"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister
"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."
- Daenerys Targaryen
"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"
- Tyrion Lannister
"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."
- Jorah Mormont
"These bad people are what I'm good at. Out talking them. Out thinking them."
- Tyrion Lannister
"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."
- Michael Barone
"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker
Saturday, January 24, 2015
Friday, January 23, 2015
And finally, QE is a little bit of a bailout, but not in the way that Germany's afraid of. Think about it like this: When a country buys its own bonds with newly printed money, it doesn't have to pay interest on that debt anymore. Now it still does, but this is just an accounting fiction. It's moving money from your right hand to your left hand, and then back again to your right. That's because the government pays the central bank the interest that's owed on the bonds, but the central bank turns around and gives the government all the money it just got paid.
As economist Paul De Grauwe points out, this wipes out each country's interest payments, so it's not as if Germany is bailing out everyone else. They're all bailing themselves out in equal measure. And this matters a lot for a country such as Italy, which would be running a surplus if not for all the interest it owes on its debt. Those payments, together with its still-shrinking economy, are why Italy's debt burden has actually increased despite all its austerity. QE will help this.
But it might be too little too late. Or maybe too late too little. It's hard to tell in Europe.
In his 1977 Nobel Lecture, as Marcus Nunes informed us a few days ago, Meade explicitly advocated targeting nominal GDP writing as follows:
I have told this particular story simply to make the point that the choice between fiscal action and monetary action must often depend upon basic policy issues which should certainly be the responsibility of the government rather than of any independent monetary authority. Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt.
So let me ask Nick the following: Was Meade right or left? And was he on the winning side or the losing side?James E. Meade
Thursday, January 22, 2015
Via Tony Yates
The best that is to be said for EZ QE is that will probably do no harm, and is worth a shot. Unless its labelling as ‘monetary socialism’ [Tweeted extract from German press, HT Mark Shieritz/Christian Odendahl] leads Northern politicians to redouble their opposition to good old fiscal ‘socialism’, which would, in fact, be a much better bet right now.We prioritize fiscal policy but understand it's a fiscal-monetary mix. NGDP path level targeting will highlight the failures of Kaleckian Central Banks who are in no rush to tighten labor markets.
We don't view it as giving money to the financial sector. We consider it to be the euthanasia of the rentier. They ration credit as to keep labor markets loose and wages stagnant.
- Very effective if it changes expectations of the future price level--that shakes rates rates of return significantly, and gives real people powerful incentives to spend their cash now.
- But setting up QE in such a way that it changes expectations of the future price level is difficult: the problem is that QE transactions are easily undone in the future, and there is every reason to think that an inflation-targeting central bank will undo them in the future.
- And if QE does not change expectations of the future price level its effects on real rates of return are minimal. READ MOAR
- It is a small plus.
- It might become part of a process that moves expectations and turns into a big plus.
- There is nothing else politically practical on the agenda that might be done that QE takes attention away from.
...First, QE is merely a correction for... the last two years... [when] the ECB withdrew about €1 trillion out of the euro-zone economy.... Second, the euro-zone economy is not getting off the ground.... Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds.... But... QE... is necessary but not sufficient. The fact that it is not sufficient, however, should not lead to the conclusion that it can be dispensed with....There is much misunderstanding and fear regarding QE, especially in Germany. There is the fear that... German taxpayers risk having to foot the bill.... [But] if... say the Italian government were to default... [it] would stop paying interest but at the same time (applying the 'juste retour') it would not get any interest refund... no fiscal transfers.... [Any] write down ]of] the Italian bonds... [would be] purely an accounting operation.... A central bank... does not need equity.... This confusion between accounting losses and real losses... has led to long hesitation to act... leads to bad ideas and wrong proposals...
Sunday, January 18, 2015
OK, arrived in Hong Kong, and IT is working a lot better. So let me weigh in a bit more on the Swiss miss. Basically, my take is the same as Brad DeLong’s: what we have here is a central bank that let itself be bullied by the balance sheet bugaboo brigade.
The way to think about the franc peg, I’d argue, is to view currency intervention as essentially a form of quantitative easing. What we mean by QE is open-market operations in which the central bank buys stuff other than the usual purchases of short-term government debt. This could be long-term assets, it could be private-sector debt, or it could be foreign securities. Obviously the channels of influence depend to some extent on which route you choose, although remember that the Fed was accused of waging currency war when it was only purchasing domestic assets, and the main clear effect of Abenomics so far has run through the exchange rate. But the main point is to think of any kind of non-Treasury-bill open market operation as a form of QE.
This in turn helps us put the explicit exchange rate target into the right slot: it was about making QE effective through commitment, so that you got the maximum impact on expectations. Actually, the success of the currency program suggests that other central banks might want to try things like setting a ceiling on some long-term interest rate.
But back to Switzerland: they had a policy that was working, so why did they stop? And the answer, Brad and I both suspect, is that the SNB, like the Fed, faced constant pressure from finance types saying “Your balance sheet is too big! Debasement! Inflation! Unnatural monetary acts! Francisco d’Anconia!” But unlike the Fed, the SNB lacked the intellectual self-confidence (and perhaps the institutional strength, seeing as how it’s partially privately owned) to stand up to that pressure.
The irony is that having been bullied into worrying about its own profitability, which is not what central banks should do, the SNB ended up imposing huge losses on itself. But that’s neither here nor there for Swiss national interests. The main thing is that the credibility essential to getting traction at the zero lower bound has been dissipated for Switzerland, and damaged for everyone else.
In an open economy setting, policymakers need to achieve two goals of macroeconomic stability, viz. internal and external balances. Internal balance is a state in which the economy is at its potential level of output, i.e., it maintains the full employment of a country’s resources and domestic price levels are stable.
External balance is attained when a country is running neither excessive current account deficit nor surplus (i.e., net exports are equal or close to zero). Attaining internal and external balances requires two independent policy tools (also see Swan diagram). One is expenditure changing policy and the other is expenditure switching policy.
Expenditure changing policy aims to affect income and employment with the goal of equating domestic expenditure or absorption and production and takes the form of fiscal or monetary policy. Expenditure switching is a macroeconomic policy that affects the composition of a country’s expenditure on foreign and domestic goods. More specifically it is a policy to balance a country’s current account by altering the composition of expenditures on foreign and domestic goods (see Balance of payments account). Not only does it affect current account balances, but it can influence total demand, and thereby the equilibrium output level.