16 Sep 2013

Even More Sumner Shenanigans

Market Monetarism, Scott Sumner 13 Comments

I almost feel bad piling on Scott, because although I disagree with his monetary views tremendously, I actually think he’s a cool guy with a good sense of humor. But this is science; we must be merciless.

When the news broke yesterday that Larry Summers was pulling his name out of the running for Fed chief, Scott wrote a post titled, “S&P futures soar 17 points (1%) on Summers dropping out.” Here are some excerpts from that post:

God I love seeing financial markets respond to monetary policy news. Now let’s see the Fed do something exciting on Wednesday. And for God’s sake, let’s get an NGDP futures market up and running.

Update: Taking into account the fact that there was already some expectation Summers would drop out, I’d guess his decision created upwards of a trillion dollars in new global stock market wealth. Not bad!

Monetary policy is really, really important.

There was just one little wrinkle in Scott’s victory party. The very news article that he quoted, in order to show how the Summers announcement drove up stock prices, also said: “In debt markets, futures for the U.S. Treasury 10-year note leaped over a full point, a sizable move for Asian hours, as investors took yields lower.”

Now you’re thinking, “Duh, Yellen will buy more Treasury debt than Summers would have, so the price of Treasury debt went up and its yield went down.” But no, Scott has taken great pains to spank anyone espousing such a naive theory.

So today, Scott asked his readers (at the end of the post) if they had any data on TIPS spreads to get to the bottom of this mystery. Here’s how it played out, with Scott commenting on their findings:

Update: In the comment section John Hall has data suggesting not much impact on TIPS spreads, albeit the 10-year may be up a couple basis points. So real rates fell. Possible explanations:

1. Not much impact on NGDP expectations.

2. Significant impact on NGDP, but fairly flat SRAS.

3. Some market segmentation—TIPS spreads don’t precisely measure expected inflation changes.

Or perhaps a bit of each. If I had to guess I’d say NGDP expectations rose, but by a very small amount.

I don’t think I’m merely being a wiseguy by saying there’s a bit of an inconsistency in Scott’s commentary from yesterday to today, am I?

13 Responses to “Even More Sumner Shenanigans”

  1. Scott Sumner says:

    Yes, you are being a wiseguy, there is no inconsistency. I’ve always said Fed moves toward easier money sometimes make rates go up and sometimes make rates go down. That’s still true. I’ve also always said that highly expansionary monetary policies (Germany 1923, America 1970s, etc) almost always yield high interest rates, and ultra-contractionary monetary policies (the US in the early 1930s, Japan in the 1990s, etc) almost always yields low interest rates. Where’s the inconsistency? What part do you disagree with?

    • Martin says:

      Scott, aren’t you reasoning from a price change in the last quote Bob published of you? 😉

    • Major_Freedom says:

      “I’ve always said Fed moves toward easier money sometimes make rates go up and sometimes make rates go down.”

      Why doesn’t the same input keep having the same output?

  2. Alex Tabarrok says:

    As I understood Bob, the inconsistency is the trillion dollar increase in stock market wealth with not much impact on NGDP expectations.

  3. Bob Murphy says:

    Yep, Alex T. gets it. Scott, you clearly were implying that Summers dropping out ==> easier Fed policy expected ==> higher expected NGDP growth ==> higher stock prices right now.

    I mean, if you’re now saying that market monetarism doesn’t work through expectations of NGDP growth, that’s a big change to what you’ve been saying in the past.

  4. Lio says:

    “I disagree with his (Sumner’s) monetary views tremendously”

    Me too!

  5. Matt G says:

    If Sumner convinces enough people to think in terms of NGDP expectations, does that make him right?

    • Major_Freedom says:

      Only if you define “right” as “what most people believe.”

    • Richie says:

      Seriously? That’s one of the most blatant logical fallacies ever:


    • Richie says:
    • Matt G says:

      I didn’t mean in the appeal to popularity sense. Bob has talked about his fundamental issue with Sumner as his being “insane” because he analyzes macroeconomic issues in terms of NGDP expectations, and constantly attributes the behavior of economic actors to their NGDP expectations. But should Sumner convince the world to analyze things in terms of NGDP expectations, might his perspective becomes accurate?

      Ah well, there goes all the potential humor.

      • Richie says:

        Ah, ok. I understand now. Sorry.

  6. Ollie Buckley says:

    Still, Yellen’s nomination remains uncertain, leaving open the possibility that markets would react differently should one of several other possible nominees be chosen.

Leave a Reply