Return of Sado-Monetarism & the Black Cat

[oldfart]

Krugman has a couple of interesting articles today that warrant further comment. First, is the return of economics as morality play flagellant monk division.

Still convalescing from This Week; but it helped focus my thoughts a bit more on the jihad against low interest rates.

What I realized is that Stockman, and many others, represent the latest incarnation of sado-monetarism, the urge to raise rates even in a deeply depressed economy. It’s a long lineage, going back at least to Schumpeter’s warning that easy money would leave “part of the work of depressions undone” and Hayek’s inveighing against the “creation of artificial demand”. Nothing must be done to alleviate the pain!...

But now that the deficit scolds have killed fiscal policy, monetary policy is also under attack, and with even more vehemence. Yet there’s something very odd about that attack.

The modern sado-monetarist view is, after all, very much centered on the presumption that markets, left to their own devices, will get it right, and that it’s only the distortions introduced by money-printing central banks that cause bubbles and crises — which is why the Fed must stop its easing right away.

But here’s the problem: for loose monetary policy to have the dire effects the sadomonetarists claim, markets must massively get it wrong, and hugely overreact to low interest rates.

And of course the dire predictions of hyperinflation that they said would materialize in 2009 have yet to manifest themselves. There is a difference between late and never; and in the world of economic predictions this one is at least three years into never.

The second point is the "proof" that austerity is working in Europe; that the spread on sovereign debt between Germany and other Eurozone nations is narrowing. But...

The point is that this narrowing of spreads has nothing to do with austerity. As Paul De Grauwe points out, the amount by which a country’s interest rate spread against Germany has narrowed is fully explained by how big its spread was at the peak of the crisis — there is essentially no indication that policies mattered at all:

In fact the R-squared between change in the spreads since February 2013 and the level of the spreads in June 2012 is over 97%! This is an astoundingly high correlation and leaves no room for nation-specific variables such as austerity. It's all attributable to the ECB announced policy of support of sovereign debt.

This is a lot like the old joke about philosophy: "Philosophy is looking for a black cat in a dark room. Marxist philosophy is looking for a black cat in a dark room in which there is no black cat. Marxist-Leninist philosophy is looking for a black cat in a dark room in which there is no black cat ans shouting 'I've found it!'. Stalinist philosophy is looking for a black cat in a dark room in which there is no black cat and shooting anyone who does not find it. "

Monetarism is searching for a non-existent black cat in a dark room, shouting that they have found it with every twist in the numbers, never mind that to do so requires them to hold mutually exclusive positions, and shooting (or at least ignoring for policy purposes) anyone who does not see the black cat. In the meantime the tiger in the room who has been growing fat off the researchers sent into the room has been doing very well.

Gentle reader; you are the next researcher to be sent into the dark room. Bon appetit!

 

[Norman]

Krugman has a couple of interesting articles today that warrant further comment. First, is the return of economics as morality play flagellant monk division.

Still convalescing from This Week; but it helped focus my thoughts a bit more on the jihad against low interest rates.

What I realized is that Stockman, and many others, represent the latest incarnation of sado-monetarism, the urge to raise rates even in a deeply depressed economy. It’s a long lineage, going back at least to Schumpeter’s warning that easy money would leave “part of the work of depressions undone” and Hayek’s inveighing against the “creation of artificial demand”. Nothing must be done to alleviate the pain!...

But now that the deficit scolds have killed fiscal policy, monetary policy is also under attack, and with even more vehemence. Yet there’s something very odd about that attack.

The modern sado-monetarist view is, after all, very much centered on the presumption that markets, left to their own devices, will get it right, and that it’s only the distortions introduced by money-printing central banks that cause bubbles and crises — which is why the Fed must stop its easing right away.

But here’s the problem: for loose monetary policy to have the dire effects the sadomonetarists claim, markets must massively get it wrong, and hugely overreact to low interest rates.

And of course the dire predictions of hyperinflation that they said would materialize in 2009 have yet to manifest themselves. There is a difference between late and never; and in the world of economic predictions this one is at least three years into never.

The second point is the "proof" that austerity is working in Europe; that the spread on sovereign debt between Germany and other Eurozone nations is narrowing. But...

The point is that this narrowing of spreads has nothing to do with austerity. As Paul De Grauwe points out, the amount by which a country’s interest rate spread against Germany has narrowed is fully explained by how big its spread was at the peak of the crisis — there is essentially no indication that policies mattered at all:

In fact the R-squared between change in the spreads since February 2013 and the level of the spreads in June 2012 is over 97%! This is an astoundingly high correlation and leaves no room for nation-specific variables such as austerity. It's all attributable to the ECB announced policy of support of sovereign debt.

This is a lot like the old joke about philosophy: "Philosophy is looking for a black cat in a dark room. Marxist philosophy is looking for a black cat in a dark room in which there is no black cat. Marxist-Leninist philosophy is looking for a black cat in a dark room in which there is no black cat ans shouting 'I've found it!'. Stalinist philosophy is looking for a black cat in a dark room in which there is no black cat and shooting anyone who does not find it. "

Monetarism is searching for a non-existent black cat in a dark room, shouting that they have found it with every twist in the numbers, never mind that to do so requires them to hold mutually exclusive positions, and shooting (or at least ignoring for policy purposes) anyone who does not see the black cat. In the meantime the tiger in the room who has been growing fat off the researchers sent into the room has been doing very well.

Gentle reader; you are the next researcher to be sent into the dark room. Bon appetit!

Hmm... Didn't Krugman claim that the economy is recovering? Now he is saying it's deeply depressed...

I don't understand his point that markets have to overreact to interest rates either. Markets react to interest rates, that's the whole point.


Then again, I guess Krugman is a comedian nowdays and not an economist.

 

[EdwardBaiamonte]

I don't understand his point that markets have to overreact to interest rates either. Markets react to interest rates, that's the whole point.

we had a housing bubble in part because Fed Fan Fred FDIC all conspired to set interest rates low to boost economy. Then there was a crisis correction. The fear is that the current low interest rates are similarly low and will create a bubble much like the housing bubble.

 

[oldfart]

Hmm... Didn't Krugman claim that the economy is recovering? Now he is saying it's deeply depressed...

I don't recall Krugman stating that the economy is recovering in any adequate fashion; to the contrary he has argued consistently for six years that fiscal policy has failed to provide adequate stimulus. I also don't see any statement of his that the economy is "deeply depressed" other than in the sense that we have had no real recovery. If you are going to argue against an economist's consistency or track record; at least identify the projections or quotes you are basing the argument on and the dates they were made.

I don't understand his point that markets have to overreact to interest rates either. Markets react to interest rates, that's the whole point.

Yes, but to make the hyperinflation/interest rate explosion argument work, you have to build a model where bond markets ignore current pricing and bet the farm on unrealistic expectations. Some bond traders did this in 2009--2010 and lost hundreds of billions of dollars (ask PIMCO). Now these guys just recommend other people follow their advice.

Then again, I guess Krugman is a comedian nowdays and not an economist.

I don't make disparaging remarks like this about any economist who was serious about his/her work, no matter how much I disagree with them. This is called "professional courtesy" and is generally observed by professionals in both scholarly work and public comment. Failure to abide by this convention labels you as an asshole.

 

[EdwardBaiamonte]

I also don't see any statement of his that the economy is "deeply depressed"

Dear, he wrote a book called "End This Depression Now."

I don't make disparaging remarks like this about any economist who was serious about his/her work, no matter how much I disagree with them. This is called "professional courtesy" and is generally observed by professionals in both scholarly work and public comment. Failure to abide by this convention labels you as an asshole.

In the case of Krugman its ok to make disparaging remarks:


"This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

 

[Norman]

Hmm... Didn't Krugman claim that the economy is recovering? Now he is saying it's deeply depressed...

I don't recall Krugman stating that the economy is recovering in any adequate fashion; to the contrary he has argued consistently for six years that fiscal policy has failed to provide adequate stimulus. I also don't see any statement of his that the economy is "deeply depressed" other than in the sense that we have had no real recovery. If you are going to argue against an economist's consistency or track record; at least identify the projections or quotes you are basing the argument on and the dates they were made.

I don't understand his point that markets have to overreact to interest rates either. Markets react to interest rates, that's the whole point.

Yes, but to make the hyperinflation/interest rate explosion argument work, you have to build a model where bond markets ignore current pricing and bet the farm on unrealistic expectations. Some bond traders did this in 2009--2010 and lost hundreds of billions of dollars (ask PIMCO). Now these guys just recommend other people follow their advice.

Then again, I guess Krugman is a comedian nowdays and not an economist.

I don't make disparaging remarks like this about any economist who was serious about his/her work, no matter how much I disagree with them. This is called "professional courtesy" and is generally observed by professionals in both scholarly work and public comment. Failure to abide by this convention labels you as an asshole.

To be honest, I am not sure if he has said there is a recovery(there is a "?" sign in my post). Maybe you are correct on that and I am associating him with someone else. Frankly, I really don't care. It's kind of funny though that for him even the over trillion deficits and 0% interest rates+FED open market operations are not enough... How much more can you possibly even spend and burrow?

As for the "deep depression". I took that part right from his quote that was posted earlier:
"
What I realized is that Stockman, and many others, represent the latest incarnation of sado-monetarism, the urge to raise rates even in a deeply depressed economy. It’s a long lineage, going back at least to Schumpeter’s warning that easy money would leave “part of the work of depressions undone” and Hayek’s inveighing against the “creation of artificial demand”. Nothing must be done to alleviate the pain!..."

So there you go.

 

[oldfart]

To be honest, I am not sure if he has said there is a recovery(there is a "?" sign in my post). Maybe you are correct on that and I am associating him with someone else. Frankly, I really don't care. It's kind of funny though that for him even the over trillion deficits and 0% interest rates+FED open market operations are not enough... How much more can you possibly even spend and burrow?

As for the "deep depression". I took that part right from his quote that was posted earlier:
"
What I realized is that Stockman, and many others, represent the latest incarnation of sado-monetarism, the urge to raise rates even in a deeply depressed economy. It’s a long lineage, going back at least to Schumpeter’s warning that easy money would leave “part of the work of depressions undone” and Hayek’s inveighing against the “creation of artificial demand”. Nothing must be done to alleviate the pain!..."

So there you go.

Obviously I was not as clear and cogent in my post as I thought I was. It's not the first time. I'll concede garbled semantics. Krugman has consistently held, and I agree, that the downturn has been horrible (I think it should be labelled the "Second Long Depression") and the recovery has been anemic. Thus he argues for more measures to restart growth. We are not technically in a recession and the economy has been recovering weakly, but not taking a second or third dip as is happening in Europe.

As I've posted on another thread, the deficits are decreasing and are getting very close to the deficit level commonly regarded as sustainable in the long run (i.e. where the deficit as a percentage of the GDP is decreasing). But the unemployment rate is unacceptably high and the growth rate much too low, which argues for stimulus. The problem is growth, not deficits. This can't be achieved at the zero lower bound for interest rates through monetary policy so it has to be through fiscal policy. Anyone who thinks there is no useful way for the government to inject spending into the economy that would promote growth hasn't looked at research spending, higher education statistics, or the state of our roads and bridges lately.

Of course such stimulus would increase the short-term deficit. But without it, the long-term deficit balloons as our future rate of growth declines due to lack of public and private investment.

 

[EdwardBaiamonte]

. But without it, the long-term deficit balloons as our future rate of growth declines due to lack of public and private investment.

of course conservatives and libertarians believe that government tax and spend harms the economy because taxation diminishes the private sector which is 90% responsible for the economic growth from the stone age to here. Libturd Solyndra bureaucrats don't invent new products and they don't know who does so the less they spend or waste the better for the economy.