AV Club review of "In Control" from "The Americans."

In short, then, the long game The Americans is playing is about how two rival nations avoided starting World War III, when the odds were stacked against such a thing, and how that happened. At the same time, it’s about two people who have avoided seeing their marriage crumble, when the odds are stacked against such a thing. You can see where I’m going with this. 

“In Control” is the first episode of the show to play blatantly off of historical events, something that many TV period dramas try to avoid doing, particularly in the wake of Mad Men, which has mostly relegated the things we think of as “the ‘60s” off to the side. Now, since this is a show about Soviet spies and FBI agents in the ‘80s and it’s set in the Washington, D.C., area, the attempted assassination of Reagan by John Hinckley, Jr., couldn’t exactly pass by without comment. What’s fascinating to me is the way that the show erects an incredibly convincing false history around actual events (like Alexander Haig coming into possession of the nuclear football), then uses it to illuminate the marriage of Phillip and Elizabeth. I have some quibbles here, but I’m mostly just impressed with how good the plotting was.

early 90s exit strategy and the Fed vigilantes

Bond Vigilantes and the Power of Three by Krugman (12.24.12)

Matthew Yglesias picks up on a point I’ve tried to make at some length recently: the popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece, Greece I tell you, is incoherent. (Here’s a 2010 example from Alan Greenspan — the piece in which he declares it “regrettable” that the vigilantes haven’t yet attacked, but grudgingly concedes that low rates might persist “well into next year”, that is, into 2011. So what has he learned from the failure of his prophecy? Nothing, of course). It’s not just that there have so far been no signs of the bond vigilantes; it’s that even if for some reason the vigilantes did attack, it’s very hard to see how they could cause a recession in a country that retains its own currency and doesn’t have large amounts of debt denominated in foreign currency.[Krugman points to France in the 1920 in blogpost I haven't found yet*]

I’ve been trying to think about other ways to make this point, and also to help people understand the interest rate fluctuations we have actually experienced; here’s one stab at it. 

Think of a simplified world in which there are three kinds of assets: short-term securities, long-term government bonds, and foreign assets, as shown schematically here:

Individual investors can shuffle their portfolios among these three assets; however, asset prices will rise or fall to match supply and demand for each asset. What are these asset prices? Well, there are three prices that might do the job: short-term interest rates, long-term interest rates, and the exchange rate. At any given time, however, one of these is fixed, leaving it up to the other two to do the adjusting. Which two? That depends on the monetary regime, as I’ll now explain. 

The United States has independent monetary policy and a floating exchange rate. The Fed uses its independence to set the short-term interest rate, basically at zero these days. So long-term rates and the exchange rate do the adjusting. 

Now, there have been some sizable fluctuations in long-term rates over the past few years, and every time those rates have gone up there have been press reports claiming that they are about debt fears. In reality, however, it’s quite clear that the driving force has been fluctuating optimism about the prospects for recovery, and hence for an eventual rise in short-term rates.
If you think short-term rates are heading up, then other things equal long-term bonds become less attractive; better to park your money and wait for better yields. So the desired portfolio shift looks like this:

In such a case long-term rates rise – but because this rise is driven by greater optimism about the future, it’s hard to see how it can have a contractionary effect on the economy. 

Incidentally, this seems to me to be a big problem with the story Brad DeLong tells about bond vigilantes in the very early 1990s. He argues that the wide gap between short-term and long-term rates reflected market expectations that deficits would eventually cause higher inflation, which in turn would cause the Fed to raise rates. This could be true. But why would such expectations be a drag on the economy? Yes, nominal rates would be higher than otherwise; but real rates would, if anything, be lower. It’s not at all easy to tell a coherent story in which the effect of future expected deficits on today’s interest rates is contractionary – I know, because I’ve tried. 

Now, the big fear now is that we’ll have a quite different type of vigilante attack, in which fear of default leads to a general flight from our nation’s assets, sort of like this:

How does this play out? 

Well, if you’re Greece, the exchange rate is fixed – or actually nonexistent, because you don’t have your own currency. So what happens is that both short-term and long-term interest rates rise. How can short-term rates shoot up, when there is also a relationship between the quantity of money and short-term rates (which is why central banks can peg these rates)? The answer is that as funds flee the country, the money supply plunges. Here’s what happened to Greek M1: 

Source. 

But that can’t happen in the United States, where the Fed retains control over the money supply and of short-term interest rates. So what would happen instead would be a plunge in the exchange rate. And this would actually have an expansionary effect on the U.S. economy. 

The point is that the analogy with Greece is just completely wrong; the difference in our monetary positions means that even if the bond vigilantes did attack, they would probably help, not hurt, our economy in the short run.

Krugman won't go as far as the MMTers and says we can mint as many trillion dollar coins as we want with little consequence.

Fed vigilantes

DeLong from December 2012:

But then I think Paul falls into a degree of heresy and error:

[Sarah] Kliff… emphasizing in particular how MacGuineas was “fascinated” by the supposed attack of the bond vigilantes in the early 1990s – a period when there was, indeed, a sharp rise in long-term interest rates. This prompts Matt Yglesias to ask a very good question… how sure are we that there really were any vigilantes back then?… 

[O]ne way to tell what’s driving interest rates over any given period is to look at what was happening to other asset prices…. If rates have risen because investors fear default and fiscal chaos, stock prices should plunge. Did this happen during the supposed vigilante attack of the 1990s? 

Well, no. 

What really happened in 1994? The economy was starting to recover (it was actually adding 300,000 jobs a month for a while), and investors expected the Fed to tighten a lot. Clearly, they overreacted. But the events don’t bear the “signature” of an attack driven by debt fears. 

Let me make two comments. 

First, what was going on in 1994--and what those of us working in the Treasury and watching the Federal Reserve and the financial markets thought was going on--was not an attack of bond-market vigilantes terrified of rising debt and the prospect of explicit default or implicit default through rapid inflation. The Federal Reserve had undertaken a long easing from 1990 through the mid-1992 unemployment rate peak. But then, as unemployment started to decline, the Federal Reserve held off on tightening: it was expecting the passage of the deficit-reducing Clinton 1993 Reconciliation Bill--OBRA 19930--and believed that the spending cuts and tax increases in that were sufficient. In early 1994, however, the Federal Reserve concluded that it was time for monetary tightening, and began to gradually raise short-term safe interest rates by selling off some of its bonds for cash. 

We in the Treasury--and the staff at the Federal Reserve--had expected the reaction of the long-term bond market to this Fed tightening cycle to be modest. Between 1990 and 1994 the Federal Reserve had reduced short-term interest rates by 5%, and as it had done so long-term rates had fallen by 3%. We attributed 1.75% of that long-term interest rate reduction to the reduced current and expected future federal deficits as a result of Clinton's OBRA 1993 and the earlier Foley-Mitchell-Bush OBRA 1990, leaving 1.25% to be the reaction of the long-term bond market to lower short-term interest rates. Thus as the Federal Reserve raised short-term safe interest rates from 3% to 6%, we expected a quarter of that to show up as a rise in long-term rates--we expected to see them go from 6% to 6.75%. 

Instead, in 1994 long-term bond rates rose from 6% to 8%.  

In the end we attributed the excess rise in long-term bond rates in 1994 to two factors:
As interest rates rose, the duration of Mortgage Backed Securities lengthened--people weren't refinancing their houses any more. MBS thus became much longer duration securities--there was a much greater supply of long-term bonds in the market--and by supply and demand that pushed the prices of such bonds down until investment banks could figure out how to tap more risk-bearing capacity to hold those bonds. 

Nobody was sure that the Federal Reserve was going to stop raising short-term safe interest rates when they hit 6%. In the late 1980s, after all, they had not stopped until short-term interest rates hit 8%. Without effective forward guidance from the Federal Reserve, the bond market was pricing in a larger tightening than seemed likely to us. 

We were, I think, completely correct. By mid-1995 it was clear that the Federal Reserve had reached the end of its tightening cycle and more money had flowed into the long-term bond market to hold attractively-priced MBS, and the long bond rate fell back into the trading range we had anticipated--and then fell some more. 

So: 1994 was an interesting lesson on the importance of clear Federal Reserve forward guidance in avoiding excess bond-market volatility and on the consequences of endogenous duration for the short-term pricing of complex securities, but it was not an example of bond-market vigilantes fearing higher deficits and default or inflation riding over the horizon. The federal deficit was under control and rapidly shrinking in 1994 as the combination of the business-cycle recovery and Clinton's OBRA 1993 worked even better than we had anticipated. 

Second, there had been an attack--or, rather, not an attack but rather bond-market vigilantes visible on the horizon and gunshots in the air--earlier. 

Throughout 1992 there was a 4%-point gap between the 3-Month Treasury rate and the 10-Year Treasury rate. Those of us in the Clinton-administration-to-be read this as market expectations that the uncontrolled federal budget deficit would lead people to expect higher inflation and the Federal Reserve would then feel itself forced to raise short-term interest rates far and fast in order to hit the economy on the head with a brick and keep those expectations of higher inflation from coming true. The result would be a low-investment and perhaps a jobless recovery. [The Fed would be wrong as Matt says?] The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 

That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes. 

I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any Federal Reserve decision that it needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right. 

But that was then, with a 4%-point gap between 10-Yr and 3-Mo Treasury yields. 

Today we only have a 1.6%-point gap between 10-Yr and 3-Mo Treasury yields. 

1.6% < 4% 

[2 charts missing, see link]

So they did deficit reduction so that the Fed wouldn't cause a jobless recovery?

The deficit was -4 to -5 percent of GDP AND A RESULT OF THE DOWNTURN. (See today) As the recovery occured, the deficit would come down, as it did. In 2012 "The gap between government receipts and government spending — about 7 percent of economic output in the 2012 fiscal year, down from 8.7 percent in the 2011 fiscal year — has become a heated election-year political issue." It will go down when (if) the recovery occurs. The Fed would have been wrong to create a jobless recovery because Clinton didn't act on the deficit.

Commenter Gobanain writes:

I was working in the fixed income division of a leading investment bank sometimes thought of as an aquatic creature at the time. It took us a while to work out what was happening, but eventually we decided that the Fed and markets had built up a feedback loop. The Fed tightened. Bonds sold off partly as an automatic eaction but also because markets thought the Fed might know something. The Fed tightened again; markets thought the Fed must know something about inflation, so bonds sold off. Commodity prices were rising, so the Fed worried that might impact on inflation (in Europe the first central bank to hike was Sweden, and they actually cited coffee prices as the reason.) Some big hedge funds decided to go short bonds long commodities. And then the loop completed. The Fed decided that the market must know something it didn't know, so it raided rates. Markets felt the Fed must know something really bad and was intending more hikes so bonds sold off. 

Greenspan later admitted that some of the Fed hikes had not been necessary. They had been counter-productive. The Fed was raising rates because the bond market was selling off. The bond market was selling off because the Fed was raising rates. No one cared at all what was happening to the deficit.

 I often wonder if the "Fixed income" lobby is one of those groups leading the charge against inflation and activist monetary policy.

Yield Curve

3 unanswered questions

Related to this post on "turning the corner" and breaking the Republican fever, the third question is Japan and Abenomics.

Abe vs Aso: The Most Important Policy Debate in the World Is Happening in Japan by Yglesias

just around the corner

Forecasters keep thinking there’s a recovery just around the corner. They’re always wrong. by Neil Irwin

(via Thoma)

Consider, for example, the Fed’s projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012. 

What’s amazing is that the Fed’s newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015. 

This isn’t meant to pick on the Fed; the same is true of other forecasters both in the government and the private sector. The Economic Policy Institute captured the CBO’s proclivity for projecting growth just around the corner in the chart below, from a briefing paper released last week. Essentially, this shows how as the years have passed, the CBO just keeps pushing back the timing of a genuine recovery—the time when the U.S. economy’s output has returned to the agency’s estimate of its potential—further and further. In early 2009, the CBO thought we would be back to full employment right about now; in their outlook released earlier this month, that was more like 2016 or 2017. 

Source: Economic Policy Institute 

The overly optimistic forecasts have rested on one crucial assumption: That if we can just get through this rough patch, the natural forces of economic regeneration will assert themselves, and growth will snap back into place....

However, Goldman Sachs's Hatzius is predicting recovery in 2013H2 and 2014. He called the housing bubble and has a model based on sectoral balances: private sector and government leveraging and deleveraging.

backstopping sans regulation

Equipping the Fed for a Future Crisis by Binyamin Appelbaum

Mr. Dudley’s concern is about a little-noticed piece of the 2010 Dodd-Frank Act that actually reduced the central bank’s authority in one crucial area: its ability to provide emergency funding to strapped financial firms. 

The Fed arrested the 2008 financial crisis by using this authority to create a series of unprecedented programs that offered emergency financing not just to American banks – its traditional flock – but also to foreign banks, and not just to banks but to other kinds of financial companies as well, and indeed to other kinds of companies entirely. 

Congress responded to this performance by making it difficult to repeat. Dodd-Frank imposed new restrictions on the Fed’s ability to make emergency loans, or to keep money flowing, outside the banking industry. 

One basic reason was that Congress had never really intended to give the Fed such broad power in the first place. Rather remarkably, the authority that the Fed used to save the financial system in 2008 was granted by Congress in 1991 with almost no debate or public notice, a story I first told in The Washington Post in 2009. It was quietly slipped into a broader bill by former Senator Christopher Dodd of Connecticut, at the behest of Wall Street companies including Goldman Sachs. When it was first used almost two decades later, legislators like Representative Barney Frank confessed that they didn’t know they had voted for it.

The problem was that Clinton, Rubin, Summers and Democrats like Dodd allowed the rise of an unregulated shadow banking system. Granted they were facing a Republican Congress but Senators like Dodd are creatures of the financial industry, bought and paid for.

(via Thoma)

"edit war"

Fine Austrian Whines by Krugman

Andrew Leonard:

There’s a lockdown on the Wikipedia page for Austrian economics and wouldn’t you know it, one or way or another, it all seems to be Paul Krugman’s fault. 

… 

For more detail, you can go, of course, to the Wikipedia page for Austrian economics. But until at least Feb. 28, if you do so, you will find that the page “is currently protected from editing.” An “edit war” has been raging behind the scenes. Two factions were repeatedly deleting and replacing a section of text that had to do with a description of a critique of Austrian economics made by economist Paul Krugman.

Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot. And as with all cults, the failure of prophecy — in this case, the prophecy of soaring inflation from deficits and monetary expansion — only strengthens the determination of the faithful to uphold the faith. 

It would be sort of funny if it weren’t for the fact that this cult has large influence within the GOP.

mommy-daddy wars (Malcolm and Martin) continued

From this post.

It would be nice if DeLong could have "shown his work" on how they came up with the counterfactuals.

Andy Harless comments:

Empirically I have to call this for Dean. Take the real 10-year yield at the end of the last quarter before the election, using the Philadelphia Fed Survey of Professional Forecasters 10-year expected inflation rate. In 1992, the real yield was 2.6% (6.4-3.8). In 2000, it was 3.3% (5.8-2.5). Obviously, you could choose the dates differently and get a different answer, but it's hard to imagine that there's strong evidence of declining real yields when my first cut shows them increasing. And I don't think you can use projections if those projections are based on models in which crowding out has large effects on interest rates. 

However, (1) everyone should realize that interest rates are endogenous, and I'm not sure the long run elasticity of investment demand with respect to the interest rate is very large, (2) it's obvious if you remember the late 1990's that there is dynamic, multiple equilibrium kind of stuff going on here, and I think interest rate comparisons are missing the important part of the story.

and

...or rather, I should say, "I think the long run elasticity of investment demand with respect to the interest rate MAY BE quite large" (not the opposite). But "long run elasticity" is really an attempt to shoehorn my subsequent point into a simple comparative static context. You don't ultimately need to "bring down interest rates" in order to "make it easier for the private sector to invest and grow," you just need to make the resources available. The interest rate would be the signal through which this process is transmitted, but given the weird dynamics and multiple equilibria, it's not clear to me that the interest rate should end up much lower than where it started.

Really this is a discussion of the bond vigilantes who the rightwing argues will punish Obama for turning us into Greece. Or is the "confidence fairy" with the discussion of prodding the private sector to invest and grow?

Continuum is a pretty left-wing show or at least explores left-wing themes. By the year 2077, corporations have taken over North America, created a "Corporate Congress," and rewritten history. There are food riots as Jean-Luc Picard's communist society, one free from wants and the "need of money," has not taken shape. Instead the government runs an undemocratic, high-tech surveillance-police state. The lead role of Keira Cameron is played by Rachel Nichols, whose green alien hooked up with James T. Kirk in 2009's "Star Trek."

Last night's episode had some Occupy protests in present day Vancouver. Although it didn't portray the protesters in the best light. Some rioted after provocateurs stirred them up with breaking windows. Although some of the more peaceable hippy ones looked on in horror. The protesters rioted when free money has given out also.

One of the main characters, a cop, called them harmless hippies.

"Contiuum" has returned for a second season in Canada. (Its first season is currently being run on the SyFy channel.)

Zombie Marx

MIKE BEGGS: "ON THE POINT AT ISSUE, [DELONG] WAS RIGHT": YET MORE FAMA'S FALLACY FRESHMAN MACROECONOMIC MISTAKES WEBLOGGING by DeLong

I see that today, in the Journal of Australian Political Economy, Mike Beggs has taken his 2011 Jacobin essay up to the top of the Temple of Huitzilpochtil, ripped its heart out with an obsidian knife, and left it dead on the ground. The most important paragraph--and my favorite paragraph--is missing. The paragraph reads, as Beggs evaluates my critique of David Harvey's word-salad:

[O]n the point at issue, [whether boosting government spending would boost employment, DeLong] was right – it is a question of interest rates, not of the number of bonds that can be sold. When Harvey went on to clarify his argument, it was only with some casual empiricism of his own. He noted that he was hardly the only one to be making the argument that East Asian central banks could stop collecting US Treasuries, so that “the track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).” This was an argument you could read in mainstream business pages; there was nothing particularly Marxist about it. Now that we are more than a couple of years down the track, DeLong still looks right: the yields on long-term Treasury bonds are, as I write in July 2011, about the same as they were in February 2009, when the exchange took place. The limits to stimulus have been political, not financial.

On this earlier post, I guess it matters what the output gap was. Deficit spending would be worthwhile in 92-94 if there was an output gap, no?

Data from the IMF:

Output gap in percent of potential GDP
Percent of potential GDP

1991         1992         1993         1994         1995         1996         1997              
-2.160     -1.370      -1.156         0.067       -0.292       0.347        1.607 

Currency Wars

Draghi Seeks to Ease Talk of Global Currency War

Over the last few years, emerging-market countries like Brazil have openly accused slow-growing advanced countries like the United States of unfairly pushing down the value of their currencies with their aggressive monetary policies. And, for years, the United States has accused export-reliant emerging economies, in particular China, of manipulating their currencies, too. 

More recently, in Japan, stimulus programs backed by the newly elected prime minister, Shinzo Abe, have kept interest rates near zero and flooded the economy with money, which has reduced the cost of Japanese products around the world.

China has capital controls which prevent inflation and "hot money." It has a trade surplus. It intervenes in foreign exchange markets by buying U.S. Treasuries. That's manipulation. This article neglects to mention this info.

The U.S. has a trade deficit and a large output gap. It's reasonable to try to stimulate the economy after a financial crisis. A stronger U.S. economy will be able to buy more exports from countries like Brazil.

daddy-mommy (Martin & Malcolm) wars continued.

CROWDING-IN AND RAPID GROWTH IN THE 1990S: DEAN BAKER GETS ONE WRONG, I THINK by DeLong

Dean Baker writes:

Can We Cut the Crap on Robert Rubin and Deficit Reduction?: Ezra Klei… feed[s] this myth when he tells us of the great virtue of deficit reduction in the Clinton years.

"Back in the 1990s, we knew why we feared deficits. They raised interest rates and “crowded out” private borrowing. This wasn’t an abstract concern. In 1991, the interest rate on 10-year Treasurys was 7.86 percent. That meant the interest rate for private borrowing was, for the most part, much higher, choking off investment and economic growth. Enter Clintonomics. The theory was simple: Bring down deficits, and you’d bring down interest rates. Bring down interest rates, and you’d make it easier for the private sector to invest and grow. Make it easier for the private sector to invest and grow, and the economy would boom. The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. 'The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,' Treasury Secretary Robert Rubin said in 1998."

Okay, fans of intro economics know that it is the real interest -- the difference between the nominal interest rate and the inflation rate -- that matters for investment, not the nominal interest rate. The inflation rate in the first half of 1991 was over 5.0 percent. This means that the real interest rate -- the rate that all economists understand is relevant for growth -- around 2.5 percent… [in] the last half year of the Clinton administration (and not some cherry picked low-point) the interest rate on 10-year Treasury bonds averaged around 5.7 percent. The inflation rate for the second half of 2000 averaged around 3.5 percent. This gives us a a real interest rate of 2.2 percent (5.7 percent minus 3.5 percent equals 2.2 percent). So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity?

The actual inflation rate in 1991 was 5%/year, but the expected inflation rate over the next decade was more like 3%/year. We are not talking about an 0.3 percentage-point decline in real interest rates, but rather about a 2.3 percentage-point decline in real interest rates. Moreover, back in 1992 when we unwound the yield curve and projected interest rates in the future we saw nominal interest rates has highly likely to rise unless the deficit was substantially reduced. The 2000 we were looking forward at had forecast nominal interest rates of not 7.86%/year but 10%/year or so--a real interest rate of 7%/year. 

The counterfactual for 2010 is thus different not by 0.3 percentage-points but by 4.8 percentage-points. That is a much bigger deal. 

How big a deal? Enough to boost the growth rate of potential output by between 0.5 and 1.0 percentage points per year, in my estimation…

Baker's math: 1991 real interest rate was 2.5 % (7.86% on 10yr - 5% inflation)
                      2000 real interest rate was 2.2 % (5.7% on 10yr - 3.5% inflation)

Interest rates were lowered by .3 precent over 8 years b/c of the confidence inspired by Clinton's deficit cutting (or rather by Greenspan's monetary policy which could have been tighter if Clinton had enacted his middle class spending bill.)

DeLong's math counterfactual: 1991 real interest rate was 2.5 % (7.86% on 10yr - 5% inflation)
                                              2000 real interest rate was 7 % (10% on 10yr - 3% inflation)

So they estimated they would have gotten 7 if Clinton had done his middle class spending bill. Greenspan would have raised rates to 10 percent? Really?

 7 - 2.2 = 4.8 lowering of rates over 8 years. Boost growth rate of potential output by .5 and 1.0 percent if they had not done deficit reduction?

Two questions: Is the 10 percent nominal rate with 3 percent inflation rate forecast accurate? (How is that determined? Growth would have been higher with higher deficits erasing the growth rate of potential outup. Did this factor into determining the boost in the growth rate by private sector output. Did they predict the Internet productivity growth which led Greenspan to keep rates low or the international crises which caused Greenspan to keep rates low?

Also we got the stock/tech bubble in 2000. Even if DeLong is correct, Klein's story of 10 year Treasury interest rates going from 7.86 to 5.26 isn't accurate.

This debate reminds one of how complicated macro is and why economic forescasts are usually wrong.

What if Clinton had pushed through his middle class spending bill and replaced Greenspan? Clinton should have pulled a Shinzo Abe.

Forecasting 10 percent interest rates on 10 year Treasuries with 3 percent inflation is fearing the bond vigilantes.

AV Club review of "All I Ever Wanted" from "Enlightened."

Cultural signifiers at Jeff Flender's (Dermot Mulroney) apartment: Wilco poster, "Manufacturing Consent" by Chomsky, and "A People's History of the U.S." by Howard Zinn.

 M83 | Midnight City from DIVISION on Vimeo.

Joe Weisenthal

Business Insider Names Executive Editor

Nate Silver intervied Henry Blodget  for "The Signal and the Noise."

2 unresolved questions

Helicopters can be dangerous by Gavyn Davies

(via Thoma)

Will McBride and Goldman's Hatzius be correct in their prediction that we'll see a pickup in growth in 2013H2 and 2014? Or will Waldman be correct and the Fed won't have to use an "exit strategy" for the indefinite future?

The negative view usually pans out. However after the lame recovery of 90-92, 1990s job growth was good with the stock/tech bubble and accomodative Fed policy.

After flirting with deflation in 2003, the 2000s saw $8 trillion in housing bubble wealth and low unemployment despite poor job growth. Unemployment didn't go up until 2008.

So the pattern is a shampoo economy with bubble and bust. Not unsurprising given the enactment of rightwing polices.

Question two is the fate of the Republican party. Demographics are against them. Tea Partiers are sabotaging primaries. They caved on the debt ceiling clown show. They are suffering from epistemic closure with Marco Rubio insisting that Fannie and Freddie caused the housing bubble and financial crisis. They still hold the House. They filibustered Hagel. Obamacare is law. Obama will nominate a new Fed chair next January. (Republican will filibuster.) He might get another Supreme Court judge. Will Obama break the Republican fever? History suggests they'll need a long time in the wilderness.

mommy-daddy wars continued (or Martin and Malcom)

Krugman can play the insider though. (see last post). He was for Hillary over Obama. He pushes the Clinton-years-were-awesome / Bush-years-sucked-partisan-theory-line.

The Great Dollar Decline by Krugman

What you see right away is that the dollar fluctuates a lot, so impressions of big decline depend a lot on your starting point. Think of it this way: maybe the question isn’t why the dollar fell so much during the Bush years, but rather why it was so strong during the late Clinton years. (The tech boom/bubble is an obvious answer).

Baker would say Rubin/Clinton had a strong dollar policy. Krugman knows governments can have policies regarding the strength of their currencies.

So: the euro was extraordinarily weak in the early 2000s (which I remember from a wonderful bike trip in Burgundy), reflecting teething troubles with the new currency. It recovered, and has stayed strong despite the crisis because of the refusal of the European Central Bank to match the easing of other central banks. Canada, meanwhile, saw its currency rise along with a great commodity boom.

Did Bush have a weak dollar policy?

I believe Krugman is correct regarding MMT.

Gavyn Davies provides the link. Davies fails to mention Professor Bernanke on Japan. And Waldman may be right that we'll be at the ZLB for a long time.

I want mommy and daddy to stop fighting (covers ears)

I tend to side with Baker here even though I agree with both DeLong and Baker 99 percent of the time and they are good about the data and history in my view. There's always the suspicion, which is perhaps unfair, that DeLong is biased by his time at Treasury. Then there's the counter accusation that Baker is harder on Clinton and Obama than he needs to be because, well because he's an outsider and a curmudgeon or something. (same goes for Krugman)

Can We Cut the Crap on Robert Rubin and Deficit Reduction by Dean Baker

Robert Rubin is best known as the man who pocketed more than $100 million as a top Citigroup honcho as it played a central role in pumping up the housing bubble that sank the economy. However, because of the incompetence (corruption?) of the Washington media, he is much better known as a great hero of economic policy.

Ezra Klein helps to feed this myth when he tells us of the great virtue of deficit reduction in the Clinton years.

Klein may have been influenced by this:

BACK WHEN I FEARED THE BOND-MARKET VIGILANTES: MAUNDERING OLD-TIMER REMINISCENCE WEBLOGGING by DeLong

We in the Treasury--and the staff at the Federal Reserve--had expected the reaction of the long-term bond market to this Fed tightening cycle to be modest. Between 1990 and 1994 the Federal Reserve had reduced short-term interest rates by 5%, and as it had done so long-term rates had fallen by 3%. We attributed 1.75% of that long-term interest rate reduction to the reduced current and expected future federal deficits as a result of Clinton's OBRA 1993 and the earlier Foley-Mitchell-Bush OBRA 1990, leaving 1.25% to be the reaction of the long-term bond market to lower short-term interest rates. Thus as the Federal Reserve raised short-term safe interest rates from 3% to 6%, we expected a quarter of that to show up as a rise in long-term rates--we expected to see them go from 6% to 6.75%. 

Instead, in 1994 long-term bond rates rose from 6% to 8%. 

In the end we attributed the excess rise in long-term bond rates in 1994 to two factors:

1. As interest rates rose, the duration of Mortgage Backed Securities lengthened--people weren't refinancing their houses any more. MBS thus became much longer duration securities--there was a much greater supply of long-term bonds in the market--and by supply and demand that pushed the prices of such bonds down until investment banks could figure out how to tap more risk-bearing capacity to hold those bonds. 
2. Nobody was sure that the Federal Reserve was going to stop raising short-term safe interest rates when they hit 6%. In the late 1980s, after all, they had not stopped until short-term interest rates hit 8%. Without effective forward guidance from the Federal Reserve, the bond market was pricing in a larger tightening than seemed likely to us. 

We were, I think, completely correct. By mid-1995 it was clear that the Federal Reserve had reached the end of its tightening cycle and more money had flowed into the long-term bond market to hold attractively-priced MBS, and the long bond rate fell back into the trading range we had anticipated--and then fell some more. 

So: 1994 was an interesting lesson on the importance of clear Federal Reserve forward guidance in avoiding excess bond-market volatility and on the consequences of endogenous duration for the short-term pricing of complex securities, but it was not an example of bond-market vigilantes fearing higher deficits and default or inflation riding over the horizon. The federal deficit was under control and rapidly shrinking in 1994 as the combination of the business-cycle recovery and Clinton's OBRA 1993 worked even better than we had anticipated. 

Second, there had been an attack--or, rather, not an attack but rather bond-market vigilantes visible on the horizon and gunshots in the air--earlier. 

Throughout 1992 there was a 4%-point gap between the 3-Month Treasury rate and the 10-Year Treasury rate. Those of us in the Clinton-administration-to-be read this as market expectations that the uncontrolled federal budget deficit would lead people to expect higher inflation and the Federal Reserve would then feel itself forced to raise short-term interest rates far and fast in order to hit the economy on the head with a brick and keep those expectations of higher inflation from coming true. The result would be a low-investment and perhaps a jobless recovery. The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 

That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes. 

I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any Federal Reserve decision that it needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right.

The Climb and the Ladder of Chaos

That's Lord Petyr Baelish aka Littlefinger speaking. It's what Eric Cantor is thinking as he maneuvers to take over from Boehner.

In the mythos of Westeros there's a prophecy of a three headed dragon which will save the world. This is taken by fans to mean that three of the protagonists will join forces as dragon-riding saviors against The Others. Daenerys does have three dragons. Could they be the first three pictured here: Daenerys, Tyrion, and Sansa? (Of the Targaryen, Lannister, and Stark houses respectively.) What of Stannis? Or Daenerys's nephew Aegon?

Stanley Fischer for Fed Chair? by Dean Baker

Dylan Matthews has an interesting column discussing former M.I.T. professor Stanley Fischer's career in the context of the possibility of him replacing Ben Bernanke as Fed chair in the fall. There are a couple of important items that are not mentioned in this discussion. 

First, Matthews notes the central role that Fischer played in the I.M.F.'s resolution of the East Asian financial crisis. While this discussion might lead readers to believe the resolution was a success, this crisis actually marked a turning point that led to the major imbalances of the next decade. 

Prior to the crisis there were substantial capital flows from rich countries to poor countries, as textbook economics would predict. However as an outcome of the crisis developing countries began to accumulate massive amounts of foreign exchanges reserves, presumably to avoid ever having to be in the same situation as the East Asian countries were placed when they had to deal with the I.M.F. in the crisis. 

This led to a huge rise in the value of the dollar and large trade deficits. The gap in demand created by the trade deficit with developing countries was filled in the United States by the housing bubble. The predictable outcome of this situation was the collapse in 2007-09, which is likely cost the country close to $10 trillion in lost output before the economy fully recovers. 

This raises the more general point that Fischer is one of the pillars of the school of thought that central banks should target 2.0 percent inflation and otherwise do nothing. If it is in principle possible for an economic theory to be refuted by evidence, this view of the optimal monetary policy has been decisively discredited.

These items may affect how people would view Stanley Fischer's qualifications as a candidate for Fed chair. 

The piece also gets one other important item wrong. It contrasts the ability of Israel (where Fischer now runs the central bank) as a small country to devalue its currency with the United States, as the holder of the world's reserve currency. 

"If Bernanke halved the value of the dollar relative to, say, the Chinese yuan, that would dramatically increase U.S. exports and probably economic growth, too, but it would also wreak havoc with the global financial system. Every dollar-denominated asset in the world, including all manner of bonds, would plummet in value." 

Actually this is very far from being the case. Most holders of dollar denominated assets are not hugely interested in the value of their assets measured in yuan. (Quick, how many yuan is your 401(k) worth?) While the repercussions of a large fall in the value of the dollar against one or more major currencies are certainly greater than the fall of the Israeli shekel, it is certainly not obvious that a major reduction in its value would have disastrous consequences. In fact, over time it is virtually inevitable.

Stan Fischer saved Israel’s economy. Can he save America’s? by Dylan Matthews

As a professor at MIT — arguably the best economics department in the world — he helped found a school of economic thought that has come to dominate departments across the country. He also advised an all-star crew of grad students who went on top jobs in the policy world, including Bernanke, European Central Bank President Mario Draghi and former chief White House economist Greg Mankiw.

Umm, I'd rather it be Janet Yellen or Christina Romer.

Fischer left the IMF in late 2001, and some months later joined Citigroup in New York as a vice president. Three years into that role, in 2005, he was offered the post of governor of the Bank of Israel. At the time, Israel’s central bank was highly centralized at the time, with the governor had having near-absolute power to pursue whatever policy course he wished. Fischer accepted. Though he did not relinquish the U.S. citizenship he had held since 1976, he became an Israeli citizen upon arrival, in accordance with the law of return for non-Israeli Jews.

Citigroup should have been nationalized. It's too bad Geithner slow-walked Obama's request.

Big central banks tend to be cautious about using that lever. If Bernanke halved the value of the dollar relative to, say, the Chinese yuan, that would dramatically increase U.S. exports and probably economic growth, too, but it would also wreak havoc with the global financial system. Every dollar-denominated asset in the world, including all manner of bonds, would plummet in value. 

It’s less risky for small countries. There aren’t massive piles of shekels lying around in other countries as the way there are with dollars and euros, and Fischer took advantage of that fact. On May 30, 2008, a dollar was worth about 3.2 shekels. On March 6, 2009, it was worth 4.2 shekels. In less than a year, Fischer had reduced the value of the shekel by about 25 percent — a massive devaluation. 

It worked. Exports soared, and 2008’s trade deficit of $2 billion became 2009’s trade surplus of $5 billion. While other countries fell deeper into recession, Israel brushed its shoulders off.

Devaluing the dollar by 25 percent would be benefical.

It would be unprecedented for the United States to appoint someone from abroad to one of its most important government jobs. But Fischer’s time in Israel might actually be a plus in the Obama team’s eyes. Obama has a famously frosty relationship with Netanyahu and has battled suggestions that he is insufficiently supportive of Israel. How better to rebuke those critics than by picking an economist whom Netanyahu knows and respects to the most important U.S. economic policy job? That Fischer’s broadly Keynesian approach is a good fit with the administration’s is just gravy.

My guess is that they won't go with Fischer.

The "Currency Wars" Wars Heat Up by Yglesias

Yglesias links to Greg Ip who I linked to below.

The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves.

(Not totally clear on this.) China was doing this with its "currency manipulations" because it was buying U.S. Treasuries and has "capital controls." Japan has said it won't intervene in foreign exchange markets to lower its currency. Also Japan is supposedly now in surplus (need to check) while China's currency has strengthened (need to check). In any event emerging markets like Brazil should institute limited capital controls to regulate hot money and make sure they don't end up like Spain.

Part of the problem is the domestic politics of each country. China is allowing the U.S. to borrow cheaply in order to subsidize its exporters. The U.S. should use the cheap money to "invest in the future" and close the output gap. Republicans are blocking this. (But if China didn't have capital controls, money would be flowing in and strengthening their currency and they would get more inflation and would have to borrow more from the U.S. Again not crystal clear on the arguments.)

The marketers for "Zero Dark Thirty" ran a full-page reprint of Roger Cohen's column on the film as an advertisement. I found myself agreeing with Cohen about Bigelow and the screenwriter Mark Boal (who also worked with Kathryn Bigelow on "The Hurt Locker" for which she won Best Director in 2009.)

Why ‘Zero Dark Thirty’ Works by Roger Cohen

...George W. Bush has been rightly mocked for once commenting on Bin Laden that, “I just don’t spend that much time on him.” But the truth is not that many people did. Bin Laden had vanished, perhaps he was already dead. Anyway he was best not dwelled upon. Years went by, 9/11 receded. Bigelow lasers in on those for whom finding the mastermind behind the killing of almost 3,000 Americans was an undying obsession. 

Or rather she and her scriptwriter Mark Boal, a former journalist, focus on a single C.I.A. analyst, “Maya,” played by Jessica Chastain. (The film has much to say about female single-mindedness and good sense as contrasted with male huffiness and volatility.)
... 

Maya's single-mindedness and competence reminds me of Clare Daines's Carrie Mathison on "Homeland" and Keri Russell's Elizabeth Jennings on "The Americans."

Watching torture — the C.I.A. should abandon its ghastly euphemism — is profoundly unsettling. But Bigelow and Boal have done an important service in setting before a wide U.S. and global audience images of a traumatized America’s dark side. This happened: the waterboarding, the sleep deprivation, the sexual humiliation, the cruelty. Not exactly as depicted, but yes it did, in places that, as if in a totalitarian world, existed on no map. 

And I think the movie’s portrayal of torture is truthful: It helped at times but at others did not. It provided clues that might have been gleaned by other means. And the ultimate success in finding Bin Laden occurred after President Obama had banned the methods “Zero Dark Thirty” portrays so powerfully....

[I'd question if torture ever helped at times. Even if it did it's morally wrong and will backfire and ultimately "not help."*]

The charge of inaccuracy is a poor thing measured against the potency of truth. “Zero Dark Thirty” is a truthful artistic creation, one reason it has provoked debate. Boal told The New York Times he did not want “to play fast and loose with history” — a statement held against him by several of the movie’s critics, most eloquently Steve Coll in The New York Review of Books. My sense, however, is that Boal has honored those words.**

There were few more minute observers of fact than George Orwell. As Timothy Garton Ash has written, if Orwell had a God it was Kipling’s “God of Things as They are.” Yet, as Garton Ash says of Orwell: “One of his most powerful early essays describes witnessing a hanging in Burma. But he later told three separate people that this was ‘only a story.’ So did he ever witness a hanging? He annotates a copy of “Down and Out in Paris and London” for a girlfriend: this really happened, this happened almost like this, but “this incident is invented.”’ 

Truth is art’s highest calling. For it the facts must sometimes be adjusted. “Zero Dark Thirty” meets the demands of truth.

Cohen is a Brit in America and Ash is British. The late, great Christopher Hitchens admired Orwell and was a friend of Ash. Cohen was obviously influenced by him and tends to share his viewpoints. I wonder what Hitchens would have made of Boal's script. Most likely, he would have dismissed Maya's argument that the ISI wasn't supporting bin Laden because al Qaeda tried to kill Musharraf. Technically no, but elements of the ISI were/are treasonous and part of the problem. The ISI was supporting him in that they didn't turn him over to the Americans when they knew where he was. Of course the ISI and Pakistan were helpful to the U.S. in other ways so it's a complicated picture.

-------------------------------------------
*I liked Robb Stark's response to the Roose "is loose!" Bolton within the brutal context of war in Westeros on the topic of flaying. First he says that his father (and moral authority) outlawed flaying in the North. "We're not in the North," replied Bolton. Robb then says something along the lines of "they have my sisters and I won't give them an excuse to abuse them."
** From Coll's review:

The result of such secrecy is that what is often described as America’s “debate” about the use of torture on al-Qaeda suspects largely consists of assertions, without evidence, by public officials with security clearances who have access to the classified record and who have expressed diametrically opposed opinions about what the record proves. Senator Dianne Feinstein, for example, has said that waterboarding and other harsh techniques were “not central” in developing the clues that led to Osama bin Laden’s hideout. Yet Michael Hayden, the final CIA director of the Bush administration, wrote last year that information gleaned from detainees who were “subjected to some form of enhanced interrogation” proved “crucial” to the search. The most thorough, independent account published on the bin Laden hunt to date—Manhunt, by the journalist Peter Bergen1 —mainly supports Feinstein’s view, but the CIA and other officials Bergen interviewed also asserted that some al-Qaeda detainees who were tortured provided relevant pieces of evidence.
...
In virtually every instance in the film where Maya extracts important clues from prisoners, then, torture is a factor. Arguably, the film’s degree of emphasis on torture’s significance goes beyond what even the most die-hard defenders of the CIA interrogation regime, such as Rodriguez, have argued. Rodriguez’s position in his memoir is that “enhanced interrogation” was indispensible to the search for bin Laden—not that it was the predominant means of gathering important clues.

The mere fact that the record is classified causes me to believe that Feinstein is not telling the truth. Rodriguez isn't as die-hard a defender as Michael Hayden and others. Rodriguez, Feinstein and Coll may all be covering the CIA's ass (and America's self image and image to the world). There's an exploration of this theme in the movie.

Allan Sloan Explains the Relationship Between Interest Rates and Bond Prices and How the Government Can Costlessly Eliminate Large Amounts of Debt by Dean Baker

Allan Sloan used his column today to explain a simple but often overlooked point, when interest rates rise, bond prices fall. This means that if long-term interest rates rise substantially in a few years, as the Congressional Budget Office predicts, then the bonds issued at very low interest rates today will be selling at large discounts. 

The implication of this fact is that in 2015 or 2016, the Treasury would be able to purchase back much of the debt issued today at substantial discounts. This would allow it to drastically reduce the government's debt at no cost. For example, if it bought back debt with a face value of $4 trillion at an average discount of 20 percent, it could instantly eliminate $800 billion in debt, reducing the debt to GDP ratio by almost 5 percentage points. 

This step would be pointless from either an economic or financial standpoint since it would not change the interest burden facing the country, but it should make many of the deficit cultists happy. Since these cultists, who largely control the economic debate in the United States, assign some mystical power to specific debt to GDP ratios, they should be pacified by the knowledge that we can buy bonds back at a discount to keep the debt burden under their magic number. This route is much simpler than raising taxes or cutting spending.

Quantitative Easing, Intervention, and Currency Wars, Again (Thinking about what is driving -- and will drive -- the yen) by Menzie Chinn

While I understand that shifts in exchange rates complicate policy makers’ lives (particularly in the euro area [2]), to some extent I think that competitive depreciations can lead to a desirable outcome insofar as it leads to a modest global (or at least G-7 wide) acceleration of inflation.[3] [4][5] 

Where the real conflict will come is in the G-20 forum. [6] There it is not so clear at all that China and the rest of the emerging market economies need higher inflation. Rather, they need to continue to allow their currencies to appreciate in order to prevent overheating. We shall see if they follow this path -- hope springs eternal.

In "Currency War or International Policy Coordination", Barry Eichengreen succinctly summarizes the current situation as compared against that of the 1930's:

...when the U.S., the Eurozone, the United Kingdom and Japan once again all experienced broadly similar deflationary pressures, quantitative easing bringing about some currency depreciation was again an appropriate symmetrical response. More focus on first-best monetary measures would again have been better, and international coordination of monetary easing might again have reduced uncertainty, although how much difference this would have made is, once more, an open question.  

The difference in the recent episode is the presence of a second group of economies that were not affected symmetrically. Emerging markets were worried about inflation rather than deflation and about currencies, asset prices and, in some cases, growth rates that were too strong rather than too weak. Their first-best response was fiscal tightening. International coordination of monetary easing in the advanced countries with fiscal tightening in emerging markets would have been better, although once again how much better is a matter for debate. More concentration on first-best fiscal measures appropriate for countering over-strong demand, overheated growth, overvalued currencies and inflation and less recourse to second-best interventions like trade and capital controls, this time too, would have been better still. But once again binding political constraints prevented full recourse to first best measures. And once again they made effective international coordination impossible to achieve.

What QE means for the world: Positive-sum currency wars by Greg Ip

Phoney currency wars: The world should welcome the monetary assertiveness of Japan and America (Economist)

Persnickety followups on inequality and demand by Steve Randy Waldman

The FHA and the Role of Government When Markets Fail by Jared Bernstein

Commenter "readerOfTeaLeaves" writes at OTE:

To put in another (background) layer, which has been brilliantly documented by Sen. Elizabeth Warren, in the background of these housing problems were underlying, quiet changes to the usury and banking laws. These changes occurred in the 80s and 90s, while the GOP controlled Congress and had great sway over federal judicial appointments that interpret legislation related to usury and banking. 

By the early 2000s, the economic pressures for housing – in part because it represented access to good schools (and consequent social mobility) – were almost unprecedented. And many families were loaded with debt at usurious rates that had *not* been permitted in the 30s, 40s, 50s, or 60s because we still had usury laws back then. 

But changes to the banking and usury laws preceded the 2000s, and by 2008 ‘finance’ had become about 40% of America’s GDP. 

I’m not defending FHA (which is beyond my knowledge base). Nevertheless, GOP political expediency in smearing federal agencies, without admitting their own culpability in making changes to usury and banking laws that affected economic security for millions of Americans, is a sign of intellectual cowardice. Is the GOP actually incapable of recognizing the linkages between the fact that suddenly banks could change 16+% interest on credit cards, and the fact that ‘finance’ morphed out of proportion to the rest of the economy…?

AV Club reviews "Gregory," from "The Americans"

Obama with the exploding fist bump

The Research Case for a Higher Minimum Wage by Yglesias

Sitting on Cash

On cash hoarding by Izabella Kaminska

The Growing Corporate Cash Hoard by Bruce Bartlett

Corporations Are Sitting On More Cash Because There's More Cash To Sit On by Yglesias

The case for helicopter money: I fail to see any moral force to the idea that fiat money should only promote private spending by Martin Wolf

Janet Yellen Speaks, Makes Critical Points, and Presents a Graph I Shoulda Made by Jared Bernstein

JANET YELLEN POINTS OUT THAT THE FEDERAL RESERVE HAS HAD NO HELP IN STEMMING THE DEPRESSION by DeLong

Young, Liberal, and Open to Big Government 

It’s Always 1923 by Krugman

David Glasner writes sensibly about the “currency war” issue and related subjects, set off by recent commentary by Irwin Stelzer. As Glasner says, expansionary monetary policy can cause currency depreciation — but it is not currency manipulation. There’s a world of difference between Chinese-style intervention-plus-tight-money and either the Fed’s quantitative easing or Japan’s new turn to inflation targeting. 

But what really seems to get Glasner going is Stelzer’s bad history — bad history that is, one has to say, very widely accepted out there. No, the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression. Hard money and a gold standard obsession, not excessive money printing, was the proximate disaster. 

One thing Glasner doesn’t do, though, is point out not just that Stelzer seems weirdly obsessed with inflation risks despite the complete absence of any evidence, but the unchanging nature of that obsession. A quick bit of googling says that Stelzer has been warning about an inflationary explosion for at least four years (pdf). (In the same piece he also insisted that it would be very hard to find anyone to buy all the bonds the US would be issuing). 

This gets at one of the true wonders of this ongoing economic crisis: the inflation-and-soaring-rates crowd has been wrong, again and again, year after year, yet seems completely undaunted in its certainty that it possesses The Truth. You might think that someone, at some point, would have a creeping suspicion that he might be working with the wrong model. But it never seems to happen.

The Housing Bubble Should Not Have Been Hard to See by Dean Baker

Economists and other policy types are working hard to maintain the absurdity that the housing bubble was hard to see. Hence we have Federal Reserve Board Governor Jeremy Stein pontificating on how the Fed should deal with bubbles and the Post playing along with the gag. 

Let's just run through the basic facts. Nationwide house prices had sharply departed from a 100 year long trend in which they had just kept pace with the overall rate of inflation. At the peak of the bubble in 2006 they were more than 70 percent above their trend level. Housing construction rose from its average of 3-4 percent of GDP to over 6.0 percent of GDP. This was at a point when the demographics would have led observers to expect a drop in construction since the baby boom cohort was seeing their kids move away from home and would have been looking to downsize. On top of this, the vacancy rate was already at record levels as early as 2002. It kept rising to new record highs year by year after that. 

The savings rate had dropped from a pre-stock bubble average of more than 8.0 percent to near zero at the peak of the bubble. Again, the demographics with the baby boom cohort in its peak saving years would have led one to expect a rise in the savings rate. 

Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work. And this is before we even talk about the explosion of the subprime market, the Alt-A market, and the huge number of homeowners buying houses with no money down. 

Folks this was really really easy. The economists and other policy types who are trying to say it was difficult to see are just covering their rears.

In Defense of David Graeber’s Debt by J.W. Mason

...What we do need to know is, should we begin our analysis of the economy, as almost all economics textbooks do, by first imagining it as a system of exchange of goods driven by mutual interest, and then bring in money and debt? Or is it better to start with a vision of an economy composed of units with obligations and objectives expressed in terms of money, and then ask how these money commitments shape production and exchange? [3] 

Some people think it doesn’t matter where you start. I think it does matter. And more to the point, many leading lights of critical economics, from Marx and Keynes through Hyman Minsky and Perry Mehrling, think so as well. 

Keynes, for instance, spent many pages of his pre-General Theory writing in the 1930s working out the distinction between a “real exchange economy” and a “monetary exchange economy,” and criticizing the economics profession for focusing exclusively on the former. Here’s a passage making the point clearly (it’s also, in a nice Malcolm-and-Martin moment, one of the few places where he has kind words for the author of Capital): Karl Marx, Keynes says,

pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C- M- C‘, i. e. of exchanging commodity (or effort) for money in order to obtain another commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M-C-M‘, i. e. of parting with money for commodity (or effort) in order to obtain more money. This is important… 

There lines up nicely with Graeber’s claim that most economists have gotten the relationship between money and exchange of goods backward. Certainly someone who has read Debt will see what Keynes is talking about here more quickly than someone who has only thought about money through the lens of contemporary economics textbooks — because I am afraid they are no less oriented toward a “real exchange economy” than when Keynes first made his critique. 

One important reason why the priority of debt matters — one reason it is important that capitalism is organized around M-C-M’ and not C-M-C’ — is that while goods are all substitutes for each other to some degree, to satisfy a money obligation, only money will do. Or as Keynes wrote in the General Theory, one defining feature of money is that its elasticity of substitution with other goods is effectively zero.

American Citizens Split On DOJ Memo Authorizing Government To Kill Them

While most Americans expressed conflicted feelings regarding the memo, the poll also found that 28 percent of citizens were unequivocally in favor of being obliterated at any point, for any reason, in a massive airstrike.

(via DeLong)