Nice post Arnold. It's refreshing to see an economist focusing on what he can't predict rather than confidently predicting counterfactual scenarios.
My own view is that everyone says they hate inflation. And they do. But most people hate it a lot less than the likely results of the other options available to the Fed.
I would love to see a post where you explain in detail how you feel about Scott Sumner's views. My understanding is that he sees the problems you describe with interest rates being too blunt an instrument and that is precisely why he supports what you criticize as "Rube Goldberg" policies.
"In fact, holders of U.S. Treasuries lost purchasing power at a faster rate than at any time since at least the early 1970s."
with
"When the government borrows a dollar and writes a check for a dollar (it doesn’t matter whether the check is a gift to a household or a purchase from a firm), both the lender and the check recipient now think they have assets worth a dollar."
I don't think it's feasible to think that many people realize the treasury is a loser of an asset and still think that investing in a dollar in a treasury is worth a dollar of wealth.
I think a good explanation here requires something more than this. Something in which treasury buyers are behaving rationally.
A common way governments buy people off is to make them think they own assets because they exist on paper, but if you try to turn that into real genuine consumption it either isn't allowed or its inflated away. Germany famously did a lot of this is 1914-1945, but it wasn't alone.
Mortgage rates have skyrocketed lately. I suspect this could be a big trigger.
Arnold, I agree with you when you say "no one can predict with confidence the consequences of actions taken by the Fed in its Rube Goldberg incarnation". I'd add, however, an important correction to say "no one can predict with confidence the consequences of actions taken by the Fed, much less in its Rube Goldberg incarnation". Yes, you should make clear that predicting the consequences of Fed's actions with confidence is possible only under exceptional circumstances (like the examples used to teach Money and Banking).
As much as we criticize orthodox macroeconomics for aggregating all good and services, we should criticize reliance on aggregation of some assets as if they were perfect substitutes (indeed, a critical issue in analyzing markets is to identify the degree of substitutability). In the 1960s, thanks to MF, we entertained ourselves about the proper M? to understand the old Fed's monetary policy. Today, our younger colleagues entertain themselves by creating categories of "liquid" or "safe" or other types of assets. Yes, we need to simplify but we learned long ago that the only relevant criterion for aggregation is perfect substitutability.
BTW, long ago I learned to distinguish between liquidity management and "liquid" assets (and much later thanks to distinguish risk management and "safe" assets). We need to know about management to argue for types of assets (if I remember correctly, in the first edition of their textbook "Money", Ritter and Silber made that point).
A clarification: An increase in rates from 1.5% to 3% does NOT cut the bond price by 50% unless the bond is perpetual or extremely long dated. It's still painful if you have a long dated bond, but that's not the way the math works. That said, if equities are viewed as having a duration equal to the inverse of their dividend yield so that at a 1.5% dividend yield. the duration is 1/.015=67 years, which is practically speaking perpetual, and IF equities are in fact priced relative to interest rates, then yes, to get to a 3% yield equities would have to halve.
I don't think the Fed controls any rates outside the 1 year duration window. The bond market is telling us that growth is simply not coming in 3-5-10-30 year window, and it has been telling us this for over a decade now.
This analysis seems to assume a causal loop between wealth and NGDP, mediated by interest rates. If so, I'm wondering if that relationship is fundamental, or varies with monetary policy regime. For example, under NGDPLT, would asset prices equilibrate, and the relationship diminish in importance? If I understand Scott Sumner's thinking, he seems to put less emphasis on wealth effects.
Nice post Arnold. It's refreshing to see an economist focusing on what he can't predict rather than confidently predicting counterfactual scenarios.
My own view is that everyone says they hate inflation. And they do. But most people hate it a lot less than the likely results of the other options available to the Fed.
I would love to see a post where you explain in detail how you feel about Scott Sumner's views. My understanding is that he sees the problems you describe with interest rates being too blunt an instrument and that is precisely why he supports what you criticize as "Rube Goldberg" policies.
How do you square
"In fact, holders of U.S. Treasuries lost purchasing power at a faster rate than at any time since at least the early 1970s."
with
"When the government borrows a dollar and writes a check for a dollar (it doesn’t matter whether the check is a gift to a household or a purchase from a firm), both the lender and the check recipient now think they have assets worth a dollar."
I don't think it's feasible to think that many people realize the treasury is a loser of an asset and still think that investing in a dollar in a treasury is worth a dollar of wealth.
I think a good explanation here requires something more than this. Something in which treasury buyers are behaving rationally.
A common way governments buy people off is to make them think they own assets because they exist on paper, but if you try to turn that into real genuine consumption it either isn't allowed or its inflated away. Germany famously did a lot of this is 1914-1945, but it wasn't alone.
Mortgage rates have skyrocketed lately. I suspect this could be a big trigger.
Arnold, I agree with you when you say "no one can predict with confidence the consequences of actions taken by the Fed in its Rube Goldberg incarnation". I'd add, however, an important correction to say "no one can predict with confidence the consequences of actions taken by the Fed, much less in its Rube Goldberg incarnation". Yes, you should make clear that predicting the consequences of Fed's actions with confidence is possible only under exceptional circumstances (like the examples used to teach Money and Banking).
As much as we criticize orthodox macroeconomics for aggregating all good and services, we should criticize reliance on aggregation of some assets as if they were perfect substitutes (indeed, a critical issue in analyzing markets is to identify the degree of substitutability). In the 1960s, thanks to MF, we entertained ourselves about the proper M? to understand the old Fed's monetary policy. Today, our younger colleagues entertain themselves by creating categories of "liquid" or "safe" or other types of assets. Yes, we need to simplify but we learned long ago that the only relevant criterion for aggregation is perfect substitutability.
BTW, long ago I learned to distinguish between liquidity management and "liquid" assets (and much later thanks to distinguish risk management and "safe" assets). We need to know about management to argue for types of assets (if I remember correctly, in the first edition of their textbook "Money", Ritter and Silber made that point).
A clarification: An increase in rates from 1.5% to 3% does NOT cut the bond price by 50% unless the bond is perpetual or extremely long dated. It's still painful if you have a long dated bond, but that's not the way the math works. That said, if equities are viewed as having a duration equal to the inverse of their dividend yield so that at a 1.5% dividend yield. the duration is 1/.015=67 years, which is practically speaking perpetual, and IF equities are in fact priced relative to interest rates, then yes, to get to a 3% yield equities would have to halve.
Agree with everything else you wrote.
I don't think the Fed controls any rates outside the 1 year duration window. The bond market is telling us that growth is simply not coming in 3-5-10-30 year window, and it has been telling us this for over a decade now.
This analysis seems to assume a causal loop between wealth and NGDP, mediated by interest rates. If so, I'm wondering if that relationship is fundamental, or varies with monetary policy regime. For example, under NGDPLT, would asset prices equilibrate, and the relationship diminish in importance? If I understand Scott Sumner's thinking, he seems to put less emphasis on wealth effects.