Wot about the capitalists?

I just read Matt Yglesias "Monetary policy complacency is the conventional wisdom" (HT RA of The Economist) piece in Slate. It's depressing reading.

"On one team are the leaders of the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England. Alongside them are the political leaders of the United States, Germany, Japan, and England along with the main opposition parties in all of those countries. The Bank of International Settlements wants tighter money. Every few months Brazilian politicians pop up to complain about "currency wars." And then on the other side you have ... a handful of economics bloggers."

Who else can we get on our side? What sort of coalition could be built to support politically a commitment by central banks to a higher level-path of NGDP?

1. The currently unemployed? And maybe those about to enter the job market who fear the risk of unemployment? And maybe those who are currently employed but in jobs which may not last?

OK. But what percentage of the population is that? What is the likelihood they would set aside their individual initiatives to solve their individual problems and all get together to lobby for NGDP targeting? Some sort of latter-day Jarrow March, with pictures of Scott Sumner unfurled on great banners?

For some reason, it doesn't seem very likely.

2. What about the capitalists?

Low (not just low but negative) real interest rates, and low rates of return on all assets, make things very difficult for pension plans, and for savers in general. You need to contribute more now to get the same future benefits, or get lower future benefits for the same current contribution. Whether defined benefit or defined contribution, or just your own personal saving outside of any formal plan, somebody's got to take the hit, either now or later, from low rates of return on assets.

The IS curve slopes up. Low risk-adjusted real rates of return are a consequence of the tight monetary policy that is low expected future NGDP. Stock markets jump on even the hint of a commitment to looser monetary policy.

The powerful monied interests need to demand a higher rate of interest, which only a looser monetary policy can achieve.

Comments

[Determinant]

Get the federal NDP in Canada on your side? It's the only major opposition party in the G7 which isn't beholden to the "status quo" because it just made its electoral breakthrough in 2011 by lapping the Liberals.

You do have my support personally as a victim of the recession, and I do carry an NDP card. Perhaps NGDP Targeting could be the future centrepiece of NDP macro policy?

[Nick Rowe]

Determinant: well, it would make sense, as I argued in my old post. (And not just because "NGDP" sounds a lot like "NDP". Sorry). But it doesn't seem to have happened at all yet. It's the Liberals who seem a bit more keen on the idea. I don't really know why. Their wanting to use fiscal policy may be part of it. But even then, the two policies don't have to be mutually exclusive. They could argue for wearing belt and braces, because they really really don't want our pants to fall down.

[foosion]

Powerful moneyed interests are seeing high business margins due to low labor costs (aided by high unemployment), low materials costs (aided by low inflation) and low borrowing costs. Higher NGDP would likely increase revenues, but whether that would be enough to offset higher costs is not entirely clear. Given the uncertainty, why should they push for NGDP growth?

[Nick Rowe]

foosion: because, as I said in my post, I think the IS curve slopes up (a very "heterodox" view, of course ;-)). So a looser monetary policy would move the economy up along the IS curve, and increase the (risk-adjusted) rate of return on saving/investment (aka "the rate of profit"). Which is presumably what capitalists want. I wish my pension plan was earning a higher (risk-adjusted) rate of return.

[Determinant]

The federal scene is in more flux than it has been in decades. The Liberals got trounced and fell to a historic low. They are desperate open to new ideas because they want to win in 2015, if they don't they're toast as a federal party.

The whole Liberal-based punditry/commentariat/power structure has been hyperventilating because their ticket to power is in jeopardy. The Canadian power structure has not fully adjusted to having the NDP on the scene.

The Liberals have the choice between dwarfs and chumps as leaders. Not pretty.

But there is mutual distrust between the Canadian power set and the NDP because the NDP wasn't taken seriously until now. For instance, the Public Service prepares policy briefings and cost estimates for the government and Official Opposition during elections. They used to refuse to look at the NDP platform. They won't do that next time.

Which is a long way of saying the usual channels of policy development in Canada aren't fully functional right now.

[Determinant]

I wish my pension plan was earning a higher (risk-adjusted) rate of return.

Your pension plan is DB. It has additional voluntary contributions, but the DB formula is 2%/year of service, which is the standard level for DB. Rate of return doesn't affect your DB entitlement.

[Peter N]

This is what happens when people begin to doubt a central bank has enough ammunition. The current rescue fund isn't enough for both Spain and Italy. It is, of course true, that if people felt the bank had enough ammunition, the bank, would need a lot less of it.

Unfortunately Chuck Norris won't be able to cope, because Willie Sutton got there first. The banks and their sovereigns are joined at the hip. The banks' vaults are stuffed with their sovereign's bonds, while the sovereigns have been Fannie Maed. To bail out the banks, the sovereigns need money. Normally they would get this by selling bonds. Of course, their banks could borrow from the ECB and buy them (which they've been doing), but you can only pull yourself up so far by your bootstraps, and they're a max altitude. And the ECB is just the collective sovereign banks in disguise. Spain and Italy would be large contributors to a rescue fund.

Somebody with believable credit has to step up and say "make my day, punk", or it's over. It's too late for an announcement of NGDP targeting to work. That's for the future. This crisis is timed in days to weeks. Spain and Italy have a lot of debt to roll over still this year, and they can't pay 8% to do it.

Talking up austerity is one of those "necessary" lies. If you have no money for any other policy, then the one you're using is defined to be great. Who's going to say "We're going to do it. It's going to fail. We're going to have a depression. You should all panic now."

[foosion]

Nick, I believe the capitalists regard higher interest rates as a higher net cost and don't believe higher NGDP would necessarily lead to higher overall investment returns. In the US, at least, pension plans are moving to defined contribution, making pension returns less important for most capitalists. My sense is they mainly look at a trade-off between increased costs and the possibility of increased revenues.

I agree with you, but the moneyed interests do not appear to. They do not seem to realize what would be in their best interests. If they did, we'd see different policy. How to educate them is far from clear.

[Frances Woolley]

Nick, love that Yglesias quote, you and a few other econ bloggers against the world's monetary establishment sounds like exactly the kind of fight you'd enjoy ;-)

[Andy Harless]

Assuming the IS curve does slope upward (which I agree is probably the case, though I'm not confident of it) what you're asking for is basically cartel discipline among capitalists/savers. (In this case the unemployed and insecurely employed also benefit, and indeed even the securely employed may not be harmed by an effective savers' cartel, but that's basically what we're talking about.) You're saying, "It's in your interest collectively if you refuse to save (or if you save in the form of capital goods rather than hoarded cash and bonds), because the return on savings will go up. In order to enforce this cartel, we want someone to threaten you and say they will reduce your returns even more if you continue to save so much." So the central banks would be kind of like cartel leaders who maintain discipline by threatening to flood the market if others start cheating on the cartel. I'm all for it, but it's a tough sell, to get people to say, "We want central banks to undertake concrete actions whose direct effects will be to make us worse off, in the hope that their indirect effects will make us better off."

[Peter N]

It's interesting to consider that Germany was in much worse shape in 1949 than the debtor countries are now and had an economic miracle. In under 2 years they exceeded their largest pre-war GDP.

I believe the differences between the two environments tell us a lot about handling a crisis. I'd be interested to hear what others have to say on this subject. Why was it so easy then and so hard now?

[foosion]

Another line of thinking is: policy might increase returns generally, but I'm not sure they'll increase the returns for my company and could easily hurt my returns. Therefore I won't push that policy.

[Determinant]

PeterN:

The Marshall Plan, the Cold War? Germany's external debts were forgiven and it was reintegrated back into the Western economic system (which wasn't guaranteed). Germany wasn't laid low with unpayable external debts.

[Alex Godofsky]

Andy:

The don't have to stop saving. They just have to save by making real investments rather than just holding money or near-monies.

[Nick Rowe]

foosion: "Nick, I believe the capitalists regard higher interest rates as a higher net cost..."

It depends how you define "capitalist". I'm (implicitly) using a very broad definition here, so that interest on loans to businesses is in this case just a payment from one group of capitalists to another.

Determinant: "Your pension plan is DB." As I've tried to explain before, I've got dozens of little annual booklets in the desk behind me saying it's a hybrid DB/BC plan. But never mind that, because currently, *on the margin*, it is *mostly* a DB plan (the minimum guarantee is currently binding on most of us). But, like many other Ontario university (and probably other) DB pension plans, the cash in the reserve isn't quite enough, according to the actuaries. So the University has been, and will be, increasing contributions and (in a few cases) reducing benefits. The general point is, if the rate of return is lower, that extra cash has to come from somewhere, and one of those places it is likely to come from, one way or another, is my pocket (and Frances'). Maybe in lower salaries, or higher teaching loads?

[Dan Kervick]

Who else can we get on our side? What sort of coalition could be built to support politically a commitment by central banks to a higher level-path of NGDP?

Nick, why not try to build a coalition with people who oppose central bank independence? Or at least the austere and wildly undemocratic form of independence we have now? Then you could redirect your blogospheric lobbying for NGDP targeting away from the abject and undignified pleading with unaccountable and autocratic central bankers, and direct it toward more conventional methods of getting things done in a democracy: getting people to .. you know ... vote for it.

It would be a lot easier to execute and NGDP targeting regime, I assume, if there were integrated fiscal/monetary coordination behind it.

[Nick Rowe]

Andy: I think the "collective action/cartel" way of looking at it is interesting. But if the Central bank can commit to higher future NGDP, at some time, it becomes individually optimal to invest more, and this has a "multiplier" effect (greater than one in this case, so successive rounds don't die out like in the standard multiplier), so it becomes individually optimal for each capitalist to invest, as long as he expects others to do so too. But the central bank needs to act as coxswain to get them all to hunt stag not hare. And the true collective action problem is to get all the hunters to tell the coxswain to step up the beat. (Sorry, very mixed metaphors there!)

[Polan]

Determinant:

The Marshall Plan - Nope, Germany was a late and grudging admission

"e. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. "

Germany's external debts were forgiven - Nope The allies took a ton. Factories, all German IP, quite a bit of territory to Poland, the Netherlands, the Soviet Union and the Saar to France.

Germany wasn't laid low with unpayable external debts. Not unpayable, but heavy, mostly in terms of industrial assets plus they payed the allies $2,4 billion a year for the cost of occupation.

it was reintegrated back into the Western economic system. This is right, but it can't be the whole story.

[Lord]

The stock market supports it, but the bond market is larger.

[Nick Rowe]

Lord: for every $ on the credit side of the bond market, there's a $ on the debit side. $ may not translate proportionately to votes or influence, of course. But if they did, the bond market is a wash.

[Bob Smith]

Determinant,

if germany 1945 is the model for the recovery of Greece, does this mean that he Germans get to govern Greece for the next few years and occupy it for the next four decades?

The greeks aren't llikely to be keen on that, but the Germans mights be receptive.

[Determinant]

Polan:

That's ahistoric revisionism. Please try again.

Nick:

My point is it's mostly DB. Under the Pension Benefits Act, Carleton cannot reduce benefits already accumulated short of institutional bankruptcy.

The general point is, if the rate of return is lower, that extra cash has to come from somewhere, and one of those places it is likely to come from, one way or another, is my pocket (and Frances'). Maybe in lower salaries, or higher teaching loads?

It's a complex chain of events. Post hoc ergo propter hoc. The point is, because of the nature of your DB plan, your pension plan is a bad example for you to use.

[jt]

Similar to Andy Harless's comment, one of the things that may be difficult are the savers preparing for retirement. Under NGDP, it seems the savers have to be convinced with negative real interest rates >X, that there are investment opportunities that will be a durable competitive advantage in their retirement years. As we know, there are no "stocks for the long run" and that durable competitive advantage is fleeting for companies, industries, and countries. The problem is much of NGDP growth in the last 20 years has been in sectors with extremely low durable advantage: housing and finance. Housing is a low productivity growth industry and is not a tradeable good (although, perhaps selling citizenship + investment properties by the Gov might be a tradeable good!). Capitalists think the same way, because by and large, not only have they been accumulating cash, but are/were retiring equity ... even during the years when NGDP growth was on trend (most years).

[Determinant]

Determinant,

if germany 1945 is the model for the recovery of Greece, does this mean that he Germans get to govern Greece for the next few years and occupy it for the next four decades?

The greeks aren't llikely to be keen on that, but the Germans mights be receptive.

No, mostly because I don't see a horrible dictatorship that needs to be replaced. Greek elections are free and fair, even if other countries don't particularly like the results.

1945-50 is a model of generosity, but it does have lots of differences too.

Back on (NGDP) target, would it be so terrible if an NDP Government replaced the current inflation-targeting accord between Finance and the Bank of Canada with an NGDP accord? I hope markets wouldn't get too worked up about it. No need to startle the horses when you don't have to.

[Edmund]

Crack out your Kalecki, everyone. It can be difficult to convince rich people to support things that will ultimately make them richer - very difficult indeed.

[Polan]

One Bernanke theory is that he is keeping his powder dry. If Europe blows up, he's going to have to do things like he did in 2008, but this time he won't be able to slip it by the opposition before they know what's happening.

If he's planning to go out on a long limb in 6 months or less, he isn't about to crawl out on a small one now. It's almost inevitable that something very bad will happen in Europe. I find it hard to believe people in the Fed aren't planning a response. Opposition to a US bailout of Europe would be enormous, and imagine if it all blew up before the election.

If only someone could convince Germany of the problems of cutting off your nose to spite your face. Those lackers of moral fiber they're complaining about are their customers. Customers in depression tend to buy less. Maybe Germany plans to sell its entire output to Brazil.

[Polan]

For the German economic miracle, try this article.

http://www.econlib.org/library/Enc/GermanEconomicMiracle.html

NIck, You'll like it. They were playing your song.

[PeterN]

I accidentally became someone else - Polan. Pretty scary.

[rsj]

Is this post about the Canadian economy, or U.S.?

I would be interested in knowing what the hosts of this blog think is wrong with the Canadian economy.

Would Stephen/Nick/Frances/Livio agree?

You're not at the zero bound, so if more aggressive action is wanted, rate cuts are possible. Inflation is at 1.5%, so why not cut rates?

[Nick Rowe]

Polan (Peter N). What interested me especially is that the Germans resorted to barter when there was an excess supply of money. I've been talking about the resort to barter when there's an excess demand for money. But the two are really symmetric. It shows the inherently monetary nature of recessions.

[Nick Rowe]

rsj: from my perspective, it's about the US and Eurozone especially. Not about Canada as such. Except that Canada cannot escape the effects of what happens with our trading partners, even if it's a supply-side effect.

[Edmund]

One Bernanke theory is that he is keeping his powder dry. If Europe blows up, he's going to have to do things like he did in 2008, but this time he won't be able to slip it by the opposition before they know what's happening.

I approve of this theory, if only because I am an optimist. Or maybe a pessimist who hopes desperately that he's wrong.

[David Beckworth]

Nick,

Maybe we could used graphs like the one I posted here to make the case to the capitalists:

[link here NR]

[rsj]

Well, I will stand in front of the Federal Reserve Bank of San Francisco for 2 hours holding a sign saying whatever text you want if you

A) write a blog about Carroll's "A theory of the Consumption Function with and without liquidity constraints"
B) For the next 6 months, if you ever write down the "standard" perfect foresight euler consumption equation, put a link to the aforementioned blog.

[Lord]

Given the opposition, that would not be a good assumption.

A lot of positional goods are zero sum, so if you are sitting pretty (employed), a rise may not be beneficial even if it helps you.

[Nick Rowe]

David: yep. But I wonder about how much of that empirical relationship is just due to the Fisher effect. What matters is whether, *in a recession* increasing expected NGDP growth will increase *real* yields*. I'm not quite sure how to tackle this econometrically.

rsj: that looks to me to be a very good paper. (And it's really neat how Milton Friedman's *intuition* wins out in the end). But I really don't think I have a comparative advantage in writing a blog post on it. Once again, the set of things I think are important, and the set of things I blog about, aren't the same. Someone else could do a better job than me. Actually, I remember someone else doing a good recent blog post on that paper, but can't remember who.

[Nick Rowe]

Dan: "Nick, why not try to build a coalition with people who oppose central bank independence? Or at least the austere and wildly undemocratic form of independence we have now?"

Trouble is, the whole point of NGDP level-path targeting is to influence expectations. So we don't get recessions like this one, when people suddenly revise down their expectations of future NGDP, and so spend less today. And you really need some sort of commitment in order to stabilise expectations. If every year we held a plebiscite on what people wanted (say) NGDP to be for next year, I have little idea about what the future outcome would be. Unless the populace themselves understood that they had some sort of commitment.

We are in search of a monetary constitution, rather than a day-by-day monetary policy.

[Nick Rowe]

Of course, there's always a tension within constitutions. They are supposed to be written in stone, but at the same time are written by fallible humans, and sometimes we find out later that the constitution we have imposed on ourselves doesn't work as well as we though it would.

I don't see any solution to this problem, except to follow some sort of pragmatic conservatism.

Lots of people thought inflation targeting might be that monetary constitution. (We used to joke about "The end of monetary history", though we knew it was a joke, and that it would likely be on us.) It did well for nearly 20 years, and countries with an explicit inflation target maybe on average have done better than those without. But it wasn't as good as we hoped it might be.

Even the Gold Standard was probably better than nothing. (Though I'm not sure what "nothing" means.)

[Nick Rowe]

Lord: if I thought all goods were positional goods, and the whole economy was zero sum, I'n not sure I would care much about anything in economic policy. Depression? Whatever. There will be losers, and therefore winners.

[Nick Rowe]

Frances: "Nick, love that Yglesias quote, you and a few other econ bloggers against the world's monetary establishment sounds like exactly the kind of fight you'd enjoy ;-)"

I've been thinking about that. Maybe I'm just getting old. But it's not just the monetary establishment we're fighting against. It's the self-styled monetary anti-establishment we're fighting against too. They are not complacent, but they are defeatists. "Monetary policy can't do anything because interest rates don't do much anyway, and can't do anything at all when interest rates are zero. Chuck can't take concrete steps.".

Keynes again: "The intelligentsia of the Left were the loudest in demanding that the Nazi aggression should be resisted at all costs. When it comes to a showdown, scarce four weeks have passed before they remember that they are pacifists and write defeatist letters to your columns, leaving the defence of freedom and civilization to Colonel Blimp and the Old School Tie, for whom Three Cheers."

As always, some honourable exceptions do support NGDP level path targeting. E.g. John Quiggin.

It is just not good enough to have a monetary system which lets this happen. And it is the monetary system, not an excess of saving, or debt, or financial intermediaries going bust, etc. Some of those things might be bad things in their own right, but that doesn't mean they have to cause a recession. They wouldn't cause a recession in a (hypothetical) barter economy, so it must be the monetary system that allowed them to have this consequence. It's the only radical analysis that makes sense.

[Dan Kervick]

Consider an economy that barters goods, and in which people also exchange IOUs for goods, but in which the IOUs are non-transferable. Is that still a barter economy? Or is it a monetary economy? I would say the IOUs aren't money if they are not transferable and generally accepted as payment for anything.

But it seems to me that such an economy is an economy in which a recession can take place. The system of production can become heavily interdependent, and depend for its continued functioning on promised deliveries of goods, and the system of promises can become fragile. It can break down in a cascade of defaults and legal disputes if a few failed deliveries tip it over. Reorganizing and restarting the production system, and settling the many leftover claims from the old one, is then a massive social coordination problem and won't happen quickly. That's the recession.

[Jacques René Giguère]

Nick: "Which is presumably what capitalists want. "
No Nick. What they want is higher profits for their business. Theu think they will get it with lower costs or higher sales from means they control ( marketing). They live in a micro world and think micro thoughts. Macro is utterly alien. CoC Nick, the number of business people I had as MNA when I was an economic adviser at the National Assembly. They are constitutionnaly unable and unwilling to understand the difference between private and public debt, can't understand national accounting where expenditure equals income etc. They just can't. That's why I shudder when,just yesterday, the leader of a political party in Québec's current election annouced the candidacy of a manager from some manufacturing firm and told he would be his Finance Minister.

[John Quiggin]

Nick, it's my impression that most on the left (well, at least Krugman & DeLong as well as me) support NGDP targeting + fiscal expansion, at least as the immediate response. I'd want to go further in the long run, reintegrating monetary policy and prudential regulation, scaling back to the pre-1990s version of central bank independence and so on, but the main thing for the moment is to end the Depression.

[On the same line, I think Keynes was being unfair - whatever pacifist views they might have held in the 1930s, most on the non-Communist left joined up and fought side-by-side with the Blimps.]

[Ritwik]

Nick

Let's say that there are four important rates of interest. The natural rate on money (mn). The natural rate on bonds (bn). The market rate on money (mm). The market rate on bonds. (bm).

Let's say that what has happened over the past 25 years is an increase in the world propensity to save/ decrease in business investment demand. So a drop in bn & mn. The Greenspan put, and the resulting cronyist macro-ization of all assets has meant that risk aversion has gone up. Capitalists/ savers want returns, but they don't want risk. So, an increase in bn-mn. On the whole, bn has stayed put, while mn has dropped substantially. There is a huge 'money demand'.

At the same time, financial innovation/ past success has reduced the risk aversion of financial intermediation and financiers (as opposed to savers). So bm-mm has dropped. Now, to be in Wicksellian equilibrium (and hence stable NGDP path etc.) bm needs to match bn. Which it has, roughly speaking. So the market rate of money has been showing 'excess returns', with no tendency to auto-correct as the macroeconomy has been in equilibrium. Ergo, the proliferation of shadow banking (which serves mainly as a way to get 'risk-free' deposits to make more return), money market mutual funds, etc. Ergo, reverse maturity transformation. See page 7 of this : http://www.imf.org/external/pubs/ft/wp/2011/wp11289.pdf Savings funds asset managers have taken a long term return demand of households and converted it to money demand. A large shadow banking complex has arosen to service this money demand, finding creative ways to create near-moneys by expanding, disastrously at times, the supply of theoretically risk free assets that can serve as the backing for this cronyist money demand.

There would have been a severe/ series of mild recession(s) long ago, had risk-taking by financial intermediaries/ the proliferation by finance not been so great.

Gradually, this proliferation of shadow money supply, as well as the assurance that each sign of economic/ banking weakness will be met by an aggressive action on asset prices has dropped the MEC even further - historically high asset prices mean businesses/ savers want even higher prices/ returns to invest/lend. A gradual trend downwards in bn, bm, mm, but counter-acted by an increasing downward trend in mn (the natural rate on money). All this while, unemployment stays low, inflation stays low, and we celebrate the success of ostensibly the greatest central banker of all time.

And then one day, the edifice collapses. The market prices in the natural risk aversion of savers. bm shoots up. Central banks expand aggressively by slashing mm. bm follows, but not by much. mn has been driven so low that it can no longer be described as natural, it is the negative unnatural rate of interest. mm has been driven low, but is still higher than this abnormally low mn. bm and bn show this same risk aversion gap, and we're in a full fledged recession.

Central banks buy their domestic long bonds, their yields drop, and we see this as disproving Keynesian liquidity traps and long term investor preference. But perhaps, long bonds of safe haven nations are actually money, globally speaking. Ergo, a gap opens up between the long risk free bonds and the generic cost of capital. bm has still not been brought down. Long govt. bond purchases don't cure the recession, not this one.

Monetary easing is often channeled directly into asset prices, which helps employment for a while, but requires a bigger injection the next time. When channeled into commodity prices, it might even be contractionary, overall.

There is an excess money demand. That is the recession. But swapping reserves for bonds won't help it. Very firm communications, new inflation targets, creative ways to get negative interest rates on money may just. But how sustainable would that be? What kind of money demand is this that it can only be satisfied at -5% real rates? Your savers/ capitalists are not ganging up, because they haven't yet been punished enough. They are exceedingly risk averse, disastrously so. They have gotten used to making savings account + 2%, with no extra risk. They'd rather take the loss in wealth than take the risk.

So yes, you are right. We need to make the market clear at higher rates. Best would be if risk aversion declines, among savers and in the market. So mn (money-natural) shoots up, bm (bond-market) shoots down and mm (money-market) and bn (bond - natural) stay put. Market monetarists suggest higher nominal income expectations, which will somehow cause themselves. Krugman type Keynesians suggest direct government investment.

But there's another way - which someone like Ashwin Parameswaran has been saying for a while. Money-financed fiscal transfers/ tax cuts to households, combined with relaxed barriers to entry for firms as well as banks. Increase the natural rates, but reduce risk aversion. Force incumbents to be risk-loving, for threat of obsolescence. The inter-temporal price that is really really out of whack is the natural rate on money. Whatever you propose, you must solve that.

At the same time, there is this huge global labour price equalization going on. Wages are the biggest component of nominal income. How do you get sustainable AD increases without sustainable wage increase? And how do you get wage increase when global forces pull them downward? Nominal devaluation. Currency prices are the big intra-temporal prices that are out of whack. If developed country central banks must buy some assets, they should make sure these are of EM/ developing country. God knows India could use some foreign investment right now.

[Zorblog]

NGDP is a technical and controversial economic policy tool. So it may not be the best axis to make that debate revolve around. You may reduce the argument to inflation.

Most people are anti-inflation, although they don't know why, while the field of economists is divided firstly between pro and anti-inflation, and secondly between those who have half-an understanding of inflation, and those who have none at all (the two divisions are not necessarily correlated).

Then, the attitude towards inflation will mostly depend on whether you are a net debtor or creditor. Most capitalists are heavily leveraged, as they borrow in order to make real investments. The question is why they side with finance (which I would not call capitalism).

[Saturos]

But doesn't disinflation help the creditors... zzzzzz....

Ritwik, hope you're not confusing wage rates with total wages. (We should really have different words for the two, like prices and revenues.)

"It is just not good enough to have a monetary system which lets this happen. And it is the monetary system, not an excess of saving, or debt, or financial intermediaries going bust, etc. Some of those things might be bad things in their own right, but that doesn't mean they have to cause a recession. They wouldn't cause a recession in a (hypothetical) barter economy, so it must be the monetary system that allowed them to have this consequence. It's the only radical analysis that makes sense."

You're the best Nick.

[Ritwik]

Saturos

No I wasn't confusing, though I did use the term interchangeably to mean the two different things. My apologies. Yes, in a world where overall wages could grow while nominal wage rates went down, you might be able to achieve factor price equalization without a nominal devaluation or a recession. But if you posit such a world, then you must also posit money illusion, so that in either case nominal wage rates won't go down.

Best is to de-value. But not the Switzerland fixed rate peg way. Low inflation, low unemployment, a property price boom and a monetary bazooka that's needed just keeps expanding. The mother of all Greenspan puts.

http://www.reuters.com/article/2012/08/02/column-markets-saft-idUSL2E8J1FCA20120802

[primedprimate]

I agree with Zorblog that attitudes towards inflation best explain the fear of stimulative policies.

Perhaps reforming the capital gains tax by indexing it to inflation would be one way to induce powerful interests to support stimulative policies?

[Nick Rowe]

Dan: " I would say the IOUs aren't money if they are not transferable and generally accepted as payment for anything."

I would say they aren't money too. But for a slightly different reason. List all the goods that people exchange. Include in that list all the IOUs to deliver goods at a future date, so we define "goods" to include those IOUs.

In a pure monetary economy, at one extreme, one very special item on that list always appears in every single exchange. Anything else can only be traded for that one good. We call that one good "money".

In a pure barter economy, at the very opposite extreme, any good on that list can be traded for any other good on that list. (Somewhat paradoxically, we could say that in a pure barter economy every good is used as money, so none is special).

And in the middle are mixed cases, where some pairs of goods can be traded, or traded by some people, but others can't. I trust Fred's IOU, because I know Fred, so I accept it. But I can't turn around and sell Fred's IOU to a third person, who doesn't know Fred. So Fred's IOU is not money. Which is compatible with your way of looking at it, when you say Fred's IOU is not generally acceptable.

On your second paragraph: you are talking about a coordination failure, and there are lots of different sorts of possible coordination failures, and some of them will have little or nothing to do with monetary exchange. For example, if we don't have clocks, or our clocks aren't synchronised, it may be very difficult to meet in the market at the same time to either barter goods or exchange goods for money. (Though even here, money will ease the problem of not having clocks, because with money we only ever have to meet pairwise, rather than all at once.) But I wouldn't want to call *all* coordination failures "recessions". The big symptom of those coordination failures we call "recessions" is that it's easier than normal to buy goods and harder than normal to sell goods. If our clocks suddenly stopped working, and that caused a coordination failure, then both buying and selling would be harder than normal (if we used money), and barter would be harder too (if we didn't use money).

In those things we call "recessions", because they look like other things we called "recessions", finding a buyer of goods for money gets harder, finding a seller of goods for money gets easier, and finding someone who wants to do a barter swap doesn't get harder. So some people resort to barter. And so finding someone who wants to do a barter swap actually gets easier in a recession.

You can talk about some coordination failures without talking about money. But, IMO, you can't talk about that subset we call "recessions" without talking about money.

God, but thinking about this is interesting (to me)!

[Nick Rowe]

Jacques: "They live in a micro world and think micro thoughts. Macro is utterly alien."

So true. But so true for almost everyone! (And understandably so.)

John: Welcome! Yep, there's you and Paul and Brad (and there are a few others too, but my memory is bad). But, just to quibble, I don't think of Paul and Brad as being really anti-establishment, at least in terms of money/macro thinking. Not that it matters, but it's why your name came to my mind.

Yep, have both government and central bank announce (the same!!!) NGDP target, and then give it both barrels, monetary and fiscal, until we are in danger of overshooting, and then adjust. And we can argue later about whether it was monetary or fiscal, or the target itself, that really won the war, when it no longer really matters to anyone except us.

[J.V. Dubois]

Nick: "God, but thinking about this is interesting (to me)!"

And for me too. Anyways I think that this is important and that there is somehting behind this. David Glasner had few posts about diverging expectations and what causes this may have on economy. All this is tied to some important topics that are being recycled over and over again:

1) What if our recession is structural, or real or whatever?
2) How so that even after so many years we are not out of recession when we are back on the pre-recession trend (I am aware of fantastic discussion that was stirred around this, but I still have a feeling that it was left kind of unfinished).

The 2) has also something to do with "microfoundations" - if sticky prices/wages is the cause of recession in New Keynesian story, then it follows that any successful attack these ideas means successful attack ob the whole story. So is there something else? Why do we have diverging expectations now and we did not have them during great moderation?

[DavidN]

Nick,

It’s this an implicit admission that academic economists (outside of policy makers, regulators, and central bankers) have little influence? Because it sounds a lot like it.

If you want to some help from polisci cousins then I would suggest the following by William H. Riker, The Theory of Political Coalitions, and The Art of Political Manipulation.

[DavidN]

*'Is this' not 'It’s this'.

[dwb]

I thought Krugmans idea for a "Manifesto For Economic Sense" was a good start. a lot of people did not sign it because it was Krugman and it did not emphasize monetary over fiscal policy. Generally my experience with friends and colleagues is basically a lack of understanding that the Fed has consistently missed its forecasts, that there are those on the Fed committee that think we are near full employment. When i educate them, they say "were doomed."

To be fair, the whole economics profession is deeply confused as well. about a third are caught up in this silly revival of early 30s Hayek liquidation and deflation is good. Another third think the problem is structural, and the last third is split between advocating more fiscal stimulus (not gonna happen) and ngdp targeting. Many are still tilting at the inflation windmill.

It might take a whole generational turnover to fix this mess, it took 14 years for the Fed to recognize its errors in the 70s.

[Nick Rowe]

DavidN "It’s this an implicit admission that academic economists (outside of policy makers, regulators, and central bankers) have little influence? Because it sounds a lot like it."

Yep. But the academic economists are sometimes perhaps complacent/defeatist too.

dwb: "I thought Krugmans idea for a "Manifesto For Economic Sense" was a good start."

Yes, but he made the classic mistake of petition writers. He made it too long. A one-liner: "Loosen monetary and/or fiscal now, with a price level or NGDP path target!" would have got a lot more signatures, I think. The longer you make it, the more stuff is in there that people could object to. We can have different views on the cause of the problem, and on details about how cures work and the ideal cure, but still agree on the general direction of a cure. I once helped organise a petition about academic freedom. I cut the original draft down from one page to IIRC 2 or 3 short sentences. When both the fundamentalist Christians and the Wiccans signed it, I knew we had won.

[Nick Rowe]

Getting academics to agree on anything is like herding cats.

[Determinant]

Yep, have both government and central bank announce (the same!!!) NGDP target, and then give it both barrels, monetary and fiscal, until we are in danger of overshooting, and then adjust. And we can argue later about whether it was monetary or fiscal, or the target itself, that really won the war, when it no longer really matters to anyone except us.

OK, put this on a bumper sticker. Circulate a petition. Through it out at conferences and dinner parties until everyone knows you will talk about nothing else.

I don't share your politics, Nick, and your association with the C.D. Howe Institute makes you suspect in lefty circles. But I can sign on with the both barrels thing. "Fiscal policy" is a dog-whistle to lefties.

If it works, maybe the NDP will make you Bank of Canada Governor. You can even ride around in the Covernor's helicopter and pull the lever marked "Monetary Policy" which dispenses cash to the masses. The lever marked "Fiscal Policy" does the same thing but can only be used when the Minister of Finance is in the helicopter.

[Josh]

Nick,

My comments are here:

[link here NR]

[Phil Koop]

Nick, you seem to have posted this just a bit too soon to have read Steve Randy Waldman's latest: [link here NR]. Ships crossing in the night!

Here he proposes that the very wealthy hold most of their wealth as insurance, not as deferred consumption. He goes on to say that whereas the latter usage of wealth depends on absolute real value, the former is zero-sum, depending on relative value, and that consequently "there is no such thing as a Pareto improvement" because a transformation that leaves everyone better off in consumption terms at the price of compressing the difference between ranks would decrease the welfare of the very wealthy.

In SRW's view, the wealthy are likely to oppose any measure that increases their wealth if it damages their relative standing.

[Jacques René Giguère]

Phil Koop: I once read a book by Edward Luttwak

http://en.wikipedia.org/wiki/Edward_Luttwak

(don't remember which but I think it was

Coup d'État: a practical handbook

[link here NR]

[link here NR]

where he said IIRC : There are essentially two social models.Sweden: Maximum stability with maximum equality and minimum oppression. Haïti: maximum stability with minimum equality and maximum oppression.

[rsj]

The powerful monied interests need to demand a higher rate of interest, which only a looser monetary policy can achieve.

One possibility, in the eurozone the powerful monied interests want less progressive taxes, smaller government, lower pensions, and labor market de-regulation. But the eurozone has democratically elected governments who will not agree to this.

Therefore the powerful monied interest have captured the ECB. The ECB will not discount government bond debt at the policy rate until the governments agree to structural reform demands of the monied interests. What does it matter if the risk-free rate is 1%, if huge risk premiums are charged to all borrowers?

So there is already a game going on, in which the ECB ensures tight money for governments until the policy agenda of the monied interests is enacted.

J.W. Mason has a great article in which he points out that the ECB is giving all sorts of political advice to the governments:

[link here NR]

Yglesias follows up with "The Discipline and Punish" view of interest rates:

[link here NR]

You are asking that the ECB switch to a completely different game.

From the point of view of the monied interests, they look across the Atlantic at their North American peers, in which 40% of the wealth is owned by 1% of the people, and 93% of income gains regularly go to the top 1%, and think "why can't I have that?".

Whereas you are promising just a few extra points of GDP for the EMU as a whole.

[Steve Roth]

"The powerful monied interests need to demand a higher rate of interest, which only a looser monetary policy can achieve."

But that way (also/instead) lies inflation, the absolute bane of the monied interests, because it transfers shares of buying power from (a relatively smaller and highly influential number of) creditors to (a relatively larger but politically much weaker group of) debtors.

One extra point of (okay: unexpected) inflation transfers *hundreds of billions of dollars* of real buying power *per year* from creditors to debtors. 'Nuf to make "the monied interests" sit up and take notice...

And: isn't all (extra) inflation "unexpected," especially after a "great moderation" engineered via decades of monetary easing? We've got authoritative voices telling us to expect both (hyper)inflation and deflation. Eight Ball Sez: "The Future Is Unclear."

[Determinant]

What rsj said and his link to JW Mason. Like it sooooo much. And what Ritwik said. Where's the smiley for bowing down because I am not worthy?

[Morgan Warstler]

I find it hilarious that Nick thinks "pension plan" and "capitalist" belong in the same sentence.

Dear Nick, that's not capitalism. Please use my new definition to say what you mean.

[Nick Rowe]

Ah Morgan. I wondered when you would find this post. There are many definitions of "capitalist". The one I was using here, slightly tongue in cheek, is a person who derives part of his current or future income, directly or indirectly, from past saving.

[Ritwik]

Nick

Here you have it - why your capitalists are not ganging up.

http://www.ft.com/cms/s/0/b42950fc-dee0-11e1-b615-00144feab49a.html#axzz22m6bOWWW

They're too frigging scared. They don't want to invest in a world which they do not understand. They want smooth flows, predictable returns. All at low cost. They are the very antithesis of what Schumpeter held dear about capitalism, and for too long they have gotten away by predicting labour market catastrophe if their interests were not taken care of.

No longer, You don't get return unless you take risk. You don't get return for investing in a money market mutual fund, an absolute return fund, a capital protected note. You get return if you're Peter Thiel. You don't get return if you're GE. You get return if you're Apple. That's the way it should be.

The money demand has to come down. The natural rate on money has to go up. The risk has to be borne, and asset purchases will not help that.