1. The Fed’s official goal is 2% headline PCE inflation.
2. PCE headline inflation has averaged 1.12% over the past 8 years.
3. Thirty year TIPS spreads are 1.66%, equivalent to 1.4% PCE inflation.
4. Top Fed officials are discussing the need to tighten monetary policy in the near future.
His interpretation is that Fed officials have been doing a lousy job of hitting their target, and they continue to send out harmful signals.
My interpretation is that the Fed cannot hit its target. Imagine that Citibank set a target for 2 percent inflation. Does anyone think that they could succeed? Well, think of the Fed as Citibank.
Instead, mainstream economists think of the Fed this way: In general equilibrium models, supply and demand conditions determine relative prices. But what about the “absolute” price level? What ties it down? We need another variable, so let’s invoke the quantity of money. Except–oops–money is very hard to define, because so many different financial instruments serve as money nowadays. So let’s just wave our hands and say that central bankers control the price level, without being able to provide a convincing account of exactly how they do so.
I fully agree with you. Even Friedman didn’t have a convincing account of the relationship between “money” and “absolute price level”. And Scott has been promoting a new monetary policy without any convincing account of how it could be effective to stabilise the economy.
QE is the Fed as Citibank, or as I prefer, as ICBC. QE has transformed central banks into old state-owned marketing boards for bonds rather than commodities with their holdings of bonds financed by banks’ time and savings deposits rather than by budgetary allocations of funds. One may call “monetary policy” everything that central banks do but their actions are not even close-substitutes; yes, there is no reason to expect that their effect are the same, although we don’t know yet why and how much they differ.
You seem to argue that ineffectiveness may be caused by a low causal relationship between the Fed’s tools (the effects of the use of these tools, really) and inflation. But as you know, it may be worse: we may not even know the relationship’s sign.
https://faculty.chicagobooth.edu/john.cochrane/research/papers/fisher.pdf
The lesson here is that distribution of money matters more than raw quantity. A price index made from stuff-rich-people-buy will show oodles of inflation.
The Fed may have less control than assumed but more than presumed but is still inconsistent within their own beliefs and context. The Fed can’t do helicopter drops, but if they could would anyone doubt they could create inflation even though they wouldn’t, at least until money was abandoned for something more stable. Or are we to assume people’s money elasticity is infinite?
Considering how little you care for the GDP factory, why are you stating the Fed has failed so much because inflation was 1.12% the last eight years? In reality, prices have never been so consistent in nation’s history and 1.12% is reasonably close to targets. What is so magic about 2%? (Especially for a measurement that is hard to define anyway.) Also, the biggest driver of sub 2% inflation since 2014 is the fall in oil prices which has had substantial secondary effects on other prices and has created some increases in real wages since 2014. Anyway, I believe this deflationary cycle is caused by low working age population growth, tech advances are keeping prices low, and the benefits of investment globalization has diminished. After China, India, & other BRICS, there is not another fast growing LARGE economy in the world anymore.
dm1/dm0 = 0?
dm2/dm0 = 0?
NGDP/dm0 = 0?
I don’t understand how you think arguments like this could possibly be persuasive.
The Fed can *literally* print money. They can print it and spend it on things and it will circulate as money and no formal liability is created that the Fed has to pay back as a result. Citibank cannot do this. Citibank can create deposits, but it must stand ready to redeem those for money created by the Fed.
This is the single most salient fact as to whether or not the Fed can target inflation, but for some reason it seems you rarely talk about it.
You talk about other things and make analogies with Citibank as if the Fed could not *literally* *print* *money*.
If you want to convince that the fed can’t control the value of money you need to either explain that the fed cannot really print money, or that somehow the fact that the fed can print money is not as critically important as it appears to be. You cannot just ignore the issue.
No, this is a mistake. Bank intermediation must still occur first. It isn’t any accident that the excess reserves have piled up back at the Fed.
I am not even sure the Fed could make it circulate by directly sending people checks- most of the new money would get deposited back into a bank somewhere and still end up as excess reserves.
I would suggest you read what Jeffrey Snider at Alhambra Partners has been writing about the central banks and money printing. He has a lucid way of describing what central banks claim they can do, and what they actually accomplish with what they do.
Yancey: “Bank intermediation must still occur first”
Huh? Intermediation between who? There’s no saver depositing the money at a bank. If the fed buys assets with new money, it simply creates new reserves or cash, exchanges them for assets, and then those those reserves just *are* money. No intermediation required. Banks only involvement is transaction-processing and record-keeping. It may be the case that most of those new reserves wind up getting parked as excesses reserves in accounts at the fed instead of being redeemed for cash, but that’s not due to a lack of intermediation. That’s because banks get better interest from the fed as IoR than they would making loans.
And how they have extended what and how they do things certainly does create a formal liability on the printing they can do. It is no accident, either, that they pay interest on reserves, and that they are engaging in RRPs.
I thought that paying interest on excess reserves only started after the 2008 Central Banking Fiasco.
I claim that the Fed can get more inflation, with “enough” helicopter drops of tax refund money. Yes, spending on boondoggle gov’t “investment/white elephants” will not raise general inflation, but mass increases in workers’ take home disposable income will, slowly or quickly, increase the inflation.
I recommend a 50% tax refund (max $2000) for payers of income tax. A lot pays off credit card debt, student loan debt, car loan debt — but folks with less debt do buy more.
>>
Refs should have links: http://www.alhambrapartners.com/2016/08/30/economists-just-now-finding-evidence-against-money-printing-that-markets-settled-on-years-ago/
Snider writes:
(A) Quant Easing = (B) Money Printing {NOT!}
(B) Money Printing = (C) Inflation
therefore
(A) QE (C) Inflation
<<
This has been shown to be true by the evidence – QE (to big companies and banks) has failed to increase inflation.
This is NOT a heli drop to taxpayers.
But a heli drop to taxpayers (NOT "the poor") is the most effective policy to revive the productive economy.
The title of the link with evidence against money printing means that QE is not money printing, it does not mean that actual money printing won't increase inflation.
It’s hard to overcome the intuition that the rate of growth in the price level in terms of dollars (and however defined) must rise above 1-2% at some policy point between what the Fed is doing now and its printing enough new money to buy title to every asset in the whole econony (or maybe even global economy). If not, then why not do it? What a bargain.
And if so, there must be some policy point in between that hits the target, especially if they get to correct errors later with ‘level targeting’.
Now I suppose one could argue that there is no stable ground between here and some kind of sudden discontinuous hyperinflation that would occur at some point in the escalation of policy. But it’s not intuitive to expect that.
I seem to recall you recently claiming that advocates of state intervention falsely believe that libertarians believe that the free market is perfect, but I can’t help getting the suspicion that you were projecting, as you seem to view anything less than 100% perfect results from intervention as “failure.”
I have this vague recollection of your old blog as being much more interesting than this. I seem to recall a lot more detail or something. Maybe the problem is my memory. But these endless variations on the same dishonest arguments in favor of the same simplistic idea will never persuade a single person.
“We need another variable, so let’s invoke the quantity of money. Except–oops–money is very hard to define, because so many different financial instruments serve as money nowadays. So let’s just wave our hands…”
Yes, “monetary theory” is messy / fuzzy because “money” is hard to define. That doesn’t make it wrong, just means one shouldn’t trust economists too much about anything involving “money” — which is what economics is mostly about.
$200 billion printed (cost of paper, printing, distribution, $20 million?), and given to taxpayers would raise the inflation rate by what amount? It won’t be hyperinflation. This amount can be sent each quarter until the 2% inflation target is achieved. Then stopped.
0 additional national debt, much lower consumer debt, some increase in big ticket purchases, more economic activity, more jobs. Why not do it?*
*because it’s too easy-rich cronies don’t get much richer, economists don’t get cushy consulting
There is only ONE economic argument against money printing: inflation. Inflation leading to hyperinflation (Weimar, Zimbabwe, Venezuela).
Thought experiment in Japan: They print the money, all the recipients use all the money to reduce debt / increase bond purchases (making debt cheaper for borrowers). This continues until, at some point some recipients are using the extra cash to buy more locally (robot?) made products. I have no doubt that there is some amount of printed Japanese money that would increase the Japanese inflation rate to 2%, altho possibly at the cost of a weaker Yen — altho this would help exports ….
“Imagine that Citibank set a target for 2 percent inflation. Does anyone think that they could succeed?”
If Citibank wanted its stock price to decline by 2% per year, it could indeed succeed by using stock splits and reverse splits. When one has a monopoly over the supply of bits of paper, one can control the price of those bits of paper by adjusting the quantity supplied.
Also, due to high correlation among banking stock returns, one could say that there are many close substitutes for Citibank stock in a portfolio. The existence of such close substitutes, however, does not prevent Citibank’s corporate actions from impacting its numerical stock price.
Actually this is spelled out pretty carefully in Michael Woodford’s book. He ties down the price level using the interest rate. You won’t agree with his model, of course, but you’re wrong to claim that the mechanism boils down to hand waving about the money supply.