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Sunday, August 28, 2016

Yellen At Jackson Hole: Übergradualism Still The Baseline

Fed Chair Janet Yellen's speech at Jackson Hole may or may not get Fed watchers excited, but it seems to me that there was not a lot of new information. She made some hawkish noises, and it seems that we are due for another rate hike this year. I think December is the most plausible time, but it could be as early as September. In any event, the exact timing of the hike does not matter; the Fed is still following an übergradual rate hike path (hiking at a pace well below 25 basis points a meeting). Her discussion of policy options was mainly useful for those of us who are entertained by the collapse into incoherence of mainstream economics.

Wednesday, August 24, 2016

Canada's Housing Market Hanging In There

Chart: Canada Housing Starts

The Canadian housing market has defied predictions of doom for years now. Given the questionable quality of Canadian house price indices, I spend little time pondering the direction in prices. Instead, I believe the focus should be on the income effects of residential construction. These effects are unfortunately overshadowed by discussions of debt and the alleged wealth effect created by home prices. Explaining why the Canadian housing market did not collapse like the American highlights the difficulties with mathematical economic models.

Sunday, August 21, 2016

Central Bank Direct Lending Does Not Add Much To Policy Space

A new front has opened up in the "Helicopter Money" debate: the belief that direct lending by the central bank somehow constitutes "helicopter money," and that it opens up new space for policy action. In my view, it just creates another way for central bank-focused mainstream economists to discredit monetary policy further, and for the central bank to lose money.

Wednesday, August 17, 2016

Book Review: Diagrams & Dollars


Diagrams & Dollars: Modern Money Illustrated by J.D. Alt is a brief ebook that introduces the national accounts flow concepts used by Modern Monetary Theory (MMT). The book is written for a general audience, covering what is unfortunately the most non-intuitive parts of Functional Finance. The concepts are actually easily understood if they are taught properly, but are difficult to understand if you have been taught that the central government is just like a household.

Saturday, August 13, 2016

The Case Against Growth And Stimulus

Larry Summers argued in this recent Financial Times article that progressives ought to favour growth policies, which prompted this response from John Cochrane. Although John Cochrane had some points of partisan disagreement, he strongly agreed with the premise that politicians in the United States need to talk more about growth. In my view, politicians talk too much about growth already. (H/T to Leo Kolivakis  @PensionPulse for ending me the Cochrane article link.)

Tuesday, August 9, 2016

No Free Lunches Courtesy Of Helicopter Money

Although economists love to tell themselves that economics is a highly quantitative, empirical discipline, the reality is that when it comes to money, clear thinking goes out the window. Forcing banks to hold reserves at a below market rate of interest is obviously an imposition -- a tax -- but it is somehow excused as being some form of a free lunch, because reserves are "money."

Sunday, August 7, 2016

U.S. Economic Cycle Still Rolling Along At A Subdued Pace

Chart: U.S. Employment Ratio


The U.S. Employment Situation Report for July was decent, underlining that the expansion continues, despite the large number of potential headwinds. Although most attention is upon the Nonfarm Payrolls numbers, the employment-to-population ratio ticked up again in July. At 59.7%, it is only up marginally versus the end of last year. However, the ratio has tended to rise rapidly at the end of recent years, which is a possible sign that the seasonal pattern has shifted. If this is indeed the case, having the employment-to-population ratio go sideways during the mid-part of the year would be consistent with the "true" underlying trend remaining on the improving trajectory that we have seen since 2014 (which is well above the mediocre trend line that prevailed from 2010-2013, which is shown on the chart).