04 Apr 2013

Sumner Responds

Economics, Federal Reserve, Scott Sumner 9 Comments

[UPDATE below.]

It’s getting late and I’m working on a deadline, so perhaps this is foolish of me. I feel like when I’m playing the computer in chess and it makes what seems to be a really dumb move. Do I pounce, or should I be cautious and assume I’m missing something subtle?

Anyway, here’s what Scott Sumner said in response to my post blasting him about Japan:

Some commenters (such as Bob Murphy) seem to think I believe that nominal interest rates are a good indicator of the stance of monetary policy. That’s probably because I often quote Friedman saying that ultra-low nominal rates are a sign that money has been tight. I still believe that, but Friedman didn’t think rates were was a reliable indicator of the current stance of monetary policy, and neither do I. [Bold in original.]

And my punky response:

Just to avoid future misunderstandings, [Scott, you think that] the stock market and foreign exchange market are reliable indicators of the *current* stance of monetary policy, right? In response to a surprise central bank announcement, you think speculators almost immediately update prices of stocks and currencies. But they wait a year or two before turning their attention to bonds?

(Yes I’m being snarky but this is the Internet. If I ever become more famous than you Scott I will be really polite.)

UPDATE: Primarily because I have a deadline I should be working on, I am going through Scott’s archives from the period where he took on Sheldon Richman and me, because I was quite sure this is the time where I got my “misunderstanding” of his position. Here are some examples of where I got the wacky notion that Scott believed if the government switched to easier money, then long-term interest rates would respond quickly (just like Scott thinks every other thing in the economy responds immediately, because of efficient markets).

==> On Dec. 26, 2012, in a post entitled “Recognizing easy money” (apropos, yes?) 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) and low frequency data (long periods of accelerating M2 growth usually result in higher inflation and higher bond yields.)

But most people don’t understand this, probably because they equate the terms ‘easy money’ and ‘low interest rates.’ So the claim that easy money raises rates leads to one of the “that does not compute” moments of puzzlement. [Bold added, to show this is an immediate effect. It is a weird type of “monetary surprise” that happend in the past.]

==> But that’s nothing. Here’s the post I was looking for, from Dec. 12, 2012, titled “Take that, Cantillon effect fans”:

Hot off the wire, once again Fed stimulus raises interest rates and lowers bond prices:

[Here Scott quotes from a financial news article:] Treasuries fell after the Federal Reserve said it will buy $45 billion a month of U.S. government debt, expanding its asset-purchase program while linking its main interest rate to unemployment and inflation.

Only the Fed can make the price of something fall by purchasing more of it. Ironically, the Fed wants to lower long term interest rates.

So let’s remember the context here. This event happened about a week after Scott and I had been crossing swords over Cantillon effects, where Sheldon and I were saying that (other things equal) when the Fed buys an asset, it pushes up that asset’s price and benefits the current owners. Scott kept pointing out how ignorant we were, and said that usually when the Fed creates new money to buy bonds, long-term yields go up because of expected price inflation.

Then, a week later, the Fed announced QE3 (right? I’ve lost track of the dates now), and Treasuries responded to that announcement by falling in price. Scott pointed to this as a feather in his cap.

* * *

Clearly, Scott is now inventing stuff when he says that he never claimed nominal bond yields are an indication of investor expectations about *current* monetary policy. He just said it twice above, and moreover that is a critical part of his worldview. I.e., Scott famously rejects the idea that we need to “wait and see” if a monetary policy worked; we look at the immediate impact on various market data.

So it’s odd that Scott celebrated the BoJ’s ability to push 10-year government bond yields down to record lows. That suggests investors now anticipate a combination of lower price inflation and/or real economic growth. How is that a success, in Sumner’s book?

P.S. I know Scott never claimed that low nominal long-term bond yields were 100% proof of tight money. But he *did* say, “near-zero interest rates are an almost foolproof indicator that money has been too tight,” and above I’ve documented him showing how when things move *immediately* in the direction he wants, then he claims it as further evidence that he is right and his critics are wrong. All in all, I don’t think this is merely my failure to read carefully, I think this is the Sumner Shuffle.

9 Responses to “Sumner Responds”

  1. Paul Andrews says:

    Good work Bob. Scott’s world-view is incoherent – I often wonder whether he really believes the things that he says. I’m betting not.

  2. Major_Freedom says:

    “I think this is the Sumner Shuffle.”

    Wow what have I been missing?

    Sounds like things haven’t changed much.

  3. skylien says:

    Well it seems JGB just turned heavily:


    It rather looks to me like the market is currently not really sure how much longer it pays to front run the BOJ.

    • Major_Freedom says:

      Sumner’s probably going to wet his pants when he finds that out.

  4. Nick Rowe says:

    FWIW (not much): Now that Japanese long bond yields are rising I feel much more comfortable with the idea that Japanese monetary policy is working. But I have no idea why they fell at first and then rose a few days later. That doesn’t make sense to me. What was the bond market thinking? Did it suddenly change its mind? Did it take it a day or two to figure out monetary policy would work, and would eventually raise shorter term nominal interest rates? Aren’t bond markets supposed to figure things out almost instantly? Who knows.

    • Nick Rowe says:

      Or should that be “a few hours”, rather than “a few days”? (I can’t see the horizontal axis very well). But either way, it’s still a puzzle.

      • Major_Freedom says:

        My two cents:

        I think what may have happened is that with the announcement, the front runners piled into the bond market hoping to get an information asymmetry generated pop of a few bps, at the expense of the under-informed investors who can’t process the information as quickly, and then, after those informed investors bid down the bonds, the market was left with a decreased demand, which then made the prices decline.

        More of a stretch/speculation: Maybe some investors purposefully bought bonds on the way up due to capital requirements, or because they wanted to incur a sure loss for tax reasons…

        • Nick Rowe says:

          MF: Dunno. My two cents would be sort of the opposite. The immediate uninformed knee-jerk reaction was “The BoJ will be buying bonds, so let’s front-run it now!”

          And then those who thought about it a bit more eventually figured out what would happen in step 2, when the increased growth and inflation would raise equilibrium nominal interest rates.

          But that too is a stretch/speculation.

          Or it may be that both of us are wrong, and there’s some local Japanese information neither of us knows about that explains everything.

          • Bob Murphy says:

            You guys are both wrong. World investors first zigged, then read my blog post and zagged.

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