: This is faith based economics.   It has nothing to do with the real world and would not help even a whit.

MMT has a better idea on how to fix the economy.  MMT will use direct action on getting the economy moving.

Attack the demand problem directly with a payroll tax cut and infrastructure spending.

Mosler’s Law: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Remember, Businesses hire when they are swamped with demand, not when corporate profits are high.

I’m just sick that this prayer for more economic activity is the best we can offer to the world right now.  Absolutely sick.

[Update:  Astonishing video footage from a recent conference on Monetary Policy. thx MA!]

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Terrifying action in the markets

August 3, 2011 2 comments

FRA - OIS Spread

Just an FYI – we’re getting terrifying action in the interest rate markets.

The 3 month FRAOIS spread – the spread between overnight bank borrowing and overnight U.S. government borrowing* – is seeing huge gains.

In other cases, gains like this have meant there is a huge, worrisome problem in the world.  Right now, Europe is on the verge of blowing out, but will this mean a run in the european shadow banking system?  I don’t know.

The european leadership has been able to calm things down over and over again, but it’s pretty clear by now that the only solution is for the European Central bank to buy huge quantities of sovereign bonds.

Of course, this is political nitroglycerin. Macro Man will probably have some good insights if he will share them  Also, we shouldn’t discount his idea that currency interventions seem to solve the problem.

*This is a massive simplification, but good enough for non-pro’s, of course.

 

Monetary Policy Sucks, Part IV: What do you do during a real estate crash?

August 3, 2011 8 comments

"Buy this house", say monetary policy advocates

Scott Sumner isn’t a bad guy.  He’s a good guy.  He’s smart.  He’s creative.  He’s forceful.  His ideas about NGDP aren’t all wrong.

But someone needs to tell him that monetary policy sucks even during the good times.  It sucks because it uses real estate as the primary vehicle for economic stimulation, which causes all sorts of bad outcomes for our economy.

And someone needs to tell him that right now, monetary policy is particularly bad.  While it sucks even in the good times, right now monetary policy is nearly impotent.

The U.S. real estate market is in the middle what will be a legendary bust.  Real estate prices are going down more than in the great depression.  Nobody wants to borrow money to buy real estate.

But that’s the channel that monetary policy uses.  That’s the part of the economy that monetary policy stimulates.

What monetary policy does is stimulate the economy by inducing people to borrow or not borrow money for real estate deals.  That’s why it works well at all.

So how cheap would money need to be to induce people to buy real estate that’s going down 5% per year?

We can talk about monetary vs. fiscal policy all we want, but until at least one person who is advocating monetary policy identifies the exact group of people who are going to start borrowing enough money to stimulate the economy, why should we bother to respond?

Corporations don’t need to borrow – they are sitting on a record horde of cash (they have more today).   So the only channel left for monetary policy to work is through real estate.

Tell me, advocates of monetary policy, how is this supposed to work?

And why would you want it to work?  There is a good chance real estate will drop another 20% or more in price.  Do you want to saddle more people with houses they cannot sell, and mortgages that are too big?

Update: Parts I, Part II, Part III on why MP sucks.  Note that most of these are too kind to monetary policy in that they assume it actually works!

US debt deal: A middle finger to first commandment of economics

August 3, 2011 1 comment

Stay Classy!

I wish I had thought of this title.  It’s brilliant.

Kevin Bloom is my new hero.

Here is the whole article:

“It’s simple: if you’re a government and you want to steer your economy out of a recession, you spend more money. History provides many examples of this truth, from Roosevelt’s New Deal to the military spending in World War II. If signed into law, President Obama’s debt agreement could put an end to all that. And the Republicans will be to blame. By KEVIN BLOOM.”

[Update: Thanks to the always working Rodger Erickson for this article.]

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Now that we’ve got a “deal”, Why not use the Trillion Dollar coin anyway?

August 1, 2011 24 comments

There is a deal, apparently.

The deal is horrible for the U.S. economy and almost certain to push it back into recession.  We’re cutting defense spending – a kinda good thing – but at the exact wrong time, and not replacing it with any other spending.

Spending Cuts are Tax Increases,” to paraphrase  Timothy Geithner.  It’s one of the few ideas he gets right.  We need more stimulus, not less.

Consumer spending is diving of a cliff. Corporations are laying off the equivalent of large towns everytime you turn around.  Brad Delong estimates -0.4% off GDP – I’d say more.  He was already asking “Where’s the demand?” before this stupid deal.

Now with this deal, the economy is doomed.  The spending cuts happen right away – and we’re at the brink of a recession.

Prior to this stupid debate, we were trying to cut taxes to stimulate demand. Of course, we haven’t felt any effects of that tax cut due to an increase in oil and gasoline prices.

These spending cuts – plus our current higher energy costs – will equal doom for the U.S. consumer and U.S. economy.

So why not just use the Trillion Dollar coin anyway?  Why not take the debt deal, and then use the Trillion Dollar Coin to makes lots of space under the debt ceiling?

We could use that extra space for huge payroll tax cuts to the U.S. consumer.  We could use it to stimulate demand where it will have the most impact.

Why not use it?  It’s widely regarded as legal.  Why not use the Trillion Dollar coin to get our economy moving again?

Business owners say they need more demand

July 26, 2011 Comments off

The Wall Street Journal notices the reason why there is no hiring – there is no demand for more product.

“The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.

“There is no demand,” said Paul Ashworth of Capital Economics. “Businesses aren’t confident enough, and the longer this goes on the harder it is to convince them that they should be.”

Holy smokes!  We need more demand.  There has actually been a slew of articles about this exact thing.  I guess the meme is catching on:

Businesses hire when they are swamped with demand, not when they have high profits.

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