My Parting Remarks on Scott Sumner and Interest Rates
Now that I had time to carefully read Scott’s response to my initial post on Japan, I have backed off a bit. I still think he is being slippery, but he was clearer in his response than I initially thought. So, my reaction in turn was not very helpful, and I can understand why Scott and his fans would dismiss me as an annoying gnat.
In this final post, let me summarize why I think he’s being slippery–engaging in the Scott Sumner Shuffle.
1) The BoJ announced a major monetary expansion, and Scott quoted a news article as if it confirmed his worldview.
2) I argued that this was weird, since Scott has consistently argued that looser money would lead to higher long-term yields, not lower.
3) Scott responded in a post that opened with these lines: “I often point out that on a few occasions easy money policy announcements have actually raised long term bond yields. But that’s obviously not always true.”
So, I am here to say that that way of framing his past writings is simply not true, and was the crux of our spat today. In the two sentences I’ve quoted above, Scott makes it sound like he says, “Hey, did you know that it’s theoretically possible that a surprise announcement of more asset purchases could actually raise long-term yields?! Really! It’s even happened a few isolated times in history!”
But no, that’s not at all what Scott has been saying over the years. Or at least, I can point to a few examples where he said something much stronger. Remember, the reason I know about this quite vividly, is that I was on the receiving end off Scott’s learning stick when he thought I denied the possibility of such things. Here we go:
==> On 12/26/12 Scott wrote: “People who pay attention to monetary policy know that easy money often raises long term interest rates. We have lots of high frequency data showing this (expansionary monetary surprises often raise long term bond yields)…”
==> On 12/12/12 Scott wrote: “[O]nce again Fed stimulus raises interest rates and lowers bond prices…” So that phrase “once again” means that this is a common thing. You wouldn’t say, “Once again, man bites dog.”
==> And the smoking gun: On 12/7/12, specifically in response to me (by name), Scott wrote a post with the title “If I Buy T-Bonds, Their Price Rises. If the Fed Buys T-Bonds, Their Price (Usually) Falls.” It was this post title that made me think that Scott Sumner believed that if the Fed buys T-Bonds, their price usually falls. Perhaps I read too much into it…
For extra clarity, from that post itself Scott says:
I notice that lots of commenters insist that bondholders gain when the Fed injects money by buying bonds. Even if this were true, it would have no bearing on my criticism of [Sheldon] Richman…But there’s a much bigger problem with this fallacy. It’s unlikely that monetary injections would raise bond prices at all.
and later
Do monetary injections always reduce bond prices? No, just most of the time. Obviously there are special cases that relate to how the injection changes expected future policy, and very small effects depending on which maturities are purchased. But the dominant effect is that more money means lower bond prices.
OK? Clearly Scott was lecturing me (yes, by name, I’m not pulling a Carly Simon here) on the fact that the default, normal case–in both theory and history–was for long-term bond yields to rise in response to an expansionary monetary surprise.
So today, when Japanese 10-year yields fell to record lows on the BoJ’s announcement, I pointed out that this was a little awkward for Scott.
And in response he said, “I often point out that on a few occasions easy money policy announcements have actually raised long term bond yields.”
That, my friends, is the Scott Sumner Shuffle–not to be confused with a Krugman Kontradiction.
It is a little bit off-topic but it is just quite interesting what Jim Reid from Deutsche Bank has to say the BOJ and other CBs:
Deutsche Bank On Central Bank Intervention: “We Are Flying Blind”:
“From DB’s Jim Reid:
The move by the BoJ plays into our ‘Journey into the Unknown’ thesis and its fair to say that there really is no precedent for what Central Banks are currently doing, or threatening to do, on a global scale. You’ll be able to read chapter and verse from strategists trying to explain what’s likely to result from such moves but the honest truth is that we are flying blind in terms of historical evidence even if we go back centuries. My guess is that medium-term global inflation is being locked in by these moves but that the first move is likely to be maintaining the low bond yield world for some time even if there are brief selloffs. For riskier assets, our simple models based on variables like the PMIs tell us that we may be due a set back soon. These models survived the liquidity burst of QE1 and QE2 but will they now be overpowered by the combined OMT potential, QE-infinity and the BoJ’s new ‘Carry-O-QE’ (ok I know it won’t catch on)? Our base case remains that we will eventually see a set back as we approach the end of H1 on weaker data (especially in Europe) but that outside of a shock, the downside will be perhaps limited by global Central Bank liquidity. Fascinating times and we can’t help thinking that these moves are not without consequence. If it really is as easy as printing money then all Central Bank’s would have done it a long time ago. That such a period for global CB’s is unprecedented should serve as a warning to watch for unintended consequences.”
http://www.cfpdir.com/news/deutsche-bank-on-central-bank-intervention-we-are-flying-blind/
*has to say ABOUT the BOJ and other CBs:*
Again I ask (and I won’t get an answer of course) how can economic actors who even see themselves that they “fly completely blind” spend their money in a way that a genuine structure of prices and capital is formed that is selfsupporting and tends towards matching value scales of market participants.
The same way in which species evolve. Those who hit upon the correct investments survive. The others go bankrupt. (Unless that it, they are propped up by central planners).
Let me improve that a little:
The same way in which species evolve. Those who hit upon the correct investments survive, as does the capital they build. The others go bankrupt and their flawed investments die with them. (Unless that is, they are propped up by central planners).
This mini-controversy reminds me of a sentence from Hayek’s introduction to Menger’s writings:
“there might be something in the suggestion occasionally heard among Menger’s admirers that it was unfortunate that he was drawn away from his works on the concrete problems of economics. ”
If only Menger had completed the volumes he had planned to follow ‘The Principles’.
Hey I’m not tutoring any Crown Princes over here.
Good post.
It seems to me that Sumner would also view the absence of a rise long term rates as a failure of monetary policy since it implies a lack of either expectations of additional economic growth or higher inflation. Correspondingly this fall in interest rates would in his views mean the policy didn’t just fail but did the reverse of what was intended. So hardly a “success” on his terms.