A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:50pm to cover the release of the FOMC statement and subsequent presser.
Back in December 2015, Federal Reserve policymakers expected they would raise the policy interest rate band to 1.25-1.5 per cent by the end of 2016, implying a cumulative increase in short-term rates of 1 percentage point, or four separate decisions to raise rates by 25 basis points. At the time, the prices of overnight index swaps implied an 11 per cent chance this would happen, according to Bloomberg’s WIRP function. Read more
This might get zeitgeist-y, but stay with us.
It’s basically the idea that extreme events and outcomes are getting more common, in part because systems are getting more complex — it’s played out through inequality stats and in the polarisation of politics, geography, the economy and markets.
It’s also charted by Citi’s Matt King in his latest note: Read more
Sticking with a plan after it seems to have stopped working can be admirable persistence — or it can be bull-headed stubbornness. The question is whether recent difficulties are just temporary setbacks bound to reverse or, instead, you’re on the wrong side of a fundamental change in the way the world works.
Consider the steady decline in real yields since the early 1980s. Back then, long-term US Treasury bonds paid more than 15 per cent each year and American stocks traded at less than 7 times earnings, cyclically-adjusted. Nowadays 30-year Treasury bonds yield less than 3 per cent and, on a cyclically-adjusted basis, US equities are priced at roughly 25 times earnings. These changes delivered huge capital gains for investors. Read more
The biggest news from Wednesday’s Federal Reserve meeting was the sharp decline in the path of future interest rates forecast by policymakers over the next few years.
Less noteworthy for its immediate impact, but still significant, was the modest change in the forecast for the level of the Federal funds rate in the “longer run”. Previously, the median policymaker expected short-term interest rates to hover around 3.5 per cent once the economy had returned to normal. Now she thinks the “longer run” level is closer to 3.25 per cent. Read more
The first batch of reviews for Robert Gordon’s new book The rise and fall of American Growth: the US standard of living since the civil war, are feeding through the blogosphere. Here, for example is Diane Coyle’s take. She’s mostly appreciative of the work but not entirely convinced Gordon’s central thesis that innovation today is slower and less important than it was in the 20th century has been entirely proven.
She is more sympathetic, however, about the issue of headwinds slowing down whatever innovation-driven growth there might otherwise be.
We haven’t read the book ourselves yet, but reading Coyle’s review it’s clear Gordon uses the book to expand in more detail on some of the ideas presented in his October 2015 paper Secular Stagnation on the Supply Side: U.S. Productivity Growth in the Long Run. That paper, itself, expands on his core thesis that the days of miracle growth are long gone and that slower growth lies ahead. Read more
A kindly hat tip to the FT Alphaville reader who directed us to the following speech by the ECB’s Benoît Cœuré from last Friday, and specifically this observation:
If every economy were to react to their domestic challenges by exporting their slack, it would only trigger a race to the bottom.
So the robots are coming for our jobs.
But what’s a government to do to fend off such an economic threat to its populace? Read more
To nick an opening from Climateer… at some point the labour-capital pendulum may not swing back.
Not sure we’re there yet but an automated restaurant in San Francisco is surely a signpost on the road to some sort of hell, albeit potentially just one made up of shoddy dining experiences.
Hell is… soylent served to you by an automaton in a room of people pretending they’re having a good time.
Anyway. That aside, we may as well keep an eye on that pendulum. Read more
A very large compare and contrast chart from Morgan Stanley’s global economics team below the break.
But first, this on the HansenSummers, Rogoff, Gordon debate, for context and stuff. With our emphasis:
The HansenSummers secular stagnation thesis argues that an excess of savings implies there is no attainable interest rate that brings the economy back to full employment for many years. However, Gordon’s ‘headwinds’ thesis argues against much slack in the economy, given that it is potential output growth that is falling, while Rogoff’s ‘debt supercycle’ view argues that weak growth persists only as long as downside from deleveraging remains in place. Together, they suggest that the US, UK and even Japan may have fewer headwinds than the euro area, China and Korea. All three views, however, cannot be right at the same time – an ‘impossible secular trinity’.
Attempting to identify a bubble is considered a fool’s errand because, as the saying goes, they’re only obvious once they’ve popped.
None of that, however, has stopped Citi’s equity strategist team from attempting to identify the current bubble risk stalking the economy.
According to Robert Buckland and team bubbles are usually formed by four key forces: 1) A new paradigm story supported by convincing fundamentals, 2) surplus liquidity, 3) a demand/supply imbalance, 4) business/benchmark risk amongst asset managers. Read more
David Beckworth, economist, disagrees with Larry Summers’ secular stagnation theory because he reckons it overlooks the fact risk premiums are falling. Once this phenomenon is recognised, he claims, there is no long decline in real interest rates.
Beckworth puts the decline of the risk premium down to improved economic management and policy over the last 20 to 30 years. Essentially, central bank intervention in markets has been much more effective, leading to a smoothing out effect of the boom and bust business cycle, and an overall improvement in price stability.
Yet contrast that with BoE chief economist Andy Haldane’s new theory of risk in complex systems. As Haldane recounted in a speech at the end of March, central bankers — if they are to continue to be effective — need to understand the economy is no longer just a system, but rather a “system of systems”. This new nature of the economy, he suggests, is something brought to light by the 2008 crisis. Read more
When it comes to central banking, we tend towards nihilism: the economy is far too complex for any policy rule, but also too complex to be understood by even the most intelligent, well-meaning technocrats. That presents an insurmountable problem for monetary policymakers, who are forever doomed to be fumbling about in the dark rather than smoothing out the vicissitudes of the cycle.
So we were intrigued to read a new paper by, among others, Goldman’s Jan Hatzius and BAML’s Ethan Harris, which was presented on Friday at the Chicago Booth Monetary Policy Forum, that basically agrees with our view. Read more
Housing booms are wasteful — and the subsequent busts are deeply destructive. Worse, they have become bigger and more frequent since the 1970s. An important new paper from Oscar Jorda, Moritz Schularick, and Alan Taylor places the blame on structural changes in the financial sector that exacerbate the impact of excessively loose monetary policy.
This is a continuation of earlier research on the drivers of credit booms and their impact on GDP using data from more than a dozen rich countries going back to 1870, which we covered in detail here. For those who don’t want to reread that post, the two important takeaways are, first, that the growth rate in private borrowing during an economic expansion predicts the severity of the subsequent downturn even when there is no financial crisis: Read more
From Citi’s Steven Englander:
That’s the average of G3 10 year yields falling below 1 per cent for the first time on record. Suck it other times. Read more
Gauti Eggertsson and Neil Mehrotra’s latest stab at modelling secular stagnation can be found here.
It includes explanations about the role of demographics, technological displacement, the liquidity trap and the paradox thrift, toil and flexibility within the secular stagnation framework — and there’s also a really neat explanation about the effects on capital, and in particular productive capital’s tendency to depreciate more quickly than might otherwise be expected. (You know, there’s more stuff being produced than expected, so the return on investment is never quite achieved in time, due to increasingly lower barriers to entry thanks to technique.)
The flip side of that scenario, however, is that unproductive capital becomes strangely useful for dodging depreciation for as long as there is belief in the asset class; hence the tendency for bubbles to form in asset classes which can’t easily be over-produced. At least not without significant investment. Read more
Citi’s Matt King has jumped on the secular stagnation bandwagon with a really nifty collection of charts that ties the whole story of how we got to this point together.
He starts off with the capex issue, noting that despite the cyclical recovery corporates don’t seem to be investing all that much. In fact, according to King, declining capex may be a key aspect of secular decline, which he suggests began in advanced economies and is now spreading to emerging markets as well.
Some further, further reading on Friday — a new paper from Citi’s Willem Buiter, on why helicopter drops of money always work. From the abstract (our emphasis):
Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.
Click the image for a link to the pdf of a new secular stagnation e-book, which features entries from Summers, Krugman, Blanchard, and many others, including some critics:
Earlier this year we wondered if perhaps Janet Yellen was thinking of secular stagnation as one of the potential reasons for the Fed’s recent, if slight, downgrading of US potential growth. Read more
On a morning which saw London grind to a halt because of a two-day strike by Transport for London workers protesting the closure of ticket offices (that is, due to automation)…
FT Alphaville was invited to participate in a panel debate about the implications of technological progress on jobs and labour, organised and hosted by the think-tank Resolution Foundation.
(Though to be fair, the tube strike didn’t seem to impact attendance and almost all of us arrived on time.)
Chairing the event was Channel 4 News’ Faisal Islam. Joining yours truly among the panelists was economist and author Diane Coyle, of Enlightenment Economics, Alan Manning, Professor of Economics at LSE and Michael Osborne, machine learning expert and associate professor at Oxford University. Read more
Larry Summers was interviewed by Chrystia Freeland at the INET conference in Toronto last week, in a conversation that very usefully expanded upon his thoughts about secular stagnation. (H/T Interfluidity)
It’s a reassuring interview for us because so many of the statements he made echo what we (and other bloggers such as Steve Randy Waldman) have been saying for some time. Namely, that there’s something more significant going on in the industrialised global economy than the effects of a banking crisis per se, and that that *something* is probably related to technological abundance. More so, that this phenomenon is having strange macro effects on capitalist incentives.
There was also a nod to the point we’ve made for a long time, that the financial intermediation industry loses its raison d’etre in such an environment, and worse than that, potentially becomes a malignant rather than constructive force on development and growth. In short, that negative rates are hardly the solution. Read more
If Larry Summers is correct about secular stagnation, the natural interest rate is negative and interest rates at current levels are too high to ensure that planned savings match planned investment in a way that generates full employment.
So what does one do about it?
In an op-ed for the Washington Post earlier this month Larry Summers identified three possible responses. Read more
In the last few weeks the “Is QE deflationary?” debate has fused with the “What’s the natural rate of interest anyway?” and the “Is it really all about the risk premium?” conversation.
Many important insights have been offered by a whole host of people. A notable development, however, came in the shape of Tyler Cowen’s post on negative T-bill returns in which he considered the phenomenon of T-bill “entrance fees” during a zero-rate climate and how this can take returns for many investors into negative nominal territory, while providing advantages to those with access to “special technologies’” even when official rates are very mildly positive. Read more
David Roche and Bob McKee at Independent Strategy have put out a strongly worded riposte to Larry Summers’ argument that the world may be beset by secular stagnation.
From the note, their main points are: Read more