Innocent fear mongering from St. Louis Fed’s Bullard
Posted by WARREN MOSLER on June 22nd, 2011
This is bad beyond description, as it displays total ignorance of the difference between interest rate determination in fixed vs floating exchange rate regimes, which may be the only thing standing between this disaster of an economy and unimaginable prosperity.
Worse is that it goes unchallenged, apart from the still relatively small MMT community.
Fed Frets Over U.S. Fiscal Recklessness
Lawmakers and investors shouldn’t take comfort in low U.S. borrowing costs because markets are often “complacent” about the risk from excessive deficit spending, said James Bullard, president of the Federal Reserve Bank of St. Louis.
“When it does blow up it will be too late,” Bullard said in an interview last month in New York. “When markets lose confidence in the U.S. and say that they don’t trust us any more, rates will skyrocket and the crisis will be upon you.”
June 22nd, 2011 at 12:09 pm
Got this from a acquaintance on recent Bill Gross comment:
“So What is Bill Gross Talking About?
So the biggest bond guy on the planet, the same guy that has repeatedly been saying there won’t be QE3 apparently “tweets” that the Fed could actually move to rate caps on 2-3 year treasuries which is actually QE to infinity (as predicted by me and many others). So why would he tweet this rather than just wait until his next monthly letter? Well he is a pretty connected guy and there is a Fed meeting next week. He also isn’t the type of fellow that likes to look like a fool in public so clearly he wanted to put this “out there” so he is seen as on top of things. While many people are talking about this, people don’t seem to be getting the joke. If this is indeed the Fed’s next step, it is a game changer beyond game changers. First of all it would mean a policy to print infinite money if necessary without having to announced further rounds of QE. Even more importantly, I am willing to bet that wherever the Fed announces a rate cap along the curve will be exactly where the Chinese holdings of treasuries are situated. The Chinese probably told Tiny Timmy Geithner and The Bernank that they want out and this would guarantee them an out at the highs! It’s brilliant. Plus, with the terms of trade going against China and other Asian nations as a result of higher commodity prices, this will provide much need cash to then go buy up resources all over the world. This would make commodity prices absolutely explode through the roof as China would without a doubt use a lot of this money to buy the necessities of life and then subsidize them at home to quell unrest. How is no one talking about this!”
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TC Reply:
June 22nd, 2011 at 3:26 pm
@RSG,
Wow. Great comment. Don’t agree, but will keep this in the back pocket.
I don’t see how China gets to prosperity but through a mangaged exchange rate appreciation. If it happens over anything less than 3 years, china will be destroyed. Their entire economy is based on exports – the domestic population cannot afford to buy what they make at current wages.
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roger erickson Reply:
June 23rd, 2011 at 3:30 pm
@TC,
> the domestic population cannot afford to buy what they make
> at current wages
?? It’s called teamwork. How on earth can they afford to make things for other people? Exports are always a real cost.
Humans, gotta love ‘em. 6 billion people on this planet & they can’t agree on something as simple as a scorekeeping process.
Let the NFL reps run the IMF & WB?
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roger erickson Reply:
June 23rd, 2011 at 3:34 pm
@roger erickson,
forgot to add:
“Biggest cost is always cost of coordination” Walter Shewhart
{and Charles Darwin: cost of accelerating coordination = cost of adaptive rate; this is old hat; ~4billion years old}
Immediate corollary: “Biggest return is always return-on-coordination.”
Tom Hickey Reply:
June 22nd, 2011 at 4:17 pm
@RSG,
PIMCO’S Gross says Fed to unveil QE3 at Jackson Hole
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Matt Franko Reply:
June 22nd, 2011 at 4:49 pm
@Tom Hickey,
“Gross said on Twitter last week on Tuesday that: “QE3 likely to take form of ‘extended period’ language or interest rate caps on 2-3-year Treasuries.”
Today:
2yr Yield: 0.383 %
3yr Yield: 0.679 %
Where are they going to put the caps? Tom, I’m afraid this is going to result in another wasted year. As everyone will have a “wait and see” attitude about how this “new” monetary policy will work out, and fiscal policy will get, at best, left alone.
Resp,
Resp,
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beowulf Reply:
June 22nd, 2011 at 6:14 pm
@Matt Franko,
The Fed should just bite the bullet and announce they’re permanently returning to pre-1951 Accord rate caps; 0.375% short term, 2.5% long term (then someone should email the CBO to point out their 10-year forecast of $5 trillion net interest at an avg interest rate of 5.0% needs to be recalculated).
June 22nd, 2011 at 1:49 pm
From SL FRB icon Bill Poole:
“Many panic cases in practice reflect highly
incomplete information. Given the costs of obtaining
information, I think situations of this kind,
which are not uncommon, provide compelling evidence
against a pure, full-information version of
the rational expectations hypothesis. Not only are
some market participants poorly informed, which
is obvious, but market outcomes can reflect poorly
informed views. However, it is essential that we not
equate expectations based on incomplete information
with expectations that are hopelessly emotional
and irrational; provision of information does
have observable effects on market outcomes. From
a policy perspective, that means that provision of
accurate information is the first line of defense in
cases of financial panics.”
http://research.stlouisfed.org/publications/review/01/03/0103wp.pdf
Deficit and debt levels certainly aren’t ‘high cost’ information, which leads me to think that either (1) Bullard and co have done a lousy job explaining to bond markets why they should panic or (2) economists and policymakers are the ones being irrational. Votes??
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Tom Hickey Reply:
June 22nd, 2011 at 2:02 pm
@art,
Given the costs of obtaining
information, I think situations of this kind,
which are not uncommon, provide compelling evidence
against a pure, full-information version of
the rational expectations hypothesis.
REH and Ricardian Equivalence are demonstrably false based on the friction (inefficiency) of transaction cost. Due to that transaction cost it is seldom worthwhile to do the necessary computations, granting that the information is even available. It is well-known that most people use rules of thumb and intuition in decision-making where the transaction cost due to information is high. If people really were the rational actors they are presumed to be under REH and RE, virtually nothing would get done, or there would be a huge industry employed in doing the figuring for them and providing it in a timely way.
Beyond, that it is well-known from research in cognitive science and social psychology that people are not the rational actors that the economic theory assumes them to be.
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Matt Franko Reply:
June 22nd, 2011 at 3:17 pm
@Tom Hickey,
For instance, why are chicken wings more expensive per pound than chicken thighs? People routinely pay more for certain brands of automobiles that are basically the same 4 door sedan as a somewhat cheaper model…
Resp,
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WARREN MOSLER Reply:
June 22nd, 2011 at 5:03 pm
and check out the sock market. the suppliers, like Burlington, sell the same stuff to all the stores with different prices with different brand names.
and not just the sock market, seen the price of Oakley’s at the Sorbonne?
Peter D Reply:
June 22nd, 2011 at 6:12 pm
@Warren,
Lol, for a moment I though you meant “stock market” :)
And how about sock puppet market?
beowulf Reply:
June 22nd, 2011 at 6:16 pm
@Peter D,
“sock market analyst Warren Mosler said today…”
:o)
Art Reply:
June 22nd, 2011 at 7:06 pm
I saw some Oakleys for $10 at an outdoor festival last weekend. Arbitrage opportunity?? :)
WARREN MOSLER Reply:
June 22nd, 2011 at 10:57 pm
those wouldn’t be Sarbane’s Oxley’s?
Art Reply:
June 23rd, 2011 at 7:11 am
“Ultimately, I think the reason so many academics and pundits do not trust current low yields on government debt and expect them to rise suddenly is that they do not trust the market economy. When a price level set by the market persists for many years, we need to realize that there is an underlying economic structure supporting those prices.”
http://ftalphaville.ft.com/blog/2010/06/09/255481/the-end-of-japans-balance-sheet-recession/
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art Reply:
June 24th, 2011 at 4:18 pm
From deficit terrorist Cecchetti:
“But bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decades.”
http://www.bis.org/publ/othp09.pdf
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June 22nd, 2011 at 2:33 pm
“There is nothing to fear but fear itself.” — FDR
Cognitive science and social psychology have shown that there is no sharp boundary between rationality and irrationality. Moreover, fear breeds fear, which ends in terror, just as bullish sentiment leads to exuberance and ends in “irrational exuberance” (h/t Robert Shiller). Market action is simply the record of human behavior in aggregate, and people often become irrational to one degree or another even with their money.
Who knows what can happen in defiance of rationality, especially when officials feed the fire of irrationality in either direction. Remember Greenspan cheering irrationality on the upside? It works both ways.
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roger erickson Reply:
June 23rd, 2011 at 3:41 pm
@Tom Hickey,
“There is nothing to instill in sheep than fear of what we instill.”
[Bernays/Goebbels, famous shepherd]
In the US electorate, we’re seeing methods scale up, disconnected from any sense of public purpose.
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June 22nd, 2011 at 3:17 pm
Meanwhile, Senate Democrats are slowing waking up…
Democrats are increasingly concerned that Republicans are setting them up to endorse large spending cuts in a deal to raise the national debt limit without giving ground on anything — even GOP-friendly policy measures like tax cuts for business owners — to stimulate the economy in the near-term.
The concern arises as numerous top Republicans react coldly to the prospect of temporarily reducing the payroll tax burden on employers and employees…
http://tpmdc.talkingpointsmemo.com/2011/06/with-economy-faltering-dems-seize-on-gop-about-face-on-payroll-tax-cuts-for-businesses.php?ref=fpblg
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Peter D Reply:
June 22nd, 2011 at 3:49 pm
@beowulf,
I cannot believe they are so naive as to think that Republicans have any other agenda than hurting Obama and the Democrats, whatever it takes.
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beowulf Reply:
June 22nd, 2011 at 6:04 pm
@Peter D,
Sometimes, when I’ve feeling cynical, I suspect the Washington Generals aren’t even trying to beat the Harlem Globetrotters.
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PJ Pierre Reply:
June 22nd, 2011 at 9:46 pm
Ha Ha Ha, This is the best laugh I’ve had all day. Thanks :)
June 23rd, 2011 at 11:32 am
Ezra Klein is on top of the dynamics of the debt ceiling negotiations:
http://feeds.washingtonpost.com/click.phdo?i=3311d78b3c8c787a8581a3cd0e4cf397
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June 25th, 2011 at 10:30 pm
“When a price level set by the market persists for many years, we need to realize that there is an underlying economic structure supporting those prices.””
What about home prices, eh? I actually agree with what you are saying about rates though!
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