Lately there’s been quite a bit of talk about how and whether the new Bank of Japan policy will succeed in pulling the country out of its self-inflicted 2-decade-long economic coma. A couple of days ago the Nikkei experienced its biggest drop since the Earthquake-Tsunami-Nuclear disaster back in 2011, falling by 7% in a single day. After rising over 70% in the 12 months before that. Big deal. Yet that’s not even really the main story here – what seems to be generally regarded as the beginning of the end, clear signs of a Ponzi scheme on top of a Ponzi scheme, is the fact that Japanese 10-year government bond yields had risen to over 1% for the first time since last year, which is supposed to be terrible news for a country with over 230% debt-to-GDP ratio. In other words, we’re all going to die! Or something like that.
This is pure gold, and that even though the US had just recently left the gold standard. Reading through a new article by Christina Romer (.pdf) i stumbled – on second look – upon a hilarious video made back in 1933 explaining money and the phenomenon of inflation. Thoroughly entertaining – including a lesson on how real economists draw their charts. “Sailors will soon again be able to afford a sweetheart in every port!” and “People are beginning to buy more steel, more automobiles, more gasoline, more clothes, more tires and MORE BEER!” – It’s all in there!
I would argue the Fed has proved, all things considered, to be led one of the most capable central bankers in history. Of the major central banks in the world, it has also shown that it understands how the economy works and what role it is supposed to play in it a great deal better than most others. I really enjoy reading about the thinking that goes on inside smaller central banks like the Swedish Riksbank, and some of the most creative thinking-out-loud by people actually wielding any power in the matter arguably comes out of those smaller central banks. But deciding how to run monetary policy for a small country like Sweden is, needless to say, something completely different than doing the same for the two largest economies in the world, the United States and the Eurozone.
Yet the Fed did not pass all tests presented to it with flying colors – quite the opposite. As I have mentioned before, the housing bubble crashed in 2006, and the real effects throughout the economy were not felt until the Fed decided to let NGDP growth collapse almost 2 years later. And by basically all conventional measures, monetary policy in the United States was also too tight compared to what was needed in the aftermath of the crisis. But it’s nothing compared to the colossal policy failure that the ECB represents. And what’s even more impressive is that the people in charge at the Fed are not ashamed of admitting their past failures. Over at Bloomberg we have William Dudley, the vice chairman of the Fed’s Open Market Committee, admitting that
“With the benefit of hindsight, we did not provide enough stimulus. Perhaps, if we had paid more attention to the persistent divergence between growth forecasts and outturns in Japan in the 1990s, we might have been more skeptical about the prospects for a strong economic recovery, even with a more aggressive monetary policy regime.”
Glad we cleared that up. Let’s not do it again. Again.
File this under attempts to clarify my own thoughts. Unions are a tricky topic in economics, particularly for someone of a liberal persuasion like myself. The essence of the issue seems to be that there are two basic freedoms involved, both of which are vital for the operation of a modern economy yet appear to be at odds with each other. The first one is the freedom to collaborate, to join in voluntary cooperation with other market participants if you deem this to be in your interest. The second is the freedom to compete, the need to create a level playing field where everyone has the same opportunities without being hindered by arbitrary market power. Should one be more important than the other? And if not, is there a way to find a middle ground that creates an acceptable balance?
There have been quite a bit of good monetary policy news coming out lately. I’ve written some posts about what I consider to be a tremendous failure of central banks all across the world to do their job in the recent crisis. Not all share equal blame, with the Fed and the Bank of England at least making it look like they are trying to get their respective economies moving again. And after more than 2 decades of slipping in and out of deflation, the Bank of Japan has impressively showed a couple of week backs that central banks are not, as is often argued, powerless once they reach the zero lower bound on interest rates.
While Mario Draghi did bring considerable positive change to the ECB, given the catastrophic levels of unemployment in southern Europe has generally left little room for praise. In a sense, the ECB has a harder time doing what it should be doing due to the rules under which it is forced to operate. Particularly its strict inflation target ties its hands even if it wanted to move to bring down unemployment. It also has the weird “feature” of not even being a really symmetrical inflation target, as any inflation target should be, with the ECBs policy being to keep “inflation below, but close to, 2% over the medium term”. Deviations to the downside should be considered as equally calling for action as deviations to the upside, yet in the past it has too often seemed that this was not the case. Recent actions seem to show that 5 years into the current crisis, the ECB is slowly but surely showing it is capable of learning new tricks. Still, the Eurozone remains in depression essentially because the ECB allows it to.
The recent years have been filled with heated discussions on the nature of bubbles and their effects on the real economy. Bubbles, of course, are generally considered to be episodes during which the price of an asset rises above what would be justified by looking at the “fundamentals” that are supposed to give the asset its price. They have been forming and bursting at least since Tulip Mania back in 1637, yet our understanding of this phenomenon remains fairly dismal. What seems to be certain, however, is that the bursting of large bubbles can have disastrous effects on the real economy, as seen most clearly by 1929’s stock market crash that led to the great depression, Japan’s asset price bubble in 1989 that lead to two lost decades, and most recently the housing bust that started in 2006 and the impact of which we now feel in what has been dubbed the great recession. There is only one problem with that story. It is not really true.
File this under Grover Norquist is an idiot. The issue might be a bit dated, but I still find it extremely interesting, in a sad way. Over at Wonkblog Neil Irwin had an interesting piece on the debate surrounding a proposal in congress that tries to make the tedious task of paying your income taxes in the United States a lot simpler. Obviously I am no American and have never had to file “a 1040” in my life, but it sounds painful. The basic idea was that instead of having to fill out every single detail in the tax return forms by yourself, the IRS would just fill in the basic information that it already knows anyways for you, such as how much you got paid by your employer, how much you earned in dividends from stocks or how much you paid in deductible home mortgage interest. For most people in America, their tax return would basically be done right there. Over the course of the years there indeed seem to have been several legislative proposals on the table intended to make exactly this a reality. Needless to say, they have not been very successful, yet opposition to the bills came from sources at least I would not have thought of or even expected.
Hilarious is probably not a term usually used to describe The Economist magazine. It is also entirely possible I also just have a weird sense of humor, but reading this article actually made me laugh out loud – and I’m also a huge fan of musicals in general.
It includes gems such as “Fagin, the pocket-picking villain from “Oliver!”, exerts a malign influence over François Hollande’s fiscal policy: “When I see someone rich/ Both my thumbs start to itch.” and “The same show (West Side Story) also has advice for Kim Jong Un, North Korea’s bellicose young despot: “Boy, boy, crazy boy/ Get cool, boy!/ Got a rocket in your pocket/ Keep coolly cool, boy!”.
Go read it if you find some time.
Over at Business Insider we find that Wall Street Journal reporter John Hilsenrath, who seems to be so well-connected to the Fed that it has earned him the nickname “Fed Wire”, has apparently been told that the Fed is discussing the end of its quantitative easing program. As he writes, the “focus is on managing unpredictable market expectations”. In his words, “officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.” None of that makes any sense at all. But first things first.
It’s been a while since the last post on this blog. 5 months and one day, to be exact. But we’re back! And it seems to be a good time to return. For anyone as interested in monetary economics as I am, we are probably experiencing the most fascinating real-world experiment in the field of monetary policy undertaken in recent history. It’s also all happening in one of the most unlikely places one might image: “how did a lost decade turn into two” Japan. The timing of it all is fascinating in and of itself, with pundits like Paul Krugman coming up with interesting analogies and what seem to be pretty convincing theories – Japan seems to have discovered its “moral equivalent of space aliens”. Indeed, even if one believes the threats of a rising China (with its enormous stake in international trade and thus peace in the region) are overblown, there is good reason to argue that Japan was scared out of complacency and into action after losing their spot as second biggest economy in the world. Oh, and the Tsunami thing, of course. Let’s just say times have been rough.