Scott Sumner Statistics: Trust, But Verify
I am being sincere when I say that I’m not accusing him of skullduggery, but I’ve noticed that sometimes Scott Sumner’s descriptions of the data lead the reader to imagine something far different from the reality. A good recent example of this is Scott’s discussion of his theory that it was (purposelessly) tight monetary policy that brought on the Great Recession:
Inevitably when I make this argument there are a few tiresome “people of the concrete steppes” who insist the Fed did not cause the recession, they merely failed to offset the fall in velocity. Unfortunately they haven’t bothered to look at the data. After rising at roughly a 5% rate for many years, the Fed brought growth in the monetary base to a complete halt between August 2007 and May 2008. That triggered the onset of recession in December 2007. Velocity actually rose during that 9 month period, but not enough to offset the Fed’s tight money policy. [Bold added.]
So from the sentence I put in bold–and especially to understand why the second greatest financial crisis struck the world in the fall of 2008–Scott’s innocent reader would assume that annual growth in the monetary base had bounced around in a fairly narrow band centered on 5% for at least 10 (?) years, with this steady 5%-ish growth chugging along until July 2007. Then, this pattern was completely disrupted starting in August 2007, when growth in the monetary base fell off a cliff.
Yet if we go look at the actual data, they don’t remotely resemble Scott’s story:
Don’t get me wrong, the above chart makes it a little awkward for other Austrians and me to tell our preferred story, namely that it was massive Fed inflation that fueled the housing bubble. (I have tried to do so e.g. here and here. But my point is, it would be easier to convince skeptics if the surge in the monetary base had been higher in the early 2000s than in practice it was.) But for sure, the above chart doesn’t seem to line up at all with the narrative Scott is spinning in the block quotation.
This Fred guy, can you trust him?
Sumner says this to another commenter (squarely rooted)
[Quote]Squarly rooted. I don’t think the base is a good indicator of monetary policy, I am simply responding to those people of the concrete steppes who claim it wasn’t because The Fed did anything to M, it was V. No, it was M. If the Fed doesn’t want to control M, that’s its choice. But it determines M.
Now some advocate looking at nominal interest rates, which is an even worse indicator. Rates are high during hyperinflation, but no one thinks money is easy. Some point to real interest rates, but then ignore the fact that the Fed raised real interest rates on 5 year TIPS from 0.57% in July 2008 to over 4% by the end of November. Isn’t that tight money? No, but if you are a person of the concrete steppes you should think so. So why don’t they?[end quote]
Two things that make me pull my hair out are that he speaks in code but then he’ll also get to the pivotal crux and appear to misspeak- the bit about hyperinflation. This is so frustrating because I’m trying to listen and always feel punished fpe my efforts.
Man I am so confused.
“After rising at roughly a 5% rate for many years, the Fed brought growth in the monetary base to a complete halt between August 2007 and May 2008.”
I thought the Fed takes it cues from demand thereof providing 2% inflation and stable dollar?
According to the above quote, I have had it backwards this entire time.
ON a side note: Isn’t that giant dip when we transitioned from world trade center to ONE world trade center?
@Gamble
-The giant dip is an optical illusion:
http://research.stlouisfed.org/fred2/graph/?g=sjL
In any case (even of the chart had showed exactly what he said it would show) how would looking at growth in the monetary base alone enable you to validate whether the fed failed to offset any fall in velocity ? You’d also have to show velocity for the same period to validate that.
Gotta say, looks like Scott Sumner’s version could have been better written, but still holds a lot of water.
For whatever reason, the Fed was bringing increases in the adjusted monetary base down to near zero by 2008, and had been tightening the monetary noose for many years. At the time, there was a lot of (misplaced) concern about global commodities prices.
Ironically, it was the domestic rural-sop ethanol program—-not monetary policy—that shot corn prices to records, while global commodities prices are set in global markets and that includes a voracious China. (I also have often wondered about the role of Putin on the NYMEX oils. I mean the guy has a patriotic duty to game prices higher, zero morals, and a near infinite wallet, and cloaking identities is entirely legal in commodities markets. So is financing any sort of news story or PR, including hysterical peak oil websites.)
Gold prices were rising in 2008, again due to retail demand in China and India, but the gold nuts and their allies on the FOMC board went berserk on that (since the Fed started QE, gold prices have fallen. That reality has driven the gold nuts insane).
By 2008 you had a lot of leverage in real estate (commercial too, btw, often forgotten. They had the same collapse at the residential). Why invest in real estate? Oddly enough, the very tight monetary policies of the Fed resulted in low interest rates. Like Milton Friedman said, low rates don’t happen when you print a lot of money. Low interest rates makes people want to buy property.
The Fed pulled the rug out hard in 2008, even though core inflation was tame, at exactly the time more Americans and institutional investors had leveraged to buy property than ever before.
Who needs Al Qaeda? The Fed can do more damage accidentally or stupidly in a few months than Al Qaeda will do in 1000 years. I assume they sing songs praising the Fed around the campfires in Al Qaeda training camps.
The big spike you see around 2000 I think was tied to Y2K scaremongering.
BTW, unit labor costs fell in 2013, according to the BLS. They have risen, however, 1.7 percent since the first quarter…of 2007.
Let’s get scared about inflation.