Friday, April 11, 2014
Problem with central banks making it up as they go along
I highly recommend this speech that Dallas Fed President and FOMC voting member Richard Fisher gave in Hong Kong. I think he does a good job of explaining the reality of central banking. It really boils down to making it up as they go along.
The problem with this is the risk of getting sucked into a hyperinflation feedback loop. If you are wondering around and making things up as you go along, and happen to step into the hyperinflation death spiral, you will not be able to just step back out.
The politicians, with their large debt and deficit spending, are really a key part of the setup for hyperinflation. I think the politicians and central bankers do not yet understand hyperinflation well enough to take the difficult choices needed to avoid stepping into the hyperinflation trap.
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Vincent you'll probably want to comment here:
ReplyDeletehttp://www.ft.com/intl/cms/s/0/46a1ce84-bf2a-11e3-a4af-00144feabdc0.html?ftcamp=published_links%2Frss%2Fcomment_columnists_martin-wolf%2Ffeed%2F%2Fproduct&siteedition=intl#axzz2ybKwcoUe
Thanks. Done:
Deletehttp://www.ft.com/intl/cms/s/0/46a1ce84-bf2a-11e3-a4af-00144feabdc0.html#comment-7144052
Jason Smith is on travel BTW... so he'll probably respond to you later. Do you understand the math on his hyperinflation page? I stared at it a while, but I think I need to go back and read more about what "Information Transfer Economics" is all about.
DeleteI just read enough information transfer economics to think it looks interesting and I want to read more. But I have not had much free time yet.
DeleteNot getting any reaction on FT I decided to post something a bit more assertive.
Deletehttp://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html
Good luck!
DeleteVincent Cate, Richard Koo's arguments about a "QE trap" reminded me a bit of your arguments. You might like this:
ReplyDeletehttp://watch.bnn.ca/#clip1080079
When he described the problem of paying IOR or having to raise the IOR rate and how much it would cost, I just thought to myself "Really? How much revenue does the Fed bring in each year? They'll really have a problem paying it?"
Also I couldn't help thinking of my old favorite solution: raising the reserve requirement above 100% ... just enough to eliminate almost all the excess reserves. Remind me again why you think that would be a problem. It seems to me that as long as the Fed keeps the FFR = IOR it won't actually cost the banks anything, and it won't cost the Fed any more than they're paying now, and it seems to me like that would put an instant damper on the problem he's describing. A totally cost free way to solve the problem for all parties involved.
If they had to pay 5% on $3 trillion that would be $150 billion per year. A very good year for them was $89 billion profit.
Deletehttp://www.nytimes.com/2013/01/11/business/economy/feds-2012-profit-was-88-9-billion.html?_r=0
The problem with raising the reserve requirement is that you will make all the bank bankrupt. The reason they were all saved is they got rid of the "mark to market" and replaced it with "mark to fantasy".
It is not cost free. You would be in effect taking money out of the banks and saying they can't use it. It would have about the pain of a tax really. You are just shifting the cost from the government to the banks.
Yes, Koo's comments do kind of remind me of mine.
DeleteVincent, I understand that reserve requirements are like a tax, but not when the cost of borrowing is set to be the exact same cost that's paid on reserves: FFR = IOR. Say you're a bank that suddenly finds yourself short of required reserves because the requirement has been raised to > 100%. So you borrow from another bank at 0.25% and then the Fed pays you 0.25%. How does that end up costing you anything?
DeleteThe Fed only pays interest om excess reserves. If you increase reserve requirements by $100 billion for a bank then there is $100 billion that moves from excess reserves to reserves. After this they can not use the $100 billion and are not paid interest on it.
DeleteNo, actually they pay on reserves, regardless if they're excess or required:
Deletehttp://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
Plus the Fed doesn't pay any more than it does now, but it could reduce it's own costs by lowering both IOR and the FFR together to whatever it wanted. The effect of raising the reserve requirement would still be contractionary.
DeletePlus the Fed can do what it wants: if it decides it wants to pay interest on only excess or only required, or different rates on the two, or negative rates... it's free to do so.
Also, if the Fed *wanted* to tax the banks, and ER were close to zero because the Fed had raised the reserve requirement, then the Fed could use a few OMOs to push the FFR up above the IOR. It wouldn't take much with reserve requirements > 100%, so they'd probably only raise it a small amount if at all.
DeleteThe Fed can cover losses from rising rates by setting aside future profits (which we know with confidence the Fed will make because it has a lucrative monopoly). It's really not an issue.
DeleteMax, you mean IOR is not an issue, as in raising it, right? That's what Sadowski said of my "raise the reserve requirements scheme" when I pointed out it was essentially cost free: He didn't give the reason, but he said the Fed should have no problem paying an elevated IOR if it needs to and that's the more "modern" way to go about it: the US is in a small minority of countries with both IOR and reserve requirements. He said having both is like wearing a belt AND suspenders.
ReplyDeleteSince the Fed is holding long term bonds, it's exposed to interest rate risk. It's the flip side of the windfall profits the Fed has made in recent years due to short term interest rates being lower than expected. Interest rates won't be lower than expected forever, so at some point the Fed will take losses on its portfolio. The reason this isn't a reason for concern is that the losses will be smaller than the present value of the Fed's future profits from its currency monopoly.
DeleteRaising required reserves would be one way of dealing with the current problem of interest rates being lower than IOR. RR could also be used to raise interest rates above IOR (which would shield the Fed from losses), but that would be a tax on deposits.
Right, I discuss raising the FFR above the IOR above (after raising the reserve requirements), and how that's a tax option for the Fed.
DeleteBut in any case there are plenty of contractionary tools the Fed has on hand which it can easily afford.
Ok, Tom, I was wrong about banks not getting interest on required reserves. Interesting.
DeleteThe other big problem with your idea is that even if the average bank could handle 100% reserve requirements, it could still leave half the banks bankrupt.
Why? If you need to borrow reserves to meet requirements, guess how much you have to pay for them? The same amount you'll GET paid for them. How does that bankrupt a bank that needs to borrow reserves? The Fed is making sure you can do so for 0 cost.
DeleteI posted on IdeaEconomics.com asking what their theory of hyperinflation is:
ReplyDeletehttp://www.ideaeconomics.org/blog/2014/4/12/a-lagging-update#comments-534a25ede4b01ccabb38b82a
I just asked for an IDEA economics explanation of hyperinflation. My comment seems to have been deleted. So I posted the following:
DeleteI commented asking for an IDEA economics explanation of hyperinflation. My comment went away. Does this mean IDEA economics does not consider hyperinflation a legitimate topic for this blog? Is hyperinflation not part of your economic theory?
PS My first post has explained that I am collecting explanations of hyperinflation from different economic theories and linked to my "many explanations of hyperinflation" post.
DeleteNot willing to back off I also posted this:
DeleteI downloaded Minsky but it would not compile on my machine. It is an Ubuntu system.
I have simulated hyperinflation using Insight Maker and thought it would be fun to do in Minsky as well. Maybe someone has a grad student or assistant familiar with Minsky that would do this?
http://howfiatdies.blogspot.com/2013/03/simulating-hyperinflation.html
Keep after them Vincent. I'd be interested to see what you think of Minsky. I've never tried it. Is it meant for Windows? Can you run it on a virtual machine?
DeleteI replicated one of Nick Edmonds' simulations yesterday. He uses visual basic macros on Excel. I thought it'd be fun to put together an interactive version. There's a free, embeddable version of Excel but it doesn't support macros, but I was still able to construct an interactive spreadsheet that solves his equations (I limit it to two iterations per time sample). I didn't even try to see if there was a closed form solution (maybe there is and a numerical approach is unnecessary). I wanted to try the iterative approach because I understand from Nick's comments that he regularly has circular references in his spreadsheets and resolves them using special macros he's made to iterate. But anyway, it was a bigger pain than I first thought it was going to be. Here's Nick Edmonds' original post:
Nick's original simulation post
And here's my post in which I only recreate one of his plots, but I let the user change one of the parameters:
Tom's interactive version
And actually the user can change more than that... but it'll be painful to change other parameters the way it's set up. Although you can download the spreadsheet and have at it. You can download it and convert it into a Google sheet or an OpenOffice spreadsheet.
... and did you see my response above? I still don't see why you say it would "leave half the banks bankrupt."
DeleteTom, the reason you want to increase the reserve requirement is to keep reserves from coming out and causing inflation. But if a bank can get whatever reserves it needs to meet the requirement at no cost, then it does not lock up any reserves. So if a bank has $100 billion in excess reserves and you want to keep that from going out into the real economy, you increase his reserve requirements by $100 billion. But then you let him borrow $100 billion at the same interest rate you pay him for holding it (so no cost) and he does that to meet the requirement and his original $100 billion he is free to withdraw as Federal Reserve Notes and loan out into the economy, speculate in silver, or whatever the bank wants to do with it.
DeleteIt would leave half the banks in violation of reserve requirements, if not exactly bankrupt, unless you were willing to loan any of them whatever they needed as reserves. But as I say above, if you loan them, at no cost, whatever they need as reserves, then you are defeating the point of raising the reserve requirement (locking the money up).
DeleteVincent, I'm not saying the CB loans them, I'm saying the inter-bank market price for reserves is the same price that the CB pays in interest for them (IOR). So I'm not suggesting that the CB lend the banks in violation any reserves, I'm saying that the banks in violation can obtain those reserves from other banks, but their net cost is 0 since the CB will subsidize them for what they pay. That's basically the situation as it exits right now: reserves are available on the inter-bank market for the same rate the Fed pays banks to hold them.
DeleteYou write:
"he is free to withdraw as Federal Reserve Notes and loan out into the economy, speculate in silver, or whatever the bank wants to do with it."
No, he's not free to do that because he must keep his reserves equal to 167% of his demand deposits. If the Fed raises the reserve requirement just enough, then all the banks will essentially be just meeting their reserve requirements, but without the Fed growing its balance sheet any further.
Of course this won't work out perfectly like I've described, and the thus Fed would have to back off just enough from 167% to account for the level of desired reserves the banks will want to hold in excess of their requirements. No matter, this can be done somewhat gradually... keep raising the requirements until the FFR starts to lift off above the IOR rate. That's when they know they've raised the RR just enough to be contractionary, but not quite enough to start to hurt the banks at their present deposit levels.
be exactly one "alpha" bank (a central bank in practice, if not in name) in any economy:
Deletehttp://worthwhile.typepad.com/worthwhile_canadian_initi/2014/04/monetary-monarchy.html
Hmm, the 1st part of that sentence got cut off somehow, that should read:
Delete"Nick Rowe has a new post up arguing that there will always be..."
... here's a simple algorithm for the Fed to implement cost-free contractionary monetary policy via reserve requirements: raise the reserve requirements every day by 1% until they notice that the FFR rises above IOR, then back off 1%.
DeleteWhether that happens at 50% or 100% or 150%... who knows! All we know is that it will happen at something less than 167%, if reserves/deposits = 1.67.
If the Fed jacks the reserve requirements way up and does not loan the banks reserves then the interbank interest rate will go way up. The demand for borrowing will be much higher if the requirements for reserves are higher.
DeleteNot all banks have the average excess reserve ratio. Many will be higher and many will be lower. If you say reserves have to be 167% of demand deposits, many banks won't have that much. They will have to scramble to borrow and the interest rate will go up.
"Not all banks have the average excess reserve ratio. Many will be higher and many will be lower. If you say reserves have to be 167% of demand deposits, many banks won't have that much. They will have to scramble to borrow and the interest rate will go up."
DeleteRight, which is why I propose this algorithm here:
http://howfiatdies.blogspot.com/2014/04/problem-with-central-banks-making-it-up.html?showComment=1397776682912#c3412186921216349286
My guess is that it would be a number of days before the FFR rose above the IOR. And as a matter of fact, the true FFR is below the IOR right now I believe... it has something to do with non-bank Fed deposit holders whom as a matter of course don't receive IOR payments (which makes sense because non-bank Fed deposits are not reserves). I'm guessing these institutions, which may have some excess deposits they are not using, can loan those out at below IOR and still make a profit.
Vincent, I'm not the only one to bring up the reserve requirements > 100% idea:
Deletehttp://macromoneymarkets.blogspot.com/2014/03/challenging-mmt-mr-notions-of-central.html?showComment=1395323083386#c7249814015505605987
Vincent, can Insight Maker be used to find numerical solutions to equations like:
ReplyDeletef(x) = 0
where x is a vector? Nick Edmonds had it like this actually:
f(x) - x = 0
f(x) is also vector, of the same dimension as x in this case.
DeleteI did not use any equation solving feature. I don't know if it has that or what it has.
DeleteI took another step towards generalizing the approach (Newton's method) here:
Deletehttp://banking-discussion.blogspot.com/p/non-linear-equation-solver-with-up-to.html
Vincent, you might like this hyperinflation related comments/posts (some new, some old):
ReplyDeletehttp://noahpinionblog.blogspot.com/2014/04/the-neo-fisherite-rebellion.html?showComment=1398472777773#c1954688344009492559
Robert Waldman's comment:
http://rajivsethi.blogspot.com/2010/08/lessons-from-kocherlakota-controversy.html?showComment=1283121748455#c8952394443166180857
But the article itself is good too. It seems to argue that a fixed rate target can lead to either hyperinflation or deflation, and this was precisely the problem in Weimar Germany.
Once again, Mark Sadowski has the most useful comment, starting with: "The Reichsbank pegged the discount rate at 5.0% from January 1914 through June 1922, a period of 8.5 years: ...". Showing that a pegged interest rate can cause hyperinflation. The theory that a pegged low rate causes deflation is contradicted by the experimental evidence and should be rejected.
DeleteBut if you notice in this comment:
Deletehttp://noahpinionblog.blogspot.com/2014/04/the-neo-fisherite-rebellion.html?showComment=1398289007270#c968037740737463226
and in Rajiv's post, they compare the fixed rate with the Wicksellian natural rate. Nobody knows what the Wicksellian natural rate is, but if you fix your overnight rate above it you get deflation. If you fix it below it, you get inflation. So it's actually a pegged *high* rate (wrt the Wicksellian rate) which should cause deflation, not a fixed low rate. Of course as deflation progresses you can lower the fixed nominal rate and still be above the Wicksellian rate *I think*.
You'll also notice that between 1915 and 1922m7, that inflation never dropped below 7.7%: in fact 7.7% is a real outlier on the low side: very different than the situation today now in Japan and the US.
Also on the subject of fixed rates: Nick Rowe always says that's a terrible target for the CB to have (and he doesn't mean fixed for a few weeks before being adjusted like is done in Canada). One time he even mentioned that the reason is Weimar, and that we don't need to repeat that experiment.
DeleteWhat matters is if the fixed interest rate is low compared to inflation. In germany 5% interest compared to 7.7% inflation is not really that crazy. But the USA with 0.25% interest and real inflation of at least 2% (8 times) is much more crazy than back then. Japan's inflation rate is rising and already well above interest rates (0.6% on 10 year). Companies and people get better off to be buying things in advance of when they need them, or not selling something till they need to buy something else, and suddenly nobody is using cash as a store of value. That is the risk anyway. By forcing interest rates too far below what is reasonable they are working toward killing the "store of value" feature of money.
DeleteI asked if Scott had seen the article, and he ended up writing a post on it (Noah's article that is). I shared an "HT" with TravisV on that.
DeleteYou might be excited because he uses the word "hyperinflation"... but don't get your hopes up too high, because you need to see the context. First this:
"Reasoning from a price change!!! If I had a crystal ball, and peered into that ball, and saw that Yellen was going to hold short term rates at zero for the next 10 years, I’d absolutely predict ultra-low inflation, condition on that interest rate forecast. So no, the monetarist prediction is not that inflation will trend upward. As Milton Friedman said, the monetarist prediction is that inflation would trend downward."
Now the bit about hyperinflation:
"Suppose a madman is put in change of the Fed who is committed to zero rates over the next 10 years, come hell or high water. Then I might forecast an upward drift in inflation; indeed I think hyperinflation would be quite possible. It depends on what else the madman did. But if you simply told me that rates would be low over the next 10 years under Janet Yellen, I’d assume that inflation would be low, and that low inflation is precisely the reason why Yellen held rates down."
I have to say, I agree with Scott there.
http://www.themoneyillusion.com/?p=26671
... so just from the limited evidence that Mark presented about Weimar between 1915 and 1922m7, it seems like Germany had such a madman in control of their CB! ... Why on Earth were rates held at 5% when the absolute low point of YoY inflation over those 8 years was 7.7%?? (and actually mostly it was double or even triple digit over that time frame).
DeleteI commented on a FT article about the post-crash manifesto:
ReplyDeletehttp://blogs.ft.com/money-supply/2014/04/22/a-post-crash-manifesto-to-rebuild-economics/?
They are attacking the "monoculture" of current economics teaching and I wrote:
DeleteIt is very interesting to see how different economic theories explain something. I have collected many different explanations for hyperinflation. After reading all these I am reminded of the blind men describing an elephant. It really seems you get a deeper understanding of the issue after reading all the different explanations. There is also something fun about being able to see a problem from many different views. Instead of just memorizing things, you end up really thinking for yourself.
http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html
Vincent, Ryan Evant reponds to Noah's Neo-Fisherite hypothetical, and I agree with him (he also answered my question about expectations that Noah's article inspired, which I posed to both Scott Sumner and Nick Rowe, but have not yet heard back on from either):
ReplyDeletehttp://www.economist.com/blogs/freeexchange/2014/04/monetary-policy?fsrc=scn/tw_ec/on_umbrellas_causing_rain
Also, coincidentally, both Marcus Nunes and David Beckworth have posts which caused me to ask them about expectations too... Marcus answered me right away, but I'm not totally convinced:
http://thefaintofheart.wordpress.com/2014/04/26/how-to-make-a-great-stagnation-come-true/#comment-13798
(It's an interesting chart that Marcus puts up there)
Just saving links to other places I posted so I can go back later:
ReplyDeletehttp://thefaintofheart.wordpress.com/2014/04/26/how-to-make-a-great-stagnation-come-true/#comment-13813
http://mainlymacro.blogspot.com/2014/03/more-thoughts-on-expectations-driven.html?showComment=1398632892116#c6467141274691039882
Thanks Tom for finding places. Have you noticed that nobody really seems to ever have any good fight against what I have on hyperinflation? Seems like I am looking for someone to argue with and just can't find anyone. Hum.
I do notice a certain lack of engagement at times, but I do think that Sadowski (for one) has made some good points and has taken your argument seriously at the same time. Marcus will probably get back to you. You had a good follow up. I would have asked though "if it's all about the money, then why isn't the US experiencing hyperinflation right now?"
DeleteSadowski scolded me the other day because I went and pestered David Andolfatto about some basic questions (although one of them was news to both of us... or at least confirmed some news to both of us). It was funny because David passed the question off to another St. Louis Fed colleague, Dan Thornton (I think was his name). Mark was not happy w/ Dan's answer on one of the easy ones, and really let him have it (to me: not in direct response to David or Dan). Said he shouldn't be allowed within 100 yards of a Fed regional bank with an answer like that. Yesterday he had some scathing words for Williamson too. Mark is not afraid to make his opinions known.
What I recall of Sadowski's comments against me is just that he does not count 26% as hyperinflation and thinks the chances of 50% per month are small. He seemed to think that a positive feedback loop was a reasonable hypothesis. And PK said he agreed that central banks using long term bonds did run the risk of a out of control spiral. Sort of 2 good things I guess, but nobody to really come close to knocking the wind out of my basic story.
DeleteI think most people just don't take hyperinflation seriously enough to even bother really thinking about it.
DeleteSadowski had another point which is evident in the Weimar data he presented recently: developed nations (he was including post-WWI Germany in that category I think) don't often have the problem and in fact their periods of high debts *tend* to be correlated with periods of low inflation and low interest rates. He pointed out that in post-WWII US the period with the lowest debt to NGDP ratio (early 1980s: ~30%) also had the highest inflation (~15%).
DeleteAnother thing he pointed out was that nations generally run for several years with high inflation before a bout of hyperinflation starts. Again that was apparent in that Weimar data: 7.5 years of high inflation... the whole time with a CB at a fixed 5% rate: then their attempts to raise the rate to get ahead of the developing hyperinflation were pathetic: YoY inflation of several hundred in 1922m6, so what do they do? They raise the rate to 5.1% Lol. He said it was mostly symbolic (they did raise it quite a bit eventually, but nowhere near the inflation rate).
I asked him why they left it at 5% for 7.5 years when they were mostly running double digit inflation over that period. I didn't really understand all of his answer, but part of it was the gov didn't really have another funding option I think. Not like in the US. We could institute a progressive consumption tax and probably raise a lot more revenue than we do now, and not hurt the economy as much as we do now with our current tax system.
But anyway, the contrast with what's happening in the US now is immense IMO.
I think Argentina might still be teetering on the edge of hyperinflation, right? They've lost their access to international credit, they aren't amongst the developed nations... could be? Perhaps some other examples? Hows the Ukraine doing? How about Venezuela?
Meanwhile Sweden has actually begun a bout of deflation, right? Lars Svensson (a former deputy governor of the Riksbank) is furious with them (he quit a while ago partly because they ignored his advice). Sumner has a good article up on it:
http://www.themoneyillusion.com/?p=26612
It's funny because Williamson, using his new Neo-Fisherite framework, put up a piece recently saying that the Riksbank should NOT do what Svensson is urging... that's the one that Sadowski raked him over the coals for (basically calling him flat out incompetent):
http://www.themoneyillusion.com/?p=26671#comment-340535
http://www.themoneyillusion.com/?p=26671#comment-340549
(there's actually four pages of mostly griping about Williamson's incompetence, etc amongst those anonymous economists that Sadowski points out in that later one)
I should say that Weimar stands out as an unusual example amongst developed nations: that's another of Sadowski's points. Not that they had low debts after WWI (re-reading my comment's 1st paragraph I inadvertently gave that impression). I think the way Sadowski put it was "Weimar's don't happen every day."
Delete... so I have to say I'm in the camp that says the US's biggest danger is continued disinflation and low aggregate demand. I think the low interest rates are a sign of that. We're more in danger of Sweden's path than Argentina's.
DeleteBy my 26%Argentina is already hyperinflation.
DeleteIf you ignore food and energy Sweden has a 0.5% deflation. You really need to want to see deflation as a danger to ingnore food and energy and get excited about 0.5%.
The timing of how fast inflation went up 90 years ago and today will not be the same. Weimar had years. Today with the cable tv, Internet, bloggs, and facebook the panic will happen far far faster. People really could not understand what was going on in germany for a long time. It will become clear far faster these days. We can also do things like buy put options on long term bond ETFs and wgat not that they could not do back then. They did not have computerized trading using algorithms to spot trends in seconds. When it goes it will go with astonishing speed.
Vincent, rather than a "death spiral" or a "giant vortex" ... it looks like, based on these charts:
ReplyDeletehttp://pragcap.com/has-the-abenomics-effect-run-its-course/comment-page-1#comment-174051
A giant fizzle?
Let me be clear. Japan does not yet have hyperinflation. They are not yet in the vortex. Once they are in, you will know.
DeleteAnd once they are in, I bet they can not get out before the value of the currency has dropped by at least a factor of 10.
DeleteYes, but how long before it drops by a factor of 10? 116 years?
DeleteI think less than 5, but predicting the timing on these positive feedback loops is a very hard thing.
Delete116 years is how much time it takes at 2% inflation. :D
DeleteThis is a good read:
ReplyDeletehttp://www.pieria.co.uk/articles/going_off_the_paper_standard
Before they get to negative interest on electronic money they will first eliminate the 0.25% they currently pay on reserves. When they do that they will get hyperinflation. We will never get to negative interest rates. Won't happen.
DeleteAlso, you can tell an unworkable idea because he needs like 15 laws to just maybe get it to work. But he has overlooked all kinds of loopholes, so really it would take many more rules and laws. But really people just won't use US banks if the US banks pay negative interest rates, except maybe to pay taxes if there is a law for that. But then, maybe they just won't pay taxes.
DeleteI wouldn't bet the US would be the 1st to try this. Maybe some nation that's struggled with disinflation and low growth for decades? Hmmm... Japan perhaps? If one developed nation has success it might serve as a legitimate model for other developed nations.
DeletePlus his list of 18 or so "suggestions" are, he says, not absolutely necessary. So I don't read them as laws necessarily.
He makes a good case for the benefits of it elsewhere on his blog. And he discusses the cons too.
But I do agree with you that this is not happening in the US anytime soon. Whether it happens at all will depend on how persistent ZLB problems are world wide IMO. Did you read this?
http://www.telegraph.co.uk/finance/economics/10774013/Eight-EU-states-in-deflation-as-calls-grow-for-QE-in-Sweden.html
"The Netherlands is still positive at 0.1pc, but this level is already so low that it is causing debt-deflation trauma for Dutch households struggling to cope with loans near 250pc of disposable income. Dutch house prices have dropped by a fifth. A quarter of mortgages are in negative equity."
Also they have an interesting chart in there showing how a bunch of European nations stack up.
Plus I thought you'd be excited by Miles' plan: it gets you to 0% inflation, which I'd guess you're a fan of (and so is he!... he lays out the advantages elsewhere). Of course you may have to deal with negative interest rates and cash trading at a discount to the new electronic UOA to get there. Miles says the only convincing reason for a small positive inflation target is to provide a buffer against the ZLB. Although he does go through a list of advantages... some of which are real, but not many of which can't be accomplished in some other way.
Delete... I should say "negative interest rates and cash trading at a discount... ON occasion, not as a constant state of affairs."
DeleteVincent, that Sweden post from Sumner I link to above, has all kinds of informative comments in it from Sadowski: including data on the unemployment rate, etc. as they've raised interest rates (since Svensson departed). It looks like it doesn't take much deflation to do a lot of harm.
ReplyDeleteHey Vincent, here's Lars himself (former deputy governor of the Riksbank in Sweden)... you should ask him why he's so afraid of a wee bit of deflation in his (presumably) native Sweden.
ReplyDeletehttp://larseosvensson.se/2014/04/23/fed-and-the-riksbank-about-low-inflation-and-increased-debt-burden-a-comparison/
Lars.Svensson@iies.su.se
He's supposed to be the world's most highly cited academic on the subject of deflation.
Commented on a Forbes article about Marc Faber's US hyperinflation prediction.
ReplyDeletehttp://www.forbes.com/sites/mikepatton/2014/04/28/is-u-s-hyperinflation-imminent/
The commentator right above you there looks like he might be game to engage you:
Deletesmack macdougal
Looking at his post, I don't recommend it. He looks like his views are a bit out there:
Deletehttp://bizarrotheater.blogspot.com/2014/04/fallacy-fraught-forbes-tries-to-stoke.html
I actually posted there an hour or two ago but it is either waiting to be moderated or rejected.
DeleteVincent, I thought Miles gave a nice analysis here:
ReplyDeleteMiles Kimball discusses the pros and cons of having a positive inflation rate target here (in the context of his proposal to repeal the ZLB):
http://blog.supplysideliberal.com/post/67342414250/pieria-2-the-costs-and-benefits-of-repealing-the
See the section entitled: “The Possible Benefits of Inflation”
Miles concludes:
“I remain unimpressed by the purported benefits of inflation other than steering away from the zero lower bound.”
Sadowski has another hyperinflation fact: large fiscal deficits neither necessary nor sufficient for hyperinflations:
ReplyDeletehttp://macromarketmusings.blogspot.com/2014/04/the-cure-for-neo-fisherism-history.html?showComment=1398968326137#c1322903167262885205
Thanks, I replied. I am with Bernholz, it takes large debt and deficit. Deficit alone is not enough. And even large debt and deficit may not be if there is good hope that the deficit is caused by something temporary like a war.
DeleteVincent, I added a bit to your discussion with Jason Smith in case you're interested (including Jason's response):
ReplyDeletehttp://informationtransfereconomics.blogspot.com/2013/09/hyperinflation.html?showComment=1399754535649#c471783353163631266
Also, you're going to love this one: using hyperinflation as a tool to keep NGDP on track:
Deletehttp://informationtransfereconomics.blogspot.com/2013/09/exit-through-hyperinflation.html
Here too:
http://informationtransfereconomics.blogspot.com/2014/05/the-effect-of-expectations-in-economics.html?showComment=1399788654273#c4334056766772648366
Vincent, I thought you might be interested in this post by Benjamin Cole:
ReplyDeletehttp://thefaintofheart.wordpress.com/2014/05/20/will-chindia-join-the-europa-america-stagnation-westernized-central-bankers-battle-prosperity-globally/
I think finding 2 cases where there was not runaway inflation and then claiming that runaway inflation is not real is a flawed argument. There are hundreds of cases of runaway inflation. So depends on the starting conditions. I just posted saying I can simulate runaway inflation and it depends on the starting conditions.
DeleteThanks as always!
Got one reply but then nothing to my reply after that. Oh well.
DeleteNoah Smith is pretty impressed with what Abe is doing in Japan (after his initial skepticism):
ReplyDeletehttp://www.bloombergview.com/articles/2014-06-11/japan-s-abe-is-the-world-s-best-leader
Long time, no update. :D
ReplyDeleteHey Vincent, it occurs to me that you might be able to produce what Jason Smith is looking for in this challenge to the world of macro:
http://informationtransfereconomics.blogspot.com/2014/07/a-challenge-to-macroeconomists.html
Took the family to a reunion in the states and stayed for awhile. Then moved houses in Anguilla. Too many other things going on so not spending time blogging.
DeleteI might be able to do that with my hyperinflation simulation if I could get more detailed data about some hyperinflation cases. So far I don't have all the different types of data (money supply, bond totals, inflation rate, interest rate) to really match the simulation to a real case.
PS Thanks!
DeleteCommented on 2 MacroMania posts but no reaction.
http://andolfatto.blogspot.com/2014/06/excess-reserves-and-inflation-risk-model.html#comment-form
http://andolfatto.blogspot.com/2014/06/excess-reserves-and-inflation-risk.html#comment-form
And the economist, no reaction:
http://www.economist.com/blogs/freeexchange/2014/06/inflation-panic?fsrc=rss
Others too.