Natasha Sarin co-wrote this post
One of us (Larry) has long advocated the abolition of the $100 note in the US and the €500 note (aka the Bin Laden) in Europe. We assumed the next step after the ECB’s announcement that the €500 note would be phased out would be a discussion of the $100 bill and the particularly pernicious SFr1,000 note. Read more
I will never again use the term “political correctness”. Whatever rhetorical value the term may have once had is far more than offset by what has been unleashed in the name of resistance to it since the presidential election. Read more
On Tuesday night I spoke in Houston at a forum sponsored by the Dallas Federal Reserve. Inevitably, given that I was at the Fed, the topic turned to monetary policy. On monetary policy, Dallas president Robert Kaplan asked what I thought the Fed should be doing and saying. I suggested four modifications to its current posture.
First, it should acknowledge that the neutral rate is now close to zero and it may well remain under 2 per cent for the foreseeable future. With the economy growing at below 2 per cent over the last year, total hours of work essentially flat for the last six months and long-term inflation expectations declining there is no reason to think interest rates are currently much below the neutral rate. And given that the neutral rate has been trending downwards since well before the financial crisis we have no basis for being confident that it will not continue declining, and certainly no basis for supposing it will increase. Read more
I have just come across an International Monetary Fund working paper on income polarisation in the US that makes an important contribution to the secular stagnation debate. The authors — Ali Alichi, Kory Kantenga and Juan Solé — use standard econometric techniques to estimate the impact of declines in middle-class incomes on total consumer spending. They find that polarisation has reduced consumer spending by more than 3 per cent, or around $400bn annually. If these findings stand up to scrutiny, they deserve to have a policy impact.
This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus programme. Alone, it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 per cent more there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession. Read more
Over the weekend, the FT published my review of Nicholas Eberstadt’s important new book Men Without Work. The core message is captured in the graph below.
© Bureau of Labor Statistics
As I argued last week, it was disappointing what came out of Jackson Hole for three reasons. The first, which I discussed here, was that the Federal Reserve should have signaled a desire to exceed its two per cent inflation target during periods of protracted recovery and low unemployment and, in this context, to signal that a rate increase was off the table for September and quite likely the rest of the year. Friday’s employment report further strengthens the case for delay both by adding to the evidence on the absence of inflation pressures and by suggesting a less robust economy than most expected. Read more
I had high hopes of the Federal Reserve’s annual Jackson Hole conference. The conference was billed as a forum that would look at new approaches to the conduct of monetary policy — something I have been urging as necessary given secular stagnation risks and the sharp decline in the apparent neutral rate of interest. And the speech by Fed chairman Janet Yellen in a relatively academic setting provided an opportunity to signal that the central bank recognised new realities required new approaches.
The Federal Reserve system and its chair are to be applauded for welcoming challengers and critics into their midst. The willingness of many senior officials to meet the Fed Up group of community activists is also encouraging. And it is important for critics like me to remember that the policy explorations of today often become the conventional wisdom of tomorrow. In this regard the fact that the Fed has now recognised that the decline in the neutral rate is something that is much more than a temporary reflection of the financial crisis is a very positive sign. Read more
© Getty Images
John Williams has written the most thoughtful piece on monetary policy that has come out of the Federal Reserve in a long time. He recognises more explicitly than others that r* (r-star), the neutral interest rate, is now very low and quite likely will remain very low for a long time to come. As he sees, this is the essence of the secular stagnation concern that I and others have been expressing for the last three years. Read more
Look at the social return on fixing potholes to judge the value of public investment © Getty Images
The Congressional Budget Office is an American national treasure. Without the impartial objectivity it brings to the budget process our country would make much worse policy. Baseball without an umpire would be a very different game, and similarly the making of budget policy without the CBO would be a very different and inferior activity. However, even the best umps occasionally blow a call and I am afraid that is what CBO has done in its recent infrastructure report. Read more
The interest rates on 10 and 30-year US Treasury bonds on Wednesday reached all-time lows of 1.32 per cent and 2.10 per cent respectively. Record-low 10-year interest rates were also registered in Germany, France, Switzerland and Australia. Notably, Swiss 50-year interest rates are now for the first time negative. Rates are negative in Germany up to 15 years; and in France up to nine years.
Such rates would have seemed inconceivable a decade ago and very unlikely even a couple of years ago. In 1991 my parents paid off their 30-year mortgage on the house I grew up in and I remember thinking that the 4.5 per cent rate they paid was some kind of antique, the likes of which would never be seen again. At the beginning of this year, US 10-year rates were 2.27 per cent and there was a general view that they would rise sharply to perhaps 3 per cent as the US Federal Reserve began to tighten. Read more
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