Matt Nolan

Rate cuts: Not out of the realm of possibility

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I see that there is an article saying that another rate hike is unlikely in the near future – this is true.  If anything, uncertainty – both about the probability of a movement AND the direction of a movement is elevated.  I would not be putting a zero, or even a particularly small probability on a rate cut within the next two meetings.  Note:  I don’t expect one, I expect a lift by around March – and I think the Bank will probably have to move pretty quickly when they do.  But this point is still useful.

Why do I say a cut is possible?  Well it has less to do with the domestic economic situation, and more to do with this stemming from this.  If the Fed does start price level targeting, they will essentially be aiming for a pretty high near term value for inflation – which in turn will see their dollar tank.  If we take this as a broader part of a “currency war” our Reserve Bank would be acting well within their mandate, and likely in an optimal sense, by lowering the cash rate.  A higher dollar tightens monetary conditions (other things equal) and they will want to counter that.

Until we have some idea regarding what the hell the Fed is going to do there will be a huge amount of uncertainty regarding changes in the OCR.  And it isn’t the RBNZ’s fault, they will just be doing what they can given the situation thrust upon them from overseas.

Matt Nolan

Scott Sumner wins

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That is my impression of what is going on here (see Fed minutes too):

The Fed also said for the first time that it was considering targeting a path for the level of nominal gross domestic product as a way to increase price expectations.

And in case you aren’t sure who I’m talking about – Scott Sumner is the author of this excellent blog here, and has been pushing the NGDP target line for the entire crisis.  See the start of the blog in February 2009 – in the depths of the crisis.

While such a target doesn’t help in the face of a “supply side” shock, it does deal with “demand side” issues eg here.

Update:  His semi ‘celebration’ here.

Matt Nolan

Absolutes

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From Policy Progress:

The giveaway words are ‘believe’ and ‘completely’. Very absolute words, those. Generally to be avoided unless you have solid evidence.

Very true, it reminds me of an old quote:

Only a Sith deals in absolutes

Of course, this quote makes sense, given my view that economists share similarities with the Jedi in terms of:

  • our inconsistency,
  • our inability to agree,
  • our unwillingness to commit to a firm opinion,
  • (and yet) our absolutism when we are forced to make an opinion,
  • our deep sense of thinking we are saving the world by describing trade-offs,
  • our (debatable) sense of moral/general superiority over other social sciences,
  • and our cool lightsabers.

Now this is not to say that anyone is the Sith [as I’ve said before I like Bernard Hickey, I can’t imagine him getting red eyes and running round with a lightsaber hunting down economists] – as after all, if there is anything Star Wars teaches us it is that no matter the moral standpoint, a desire to provide absolute answers and view things in black and white terms is what drives people to evil.  Not the tag they live under.

So if this post had to have a conclusion [it was obviously just a reason for me to compare economists to Jedis again], it would be to not get annoyed at the “two-handed” economist – as their response is more honest, and fundamentally probably more useful in the long-term, then the response of someone who is willing to be “one-handed”.  The world is uncertain, and the economic method is just trying to shine a light on this uncertainty – not make your choices for you.

Matt Nolan

Nobel 2010

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Congratulations to Peter Diamond, Dale Mortensen, and Christopher Pissarides on being joint winners of the 2010 Nobel Prize in Economics.

I am stoked that Peter Diamond won this year – I was quietly rooting for him, especially after all this rubbish argument about whether he could be a Fed governor (of course he could be).  I avoided making him my pick for fear of jinxing him – so I happy 🙂 .  Although I have heard of Mortensen, I’ve never heard of Pissarides before – which is weird because it sounds like their best work was together!  I will make sure I educate myself this weekend.

Economist’s View (*), Paul Krugman, and Econlog have posts up.  Marginal Revolution’s coverage is excellent, with Tyler writing profiles on each of this year’s winners (Diamond, Mortenson, and Pissarides).

This year’s prize is very much a labour market prize – which is definitely topical given the seemingly unending elevated level of unemployment in the United States.  These authors have all done work describing why unemployment may not move back to its “natural rate” following a large shock – implying that we can’t necessarily expect a self-correcting process in the labour market EVEN IF we had fully flexible wages/prices.  It is an important lesson in the current environment – both in terms of trying to understand why unemployment can stay elevated, and IF there are any policies that can help the labour market in such a situation.

If the problem isn’t sticky wages, smashing unions (or even printing money) isn’t going to help us move out of a “bad” equilibrium in the labour market.  And even if you don’t care about the labour market – remember what the flip side is to higher equilibrium unemployment (in this type of situation), lower equilibrium output/income.

I imagine labour economists will be happy with this prize – I expect them to have a drink tonight to celebrate 😉

Matt Nolan

More on macro controls

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From Eric Crampton:

Because he personally has lost faith in modern portfolio theory, he wants to force all of us to invest locally. Yeah, things have been rough for the last few years. But the proposal here seems pretty worrying.

It is a great post – adding to the things I said here, so definitely give the whole thing a read.

When the environment changes, for some reason people want “control” – they want to feel like they can change what is going on for the better.  Although this is a noble goal, without trying to understand the underlying rationale and trade-offs associated with any choices, we are more than likely going to hurt people.

Fundamentally, I am willing to go out on the limb and say that, in this case, Bernard has no implicit model of the economy to base his policy prescriptions on – and so such prescriptions are both internally inconsistent and dangerous.  If he provides us with a model, and an actual description of why, I would gladly discuss it – but from the last few weeks of reading through his writing on the issue (I decided to pay more attention following the initial article – especially given that I was receiving a lot of pressure from others to respond) I have not yet ascertained what it is.

Markets fail, institutions fail, governments fail – let’s try to understand why before we arbitrarily play with them.  This is why economists struggle to understand why people fly off the rail like this, we see the point of our discipline as one of understanding and description – predictions are just an outcome from this process not the main goal (see lots of discussion on this issue).

Update:  Surprisingly related posts on Economist’s View and Marginal Revolution (*, and response).

On Economist’s View, the claim is made that “protectionism is instinct, as we struggle with non zero sum games”.  I have heard this before – and this explains why economics, and the actual functioning of the macroeconomy often seems “counter-intuitive”.  Introversion is essential for doing economics – but we have to be willing to question our intuition if it just doesn’t hold!

This is relevant, as I get the impression that many calls for macro-controls are on the basis of this instinct.

On Marginal Revolution there is a link to an article on the adjustment in the yuan.  Brad Delong’s reply also offers relevant points.  Overall, this illustrates that the true “concern” regarding currencies has existed for a while – and stems from currencies being fixed NOT from the fact that many monetary authorities are simultaneously devaluing now.  These issues need to be separated.

Matt Nolan

Race to the bottom actually race to the top

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Note:  The title should be premised with in the current extreme environment – I am not supporting the idea that we can have permanent income gains beyond potential from printing money, that would simply be inflationary.

A bunch of poppycock from Reuters on “currency wars” here.  I’ll let Scott Sumner discuss the fallacy here.

I have no idea where these guys are coming from.  A currency war causes everyone to lose?  Why is that Mr. Reich?  Because it leads to high inflation?  And what causes the high inflation?  Rising AD?  And what is the point of the fiscal stimulus you favor?  Higher AD?

Seriously, when people talk about “currency wars” do they recognise what the mechanism is that is used to lower the value of currency – well it is printing dollars.  If we truly do have “insufficient aggregate demand” this is what we want monetary authorities to be doing.  Far from being a “war” it is really co-operation …

Note:  The “imbalance view” stems from the relative exchange rates changing and prices being sticky – so that countries can sneakingly change their real exchange rate to favour exports or some such.  This structural issue is interesting – but criticising what seems to be a bunch of central banks loosening policy on these grounds misses the point.

Furthermore, lets not forget the impossible trinity here (*,*,*) – if we try to control the exchange rate we either lose control of the inflation rate, or we have to arbitrarily restrict capital flows (which is also costly – as by restricting capital flows the cost of capital will rise).  If we want to forget about the crisis and argue for a medium term strategic (arbitrary) fixed exchange rate target this is a separate issue to any near term “currency wars”.

Update:  Paul Krugman paints out the structural issue here.  Now note that the US and Europe could devalue, and they force China to devalue – so they all print more money and stimulate aggregate demand.  Ergo, we have a recovery.

The issue here is that the recovery is “unbalanced” because of the artificial shift in the relative prices faced by exporters/importers.  This issue existed before the economic crisis – and this is a trade issue.  However, the threats regarding this are as high as they have always been – I can’t remember a time that the US wasn’t trying to get China to shift its currency.

I would also note that if China is willing to lend its export income for a tiny (maybe even negative) rate of return to the countries buying its exports then it isn’t clear that they aren’t just f’ing themselves over to be honest …