Good point by Sumner

He writes:

This is similar to a mistake many commenters make, wanting to distinguish between cash injected into the “real economy” and cash injected into financial markets.  Cash doesn’t go into markets at all, it goes into the pockets of people and businesses.  There is no meaningful distinction between cash going into the “real economy” and the “nominal economy.”  If the Fed buys a bond from a dealer, he’ll quickly deposit the funds in the bank.  If the Fed injects cash by paying Federal salaries in cash, the workers will quickly deposit the cash into banks.  Over time the demand for cash will rise as NGDP rises.  I suppose one could distinguish between cash boosting RGDP and cash boosting NGDP but not boosting RGDP.  But then commenters would want to talk about the slope of the SRAS curve, not who gets the money.  Or you could talk about cash injections failing to boost NGDP, because the extra money is hoarded.  Yes, but once again that depends on factors that have nothing to do with who gets the money, as long as we assume fiscal policy is unaffected.

A monetary problem

Ryan Avent writes at the Free Exchange blog:

But since mid-October, there has been an unmistakable reversal in the inflation-expectations trend. Based on 5-year breakevens, all of the September spurt has been erased. And 2-year breakevens are back at July levels. Given my optimism over the Fed’s September moves and the apparent strength of underlying fundamentals in the economy, I would like to disregard this trend, but one should be very reluctant to abandon guideposts that have served one well just because they’ve moved in an inconvenient way.

NGDP Targetting

It appears Ben Bernanke will step down in January no matter who the next President is; that means the next president will need to appoint a new chairman.  Scott Sumner makes a case that that person should consider NGDP targeting as the new Fed policy.  He writes:

As compelling as I think the arguments for NGDP targeting are, I have come to believe the pragmatic arguments for it are even more powerful. These arguments mostly revolve around some overlooked practical shortcomings of inflation targeting…

There are errors in the measurement of both inflation and NGDP growth. But to an important extent, the NGDP is a more objectively measured concept. The revenue earned by a computer company (which is a part of NGDP) is a fairly objective concept, whereas the price increase over time in personal computers (which is a part of the CPI) is a highly subjective concept that involves judgments about quality differences in highly dissimilar products…

Such targeting would make it easier for the public to appreciate the need for sound supply-side policies. If the fiscal authorities understood that the central bank was going to allow only 4 percent NGDP growth, then they would know that the only way to boost real growth would be with supply-side policies, even in the short run. Tax reform that lowered marginal tax rates would tend to increase aggregate supply and, hence, to improve the inflation/output growth split in NGDP growth…

Finally, NGDP targeting would help depoliticize monetary policy. The current ill-defined dual mandate allows each side of the political divide to latch onto its preferred policy indicator and to argue that money is either too easy or too tight. This polarization has been especially pronounced during the Great Recession. NGDP targeting would provide for much greater transparency of whether policy was overshooting the target or falling short.

Really Entertaining Comment Thread

Alex Tabarrok, having recently returned from a trip to Korea, requested his readers describe how he impacted the South Korean economy by accidentally bringing home some won in his pocket.  The catch is that the responses have to be written as a famous economist.

Maintaining The Zero Bound

 

Karl Smith asks how a central bank would maintain zero nominal interest rates forever.  Then he writes the answer himself.

[W]e must move the natural rate to zero. How to do this?

In theory the natural rate will tend towards the expected nominal growth rate of the economy, so you want to keep that at zero. For this you will need low inflation, preferably deflation.

However, if population and productivity are growing you still have a problem. The natural rate will try to rise to meet them.

Yet, you could try to drive a wedge between the natural rate and the real growth rate. You could do this by engineering a permanent increase in the risk premium.

More precisely you could promise the following: If by some chance this economy starts to take off and desired savings falls below desired investment then I will raise interest rates so far, so fast that it will crush every single investor in America, drive homebuilders into a ditch, shutter factories, skyrocket the Federal debt and put half the population on the bread line.  Test me if you dare!

He concludes by saying:

So, if we observe an economy, in which the interest rate was below the nominal growth rate and inflation was not increasing what might we conclude? One possibility is that the Central Banks has frightened people into believing that it will crush full recovery, if the economy even looks like its about to make one.

Zero Bound

Yesterday I alluded to this when I pointed out that the 20 year treasury recently dipped under 0%. Also last week the long term average yield went below zero, the rareness of this is highlighted in the graph below.

Impact of QE

Need to see the impact on long term real treasury yields of quantitative easing?

A Renminbi Doomsday Scenario

From FT Alphaville:

In which case, forget about Greece and the euro. China’s capital outflow problem is the real ticking time-bomb for markets.

If China fails to plug this problem sharpish, the world’s biggest put option — the China growth story — could quite genuinely come undone.

The pointer, an ominous reaction and an informative comments thread come from Tyler Cowen at Marginal Revolution.

The Meaning of Reserve Requirement Cuts by China’s Central Bank

This post at The Financial Times’ FT Alphaville blog tells you basically anything you want to know about PBoC behavior regarding reserve requirements.

FT Alphaville wrote in January about how the RRR has become less effective while the PBoC’s “reverse” repo operations have become a more effective instrument, particularly for liquidity management.

So why did the PBoC come out with this RRR cut so quickly after the poor April trade figures which reportedly took officials by surprise? Sure, the RRR is talked about in headlines as “easing” but most people know better by now.

Matt Yglesias on Zero Bound Recessions

The present economic dilemma in which setting short-term nominal interest rates to zero has failed to revive the economy looks exceptional from our present perspective but will in fact be typical of future recessions.

The cause of this, according to Yglesias is an aging population (illustrated below by population pyramids from Flatrock.org).