Benn Steil and Emma Smith show how China mirrors the U.S. “exorbitant privilege” from minting the world’s primary reserve currency. While the United States is deeply indebted to the rest of the world, it still earns far more abroad than it pays out. China, in contrast, has become the world’s largest creditor while paying foreigners far more than it receives. Steil and Smith argue that China is making itself vulnerable to financial crisis by massively subsidizing its geostrategic objectives.
Perhaps you recall this classic line from Dr. Strangelove: The whole point of the doomsday machine...is lost if you keep it a secret! I thought of that line when reading a recent Bloomberg piece on monetary offset of the widely expected Trump fiscal stimulus. (Amusingly, it mentions Paul Krugman as a proponent of the idea, but doesn't mention any market monetarists. But that's good if it means the idea is going mainstream.) This offset should not necessarily be construed as a negative development, he added, as it would ultimately allow monetary policy to regain its traditional effectiveness as the Federal Reserve moves away from the lower bound. However, the central bank has also recently discussed the potential benefits of allowing the economy to run hot, which include reversing the supply-side damage done in the wake of the financial crisis and allowing the natural rate of interest to rise, which in turn would enable the Fed to raise its policy rate to loftier heights in the future. After years of hoping for a more active role for the government in facilitating an acceleration in growth, it would be curious development if monetary policy makers were to dampen such an expansion. In that sense, "Trump may find an unlikely ally in Yellen," argued Neil Dutta, head of U.S. economics at Renaissance Macro Research, as she's a Fed Chair that doesn't seem too inclined to counteract the promised fiscal boost. "Will overheating the economy pull capacity off the sidelines? Maybe or maybe not," the economist said. "But Yellen will make the case for maybe." An extended period of low levels of market-based measures of inflation compensation and the disinflationary effects of a stronger greenback -- ahead of the implementation of any protectionist measures -- suggest the Fed to forego a more aggressive pace of tightening, Dutta added. Moreover, if the Federal Reserve wants to act like a price-level targeting central bank -- effectively making up for sluggish inflation since 2012 -- then it can allow PCE inflation to run a full percentage point above 2 percent for several years, as New River Investments Portfolio Manager Matt Busigin observed. There's a good argument for either of those ideas (running hot and price level targeting). But the good argument was to be made in 2009 when unemployment was 10%, not 2016, when unemployment is already down to 4.9% Were the Fed today to retroactively adopt a policy of price level targeting, it would represent almost criminal negligence. The whole point of the policy is to make downturns like 2009 less severe, by creating higher inflation expectations. If you deny throughout 2009, and 2010, and 2011, and 2012 that you plan any such catch-up, and then suddenly announce it in 2016 or 2017, it's like building a (mutual assured destruction) doomsday machine and keeping it secret. I already have a rather low opinion of Fed policy in 2008-2014. If this article turns out to be correct then my evaluation of the Fed's actions during the crisis will be even lower, indeed much lower. One other point. People who criticize the idea of monetary rules need to really think about the implications of this article. Yes, we don't know that this will happen, but just the fact that it's being contemplated is frightening. If you are the kind of person who says, "I don't care about this regime stuff, just tell me what the Fed should do now", then you are not part of the solution, you are part of the problem. HT: Benn Steil (10 COMMENTS)
Benn Steil’s June 24 op-ed on the PBS NewsHour Making$ense site, co-authored with Emma Smith, shows the strong relationship between consumer confidence and presidential elections going back to 1952. Current readings suggest an 80% chance of a Clinton victory, but the Brexit aftermath threatens to knock that down significantly.
Submitted by Lance Roberts via RealInvestmentAdvice.com, This past week, the markets rallied sharply from last week’s lows sending the “bulls” stampeding into the market with claims the market is back. To wit: “Hold on to your hats, folks. According to Andrew Adams, a market strategist at Raymond James, there exists a perfect mix of conditions that could send stocks on a ride up, up, and up. In a note out Thursday, Adams noted that there was a significant shift of investors from the stock market to ‘safer’ assets. Eventually this move to the sidelines will have to change.“ The problem is that Adams is incorrect about the “cash on the sidelines” theory. As Cliff Asness penned previously: “Every time someone says, ‘There is a lot of cash on the sidelines,’ a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines. Even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines. There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite. Add us all up and there are no sidelines.” Adams comment would also suggest that investors are sitting primarily in cash and bonds rather than equities. Again, they aren’t. All that really happened last week, as shown in the chart below was an oversold bounce on deteriorating volume confined to an overall market downtrend. This isn’t a rally that should embolden investors to take on more risk, but rather considering “selling into it” as we head into the seasonally weak period of the year. But that’s just me. One note though. The markets have not made a new high within the past year. What does history suggest happens next? 77% of the time it has evolved into a bear market. On second thought, maybe that should be you too. Here is your reading list for the weekend. CENTRAL BANKING World Running On Monetary Fumes by Benn Steil & Emma Smith via PBS Newshour The Fed Is Cooking Up A Surpise Move by Jeff Cox via CNBC The Quest For Robo-Yellen by Chris Condon via Bloomberg Why The Fed Must Raise Rates by John Crudele via New York Post Who Needs The Fed by John Tamny via The Federalist 5 Reasons Market Is Ignoring The Fed by Caroline Baum via MarketWatch THE MARKET & ECONOMY Orders For Capital Goods Fall Again by Shobhana Chandra via Bloomberg 7 Unmistakable Bear Market Signs by Jeff Reeves via MarketWatch Is This The End Of The Road? by Chris Vermeulen via TheStreet Summers Is Wrong On Secular Stagnation by Dr. Thorton via HedgEye Selling Into Panic? Not A Bad Idea by Mark Hulbert via USA Today Why Market Is Going Nowhere Fast by Aaron Task via Fortune Stock Buybacks Are Out Of Favor by Jon C Ogg via 24/7 WallStreet Poised For A Collapse by Ken Goldberg via The Street Bears Want You Believe End Is Coming by Avi Gilburt via MarketWatch Stock Market Has Stability Of Graveyard by Anthony Hilton via Evening Standard This Hasn’t Happened In 20-Years by Alex Rosenberg via CNBC Why Oil Prices Are Headed Back To $20 by Ivan Martchev via MarketWatch Can $50 Oil Make U.S. Great Again? by Chris Matthews via Fortune What Gundlach Needs To See From The Market by Mark Decambre via MarketWatch Global Economy Better Than We Think? by Joe Calhoun via Alhambra Partners BEST 6 MINUTES YOU WILL SPEND Gross Trying To Short Credit Against Instinct by John Gittelsohn via Bloomberg INTERESTING READS Fed Is Losing Ground by David Stockman via Stockman’s Corner 12 Articles Every Economist Should Read by Steven Horwitz via ValueWalk Dirty Secret Of Passive Investing by Michael Aked via RA Insights Coming Fed-Induced Pension Bust by John Hussman via Hussman Funds Former McDonalds CEO Crushes Minimum Wage Lie by Tyler Durden via Zero Hedge Peak Stupidity – Abolish Grades Below “C” by Becca Stanek via The Week Schrodinger’s Market by Macro Man 10-Reasons To Be Bearish by Tyler Durden via Zero Hedge Bulls Make Important Stand by Dana Lyons via Tumblr Most Extreme Euphoria Ever Seen by Jesse Felder via The Felder Report Dear Prof. Siegel: AYFKM? by Jesse Felder via The Felder Report “The contrary investor is every human when he resigns momentarily from the herd and thinks for himself” – Archibald MacLeish
Benn Steil’s May 20 op-ed on the PBS NewsHour Making$ense site, co-authored with Emma Smith, explains the practical and political barriers to further monetary or fiscal loosening in nations representing at least 60 percent of the global economy. This spells trouble ahead if economic conditions worsen.
**Over at [Equitable Growth](http://EquitableGrowth.org): Must-Reads:** * **Nick Bunker**: [Economic rents are rising, and it matters who receives them - Equitable Growth](http://equitablegrowth.org/economic-rents-are-rising-and-it-matters-who-receives-them/)* **Emanuele Felice** (2014): [The Challenges of Updating the Contours of the World Economy](http://equitablegrowth.org/?p=25259) * **Paul Krugman**: [Robber-Baron Recessions (Competition Policy)](http://equitablegrowth.org/?p=25236) * **Paul Krugman**: [Robber-Baron Recessions (Investment)](http://equitablegrowth.org/?p=25236) ---- **Should Reads:** * **Jason Furman et al.**: [Economic Report of the President 2016](https://www.whitehouse.gov/sites/default/files/docs/ERP_2016_Book_Complete%20JA.pdf) * **Mark Thoma**: [Reducing Long-Term Unemployment: Perfect Is the Enemy of the Good](http://www.thefiscaltimes.com/Columns/2016/04/19/Reducing-Long-Term-Unemployment-Perfect-Enemy-Good) * **Bill C**: [Hysteresis in a New Keynesian Model](http://twentycentparadigms.blogspot.com/2016/04/hysteresis-in-new-keynesian-model.html) * [Mikhail Golosov](http://scholar.princeton.edu/sites/default/files/golosov/files/cv_0.pdf) * **Nancy LeTourneau**: [Obamacare Has Halted the Expansion of the Gap Between the Haves and Have-Nots in Health Insurance](http://www.washingtonmonthly.com/political-animal-a/2016_04/obamacare_has_halted_the_expan060294.php) * **Nick Bunker** (2015): [The declining impact of U.S. income taxes on wealth inequality](http://equitablegrowth.org/declining-impact-u-s-income-taxes-wealth-inequality/) * **A Fine Theorem**: [“Does Regression Produce Representative Estimates of Causal Effects?,” P. Aronow & C. Samii (2016)](https://afinetheorem.wordpress.com/2016/02/26/does-regression-produce-representative-estimates-of-causal-effects-p-aronow-c-samii-2016/) * **Jeff Spross**: [The forgotten 1979-1982 recession that irrevocably damaged the American economy](http://www.theweek.com/articles/618964/forgotten-recession-that-irrevocably-damaged-american-economy) * **Matthew Yglesias**: [How Amazon plans to avoid making a profit this holiday season](http://www.vox.com/2016/4/18/11449748/amazon-prime-video-temporary) ---- **And Over Here:** * [Must-Read: Emanuele Felice (2014):](http://www.bradford-delong.com/2016/04/must-read-emanuele-felice-2014-the-challenges-of-updating-the-contours-of-the-world-economyhttpequitablegrowth.html) The Challenges of Updating the Contours of the World Economy * [Live from the Rumpublicans' Self-Made Gehenna:](http://www.bradford-delong.com/2016/04/live-from-the-rumpublicans-self-made-gehenna-may-i-say-that-anchor-babies-for-mass-deportation-scare-me-they-seem-to-m.html) May I say that anchor babies for mass deportation scare...
**Hoisted from 2011:** [Department of "Huh?!": Unclear on What Central Banks Are Department](http://delong.typepad.com/sdj/2011/11/department-of-huh-unclear-on-what-central-banks-are-department.html):Benn Steil, a student of "geoeconomics" at the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations, is trying to scare his listeners into thinking that something very bad might happen because (i) the ECB is "undercapitalized" and (ii) the ECB is busy buying up the bonds of europeriphery sovereigns: >The Future of the Eurozone: The ECB only has 81 billion euros in capital. That could easily be wiped out with, say, just a 25 percent haircut in PIG debt -- Portugal, Ireland and Greece. That's it. Gone. >Now, a central bank can operate for a brief period without any capital. But eventually any central bank will have to tighten monetary policy at some point in the future. And in order to do that, they need assets to sell. And unless the market believes that the ECB is going to be credibly recapitalized, there will be a god-almighty run against the euro and it will, quite frankly, collapse. >That's not the same situation as the Feds in the United States. In fact, if you look at the Fed's reported capital, it's only $58 billion…....
Benn Steil’s latest op-ed in The Weekly Standard examines Paul Krugman’s continuing calls for fiscal stimulus, as well as his defense of government wage intervention and mercantilism. These have all been grounded in the assertion that the United States is in a “liquidity trap,” in which monetary policy is ineffective. Steil explains why the theory of liquidity traps is logically inapplicable when the central bank’s policy rate is positive, as it has been in the United States since December, and concludes that it operates as a fig leaf behind which to advocate policies with less scientific rationales.
Benn Steil’s op-ed in the March 30 edition of the Wall Street Journal, co-authored with Emma Smith, looks at presidential campaign charges that China is engaged in “currency manipulation” to boost net exports. They show that the aims of China’s pegged exchange rate regime have varied over the past two decades, and have not always been mercantilist. In recent months, with capital flowing out of China at a prodigious rate, its interventions have been to keep its currency up—not down. Launching a trade war with China over currency management, as Donald Trump and Bernie Sanders intend, would therefore be nonsensical—as well as damaging to U.S. interests.
Paul Krugman has a new post of mercantilism: Neil Irwin has a good think piece on Trumpism and the trade deficit; but as Dean Baker rightly suggests, it arguably suffers a bit from being a discussion of the effects of trade deficits in normal times. And these times aren't normal. In normal times, the counterpart of a trade deficit is capital inflows, which reduce interest rates, and there's no reason to believe that trade deficits reduce employment on net, even if they do redistribute it. But we are still living in a world awash with excess savings and inadequate demand, where interest rates can't fall (or at any rate not much) because they're already near zero. That is, we're in a liquidity trap. Actually we are not in a liquidity trap, and it's not even debatable. Just as a woman cannot be a little bit pregnant, you are either in a liquidity trap or you are not. In the case of the US in 2016, we are not in a liquidity trap. Hence liquidity trap theories do not apply. Krugman's post is completely wrong, because it's entirely built on the incorrect assumption that we are in a liquidity trap. When Krugman uses the liquidity trap excuse to justify an otherwise counterproductive policy (such as mercantilism, fiscal stimulus, or artificially higher wages) the term has a very specific meaning. It does not mean "interest rates close to zero." It means interest rates higher than the central bank would prefer. The Fed raised rates in December, and will probably raise them again in June. Interest rates are relatively low, but they are obviously not lowerhigher than the Fed wishes. So Krugman is simply wrong. To the casual reader this Krugman post may seem like more of the same, but it is actually another step away from the neoliberal analysis that he produced in the 1990s. The first step was when Krugman claimed that fiscal stimulus and mercantilism are only justified when interest rates are at zero. I disagree with that view, but it's a defensible argument. Now he claims that these policies merely require that interest rates be relatively low. That's not even a defensible argument. If rates are low but non-zero, then the central bank has NGDP right where they want it. Right now it's in the central bank's power to raise NGDP growth as high as they like. If we fall back to the zero bound, it would be 100% the fault of the central bank, no one else. Unfortunately, it seems likely that we will fall back to the zero bound in the very next recession. We don't need fiscal stimulus or mercantilism; we need to fix the monetary regime. There are many other problems with the analysis. Krugman links to a Dean Baker post that suggests the current "secular stagnation" is mainly caused by the trade deficit. But secular stagnation is occurring all over the developed world, including those countries with trade surpluses. Indeed the US is doing better than most other developed countries. The one country that avoided a global recession in 2008-09 was Australia, which has an even bigger deficit, as a share of GDP. Japan has a big surplus. Whatever you think of trade deficits, there is little evidence that trade deficits lead to slower economic growth. PS. Krugman's post cannot be saved by pointing to the global economy, which does have many countries at the zero bound. The global economy has no overall current account deficit. PPS. In this post I've assumed that zero interest is the lower bound. If the actual lower bound is a minus 0.75% interest rate, then Krugman's argument is even weaker. PPPS. The current account deficit in America is almost identical to 30 years ago, as a share of GDP. Trust me, it has nothing to do with "secular stagnation." HT: Benn Steil (19 COMMENTS)
During the 1980s and 1990s, there was a growing consensus that: 1. The minimum wage was not a particularly effective anti-poverty program, as it raised unemployment. Even the New York Times editorialized in favor of abolition of the minimum wage, in 1987. 2. Monetary policy drives inflation and NGDP, and fiscal stabilization policy is almost useless. The liquidity trap is not a problem in a fiat money regime. 3. Free trade with China will benefit the US economy, albeit at some cost to workers and companies in import competing industries. Now all three of these views are under assault. And what I find interesting is the willingness, indeed almost eagerness, of many economists to accept the new heterodoxy. In my view, if the new heterodox view is correct it really calls into question the entire field of economics. Points one and three are some of the most basic ideas in all of economics. We've been lecturing the public for years that they are wrong about free trade. We say, "See, economists know something the public does not". We've also been telling the public there are no free lunches, and that price floors create surpluses. And with the exception of a few extreme supply-siders, we've been saying that tax cuts and spending increases will raise the budget deficit. Let's say this is all wrong. Why should the public take seriously anything we say now? We'd have become the laughing stock of the social sciences (no mean feat) and deservedly so. In that case, why not listen to Trump? I'm especially surprised by how many economists are willing to accept contrarian views when questions are still very much open. Here are some examples: 1. The Card and Krueger study did cast doubt on the view that modest increases in the minimum wage cause more unemployment. But other studies have reached the opposite conclusion. (My own work on the Depression suggests that minimum wages do reduce output.) Even worse, the only plausible theoretical mechanism that I am aware of is the monopsony model of labor markets. That model suggests that if a minimum wage fails to boost unemployment, it will also fail to raise produce prices. But studies show that minimum wage increases clearly do raise product prices. And we still don't know much about the long run effect of higher minimum wages. The entire question is fraught with uncertainly, so why believe the worst about economics? 2. As far as fiscal stimulus, the studies I've seen tend to ignore the problem of monetary offset, either by looking at state and local effects, or by including the eurozone in international cross-sectional studies. Those studies that did properly focus on countries with independent monetary policies (by people like Mark Sadowski, Benn Steil and Dinah Walker, and Kevin Erdmann) did not find any significant impact from fiscal policy. And of course the big difference between the Eurozone and the US after 2011 was due to monetary policy, as the US did as much or more austerity than the eurozone. 3. I recently discussed a paper by Autor, Dorn and Hanson, which suggested the US may have been hurt by the rise of Chinese exports, during the period from 1990 to 2007. Noah Smith seemed convinced by the findings, indeed so much so that he was willing to trash the economics profession: In his recent book "Economics Rules," Harvard economist Dani Rodrik laments how economists often portray a public consensus while disagreeing strongly in private. In effect, economists behave like scientists behind closed doors, but as preachers when dealing with the public. . . . Popular opinion seems to be exactly right about the effect of trade with China -- it has killed jobs and damaged the lives of many, many Americans. Economists may blithely declare that free trade is wonderful, but our best researchers have now shown that public misgivings about these smooth assurances have been completely justified. And yet as I pointed out, all they really showed was that Chinese exports had negative effects in certain local areas, something we already knew. There was no plausible evidence presented that China trade reduced overall employment. Yet many others, including The Economist, The Atlantic and Tyler Cowen treated this as a very important paper. Maybe it is, but I don't see it. Marcus Nunes sent me a recent paper by João Paulo Pessoa, from the LSE. Here is the abstract: How does welfare change in the short- and long-run in high wage countries when integrating with low wage economies like China? Even if consumers benefit from lower prices, there can be significant welfare losses from increases in unemployment and lower wages. I construct a dynamic multi-sector country Ricardian trade model that incorporates both search frictions and labor mobility frictions. I then structurally estimate this model using cross-country sector-level data and quantify both the potential losses to workers and benefits to consumers arising from China's integration into the global economy. I find that overall welfare increases in northern economies, both in the transition period and in the new steady state equilibrium. In import competing sectors, however, workers bear a costly transition, experiencing lower wages and a rise in unemployment. I validate the micro implications of the model using employer-employee panel data. So why do so many economists like to trash their own profession? 1. It's fun being a contrarian. I've done a good bit of contrarianism myself, so I should not be the one to cast the first stone. Oddly, much of my "contrarianism" has been in defense of the old conventional 1990s neoliberal model. Paul Krugman put it best (describing his own contrarianism): (ii) Adopt the stance of rebel: There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me! Me too!! 2. Another possibility is that the standard model falls into disrepute whenever there is a major macroeconomic crisis, like the Great Depression or the Great Recession. Both were caused by excessively tight money, but since central banks tend to follow the consensus of the profession, it's almost a tautology that economists will misdiagnose depressions. If they understood what was going on, then the depressions never would have happened. Instead they shift their blame to imagined failings of "laissez-faire economics", or those reckless "speculators" in the asset markets. (So lots of investments look bad, ex post, during a major depression? Wow, I never would have imagined that!) Any other ideas? It seems weird that economists would want to bring their profession into even lower public esteem, but that seems to be what we observe. Maybe it's just an externality problem, like relieving oneself in the public swimming pool. (41 COMMENTS)
Max Boot and Benn Steil argue that a Trump presidency would undermine the liberal international order which the United States painstakingly constructed and cultivated after the Second World War. This would, they believe, gravely damage America’s security and standing in the world.
Benn Steil and Emma Smith at the Council on Foreign Relations present an interesting picture of Chinese reserves. They write: The People’s Bank of China has been selling off foreign currency reserves at a prodigious rate to keep the RMB stable. At $3.2 trillion, China’s reserves still seem enormous. But they are down $760 billion […]
Бенн Стейл, директор Council on Foreign Relations, рассказал о роли ФРС в нынешнем кризисе на Украине. От себя отметим, что ни он, ни его информационный портал никогда не были замечены в симпатиях к России. Собственно, в оценке Стейли, которую он дал деятельности Федрезерва в отношении Януковича, Москва вообще не фигурирует.
*Бенн Стейл*, директор Council on Foreign Relations, рассказал о роли ФРС в нынешнем кризисе на Украине. От себя отметим, что ни он, ни его информационный портал никогда не были замечены в симпатиях к России. Собственно, в оценке Стейли, которую он дал деятельности Федрезерва в отношении *Януковича*, Москва вообще не фигурирует. *Это уточнение адресовано тем, кто в любой критике Майдана видит исключительно «антиукраинскую руку Кремля».* Для начала отметим, что Бенн Стейл является автором популярной среди мировых экономистов книги «Битва в Бреттон-Вудсе», которая в 2013 году стала победителем международного конкурса «Финансовая история». Агентство Bloomberg назвала этот труд главным выбором руководителей компаний, политиков и экономистов в номина...