04 Apr 2013

Market Monetarists, Like Ogres, Have Many Layers

Federal Reserve, Scott Sumner 5 Comments

(In the title I’m referring to this.)

You know, I really have tried over the last few years to make sense of a guy who says the fundamental explanation for our economic malaise, is that Ben Bernanke has implemented the tightest monetary policy since the Hoover Administration. But it’s tough. In a recent article in the New Yorker the author states, “But, if you look at the U.S. economy, you don’t see any of the signs you’d expect if the Fed were acting recklessly: the money supply is not growing rapidly, and inflation is trivially low.” Scott Sumner was interviewed for the article, and on his blog praised its excellent fact-checking. This puzzled me, since the monetary base has risen 206% since September 2008, while M1 is up “only” 70%. (The Austrian Money Supply as defined by Rothbard and Salerno is up 37%.) You’d think at the very least the article would say, “By some measures, money is rising at an extremely rapid rate, while other measures are more benign.”

Anyway, the point of my current post is to wonder aloud about Scott’s blog concerning Japan. It has the sarcastic, self-congratulatory title, “Nothing to see here folks, move along,” and–as long-time Sumner readers will recognize–the point of the article is to say that the unfolding events in Japan perfectly vindicate the Sumnerian worldview. Scott opens up by declaring, “While many of our famous macroeconomists, pundits and bloggers insist we need fiscal stimulus because the Fed and BoE and ECB are out of ammunition, Japan continues to prove them wrong,” and then quotes from a news article that states:

Kuroda’s first policy meeting since taking office on March 20 was seen as a big test of his ability to steer the BOJ towards unorthodox measures to meet the inflation target it adopted in January, and markets liked what they saw.

Government bond futures soared and the benchmark 10-year bond yield hit 0.425 percent, its lowest ever. The yen, which had been creeping up in the run-up to the meeting, plunged, driving the dollar up by more than 2 percent to around 95.25 yen from around 92.90 before the decision.

The Nikkei stock index unwound losses of more than 2 percent to end up 2.2 percent, just shy of a 4-1/2 year closing high hit last month.

The BOJ will buy 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of bonds sold in markets. It combined two bond-buying schemes, its asset-buying and lending program and the “rinban” market operation, to buy longer-dated government bonds, including those with duration of 40 years. [Bold added.]

Later Scott goes on to say: “Some people will discuss whether the policy will “work.” It’s already worked. The yen plunged on the news. That’s not supposed to happen when you are stuck in a liquidity trap.”

So we all get the picture, right? The events in Japan happened exactly according to the Sumner playbook, while traditional Keynesians should be troubled.

Yet hold on a second. Look again at that sentence I put in bold, from the news article. When the BoJ announced it would create new yen out of thin air in order to buy massive amounts of government bonds, those bonds rose in price, driving their yield down to record lows.

Is this what Scott Sumner told us would happen? When the Fed pushed down longer-term yields, didn’t Scott say that was the exact wrong thing to do? Hasn’t Scott repeatedly cited the legacy of Milton Friedman, in order to tell us (Scott’s words) that “near-zero interest rates are an almost foolproof indicator that money has been too tight”? Didn’t Scott take Sheldon Richman (and me) out to the woodshed, when we had the audacity to say that the Fed pushes up the price of bonds when it buys them?

Don’t get me wrong, I’m sure Scott can come up with some story to reconcile the record-low 10-year Japanese yields with his view that the BoJ is finally doing the right thing, by opening up the monetary spigots. But prima facie, he has some ‘splainin to do. That aspect of the market reaction to the BoJ contradicts a major element in what Sumner has been preaching the last 5 years. The fact that Scott quotes from that news article, as if it’s self-evident that he just hit it out of the park, is further evidence of my claim that today’s major economics bloggers see what they want to see, when they look at the data. It is confirmation bias of the highest magnitude. Why, it’s comparable to the amount of money that Bernanke has added since the crisis unfolded–and that’s a lot!

5 Responses to “Market Monetarists, Like Ogres, Have Many Layers”

  1. John p says:

    ‘You know, I have really tried over the last few years to make sense of a guy who says the fundamental explanation for our economic malaise, is that Ben Bernanke has implemented the tightest monetary policy since the Hoover Administration.’

    I know.I feel your pain.

  2. Bob Roddis says:

    I listened to Russ Roberts interview Sumner for 1.09.36 and expected some pushback, at least enough for Sumner to explain himself. Didn’t happen.


  3. Scott H. says:

    The issue with the FED, and the bond prices, and money supply, and the monetary base Is that we are talking about a process that goes from FED purchases to actual money creation and money velocity through to a certain price level or NGDP. There are going to be circumstances that will affect the different stages of the process from one particular situation to another.

    Clearly we’ve had a money supply that has not expanded fast enough to accomodate the drop in the monetary velocity. I see what Sumner is saying. The question is: Can we really lay all this at the feet of the FED. The FED can’t force banks to loan money. It can’t make Companies spend their cash hordes. It can’t force me to purchase goods and services…. Or can it?

  4. John says:


    Here’s an interesting blog post by Arnold Klein talking about how Basel is ruining the transmission mechanism.


  5. TallDave says:

    Well, I’ll attempt a few explanations here.

    1) the monetary base may be significantly larger, but when NGDP is still well below trend that means the the expansion isn’t working, which isn’t surprising: the policy is still a 2% inflation target, which means Bernanke is simultaneously pushing on the brake and the gas — you can waste a lot of gas that way, expectations uber alles (i.e. everyone still expects a 2% inflation target long-term regardless of short-term action)

    2) liquidity effects *can* be larger, especially since the BOJ target is still only 2% — let’s say the situation was analogous to the U.S. in the 1960s-70s, i.e the BOJ targeted something like 7% inflation. What do you think would happen to bond prices? 🙂

    3) the Nikkei seems to be saying “yay! we see more growth now!” i.e. that money is tight, and note the stronger correlation to monetary policy is something that started in 2008.

    4) this is not an ideal policy for Japan in Sumner’s view (NGPLT would be far better) it is just less bad than what went before

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