16 Jan 2016

Contra Krugman Episode 18: We Tackle the China Syndrome

Contra Krugman 1 Comment

Episode here.

16 Jan 2016

Mystery Explained

Banking, Federal Reserve 2 Comments

Thanks to Captain Parker and E. Harding, they were telling me the answer to my previous query, but I was not receptive until yesterday for some reason.

Here’s a chart showing the drop in official “total reserve balances” and how it is largely explained by a rise in Treasury deposits (with the Fed) and reverse repos (that the Fed engages in with Federal Home Loan Banks and other institutions that aren’t eligible to receive interest on reserves):

So, it’s not that reserves are leaving the banking sector, it’s just that some are being held in different ways that don’t get counted in the normal metric.

For a great explanation of the mechanics/accounting of how the Fed is actually raising interest rates, see this Econbrowser post by James Hamilton. (Again, thanks to Captain Parker for the link.)

14 Jan 2016

Federal Reserve Banks: Total Assets vs. Reserve Balances

Federal Reserve 15 Comments

Here’s something interesting, possibly disturbing, that I just noticed while prepping for a radio interview:

The red line shows that since the “taper” ended, the Fed has been treading water with its assets, rolling over bonds as they mature but not letting its total holdings drop.

On the other hand, the blue line shows the total reserves in the banking system. I’m not sure why it bounces around so much, or why it has dropped ~$230 billion since late December. There is no seasonal adjustment on the blue line, but the other dips didn’t occur in Dec/Jan.

Any thoughts?

13 Jan 2016

Inverted Yield Curve and Recessions

*Choice*, Austrian School, Shameless Self-Promotion 10 Comments

The 3-month and 1-year Treasury yields have gone way up in the past year, but the overall spread (say between them and the 10-year) is still quite positive, so the classic warning of an impending recession is still not here. Here’s a long-term chart:

In the chart above, the red line is the 10-year yield, the green line is the 3-month yield, and the blue line is the difference between them.

So, if you just look at the blue line and the recession bars, you can see that the blue line always goes negative before a recession.

But by decomposing it, you can see that specifically what happens is that short rates zoom upward to exceed long rates. (In principle the yield curve could invert if long rates collapsed below short rates. But this chart shows, that’s not how it actually happens historically.)

In this paper, I argue that the Austrian business cycle theory, among its other virtues, can explain the predictive power of the yield curve. Specifically, central banks have more control over short rates than long rates. So in standard Austrian theory we say the central bank “raises rates” and this causes the boom to turn to a bust. Well, when you get more specific about it, that would mean short rates go up while long rates (which are a combination of expected real growth and price inflation) will stay put or possibly even go down.

So, if you buy the basic story of ABCT, then out pops the fact that an inverted yield curve “predicts” recessions as a bonus.

** For a full explanation of the Austrian theory of the business cycle, see my new book Choice from the Independent Institute.

13 Jan 2016


Potpourri 6 Comments

==> I realize I am trained at this point to perceive tension between our popular Keynesian writers, but isn’t there a problem reconciling this DeLong piece with this Krugman op ed?

==> This Vox piece is happy to report that (apparently) employers aren’t penalizing full-time work in response to ObamaCare mandates as many analysts (including me) warned would happen. Yet look at this part in particular:

But [the study] also tries to dive a bit deeper and look not just at the overall economy but at very specific subgroups that seem more likely to be affected. This includes people who work just above 30 hours per week and don’t get insurance at work, who might see their hours cut to dodge the employer mandate. Or workers who gained Medicaid coverage — and might be less inclined to keep their job now that they have an alternative source of health insurance.

But Simon says that neither of those groups showed a clear employment pattern. Take the group that worked just above 30 hours per week and didn’t have insurance in 2013, right before Obamacare hit. Their hours went down a little bit in 2014, but bounced back in 2015 to 2013 levels.

“These are the people right on the margin, and we’re not showing any clear trend,” Simon says.

This is really incredible. To their credit, the people associated with the study–and others quoted in the article–are being very guarded about the results.

But in light of the gleeful tweets from people like Noah Smith, I have to ask those who ridicule people warning about minimum wage/ObamaCare: Suppose the federal government said employers had to pay an additional $5,000 for every racial minority on their payroll. Would it be crazy for civil rights groups to get upset about that? Would you say we need to go run some regressions a few years after the experiment?

13 Jan 2016

Many Climate Economists Don’t Believe Climate Economic Models

Climate Change, Shameless Self-Promotion 7 Comments

My latest at IER. Some excerpts:

As the numbers indicate, 59 percent—a solid majority—[of the 365 peer-reviewed climate economists] thought that climate change would be beneficial for the global economy at least through the year 2025. Moreover, 37 percent of the experts thought that climate change would be beneficial to the global economy until at least the year 2050. Does this match up with the apocalyptic rhetoric coming from Vox and other quarters?


The irony here is incredible. Americans have been beaten over the head for years about the “settled science” of the peer-reviewed research, and the Obama Administration assembled an Interagency Working Group that has spent years calculating and updating estimates of the “social cost of carbon.” We at IER have reported on all of the problems with these models, and cited MIT economistRobert Pindyck’s scathing critique. Now guys like Roberts are coming along and effectively saying, “I don’t care about the peer-reviewed literature that the IPCC uses, or the models chosen by the Obama Working Group. Let’s make policy by conducting a survey to see what the group thinks.”

11 Jan 2016

Powerball and the Lucas Critique

Economics, Shameless Self-Promotion 12 Comments

I realize a few commentators gave a nod to this consideration, but I don’t think they realized just how critical it is. An excerpt:

To see the point, suppose the Powerball official jackpot somehow rose to $1.3 trillion, with a lump-sum payout of $806 billion. Running through the same calculations as above, we might get a ballpark gross expected value of one ticket equal to $1,700. That is far higher than the ticket price of $2, making it a no-brainer to play. In fact, in order to eliminate any risk, a hedge fund might devote $585 million to buying every combination of Powerball numbers. It would appear that by spending $585 million on tickets, the hedge fund could guarantee itself the $806 billion lump-sum payout. Who wouldn’t put up $585 million to win a guaranteed $806 billion?

Yet hold on a second. If one particular hedge fund sees this opportunity, why wouldn’t dozens more seize it? Yet it obviously can’t be the case that dozens of hedge funds can all guarantee themselves $806 billion from the same pot of money. In this contrived scenario, what would happen is that the dozens of hedge funds would all buy every combination of Powerball ticket, and so whatever the winning number happened to be, there would be dozens of winners splitting the pot. Realizing this, some of the hedge funds might buy multiple tickets for each possible number…until the point at which it no longer made sense to buy a ticket.

11 Jan 2016

David Hume Loves 100% Reserve Banking

Banking 12 Comments

I’m not sure I fully appreciated this when I read it as a young lad:


This has made me entertain a doubt concerning the benefit of banks and paper-credit, which are so generally esteemed advantageous to every nation. That provisions and labour should become dear by the encrease of trade and money, is, in many respects, an inconvenience; but an inconvenience that is unavoidable, and the effect of that public wealth and prosperity which are the end of all our wishes. It is compensated by the advantages, which we reap from the possession of these precious metals, and the weight, which they give the nation in all foreign wars and negociations. But there appears no reason for encreasing that inconvenience by a counterfeit money, which foreigners will not accept of in any payment, and which any great disorder in the state will reduce to nothing. There are, it is true, many people in every rich state, who having large sums of money, would prefer paper with good security; as being of more easy transport and more safe custody. If the public provide not a bank, private bankers will take advantage of this circumstance; as the goldsmiths formerly did in LONDON, or as the bankers do at present in DUBLIN: And therefore it is better, it may be thought, that a public company should enjoy the benefit of that paper-credit, which always will have place in every opulent kingdom. But to endeavour artificially to encrease such a credit, can never be the interest of any trading nation; but must lay them under disadvantages, by encreasing money beyond its natural proportion to labour and commodities, and thereby heightening their price to the merchant and manufacturer. And in this view, it must be allowed, that no bank could be more advantageous, than such a one as locked up all the money it received,*25 and never augmented the circulating coin, as is usual, by returning part of its treasure into commerce. A public bank, by this expedient, might cut off much of the dealings of private bankers and money-jobbers; and though the state bore the charge of salaries to the directors and tellers of this bank (for, according to the preceding supposition, it would have no profit from its dealings), the national advantage, resulting from the low price of labour and the destruction of paper-credit, would be a sufficient compensation. Not to mention, that so large a sum, lying ready at command, would be a convenience in times of great public danger and distress; and what part of it was used might be replaced at leisure, when peace and tranquillity was restored to the nation.