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Friday, June 3, 2016

Bye, Bye, June!

The latest labour market data in the United States poured a lot of cold water on the need for immediate rate hikes. Although I think the U.S. economy will only "close the output gap" (whatever that really means) based on current trends some time around 2020, my reading of the Fed is that they want to get the policy rate further away from 0% before then. (This article discusses this report, along with some random musings.)

As always, I prefer looking at the Household data; the Nonfarm Payrolls data feels too much like the output of a random number generator to me. The pullback in Nonfarm payrolls is just a reversion to the weak underlying trend. The Household data says that not a lot new is happening. There was a blip increase in people dropping out of the labour force, flattering the unemployment rate, but the employment-to-population was unchanged. Yes, demographic trends tell us that a flat employment-to-population rate would imply a tightening labour market, but unless you think the U.S. population has been hit by an ageing ray, this demographic shift will be dominated by cyclical trends.

I doubt that these data will dissuade the hawks at the Fed; but I would guess that the best that they could hope for is to prepare the ground for July. If not, December is the next target. A rate hike cycle that consists of rates rising by 25 basis points a year is a frankly amusing concept.


Alex Douglas has a new post "Chartalism And Stock-Flow Consistency: A Reply To Nick Rowe."

He is responding to Nick Rowe's statement:
There’s a problem with that answer. Taxes are a flow; they have the units $/time. Taxes create a flow demand for intrinsically worthless bits of paper. But there is a stock of intrinsically worthless bits of paper; and that stock has the units $. And if that stock of paper is strictly positive and increasing over time, as it usually does, that means the flow supply of new paper created must exceed the flow demand for paper to pay taxes. So if flow supply exceeds flow demand, why doesn’t the market price of those intrinsically worthless bits of paper fall to zero?
Alex Douglas has a thoughtful response in the article. However, as I noted in the comments, one could just focus on an embedded assumption of Nick Rowe: that everyone is identical. If everyone were identical (which is a standard assumption within DSGE macro or overlapping generations models), then there would be an issue of the valuation of money as Professor Rowe suggests. But if we are not, the people with more money than tax liabilities can charge what the market will bear for money. Obviously, the full answer is more complicated, but it risks being side-tracked on debates about other topics (such as uncertainties, and how do future generations fit in?).

Economic "Facts"

Apparently, the "fact" that central banks can control the term premium is going to be taught in undergraduate textbooks, even though it is trivial to show that the event studies that prove this "fact" cannot be used to make such a conclusion.

Sure, mainstream economics is a "science."


As a final note, I am going over the proof of Interest Rate Cycles. It looks good, although some charts got dropped, and so I have to add them back in. Unless we have another "the cat sat on the keyboard" incident (or more missing charts...), the paperback should be available for order online by early next week. (I will then turn to the paperback edition of Understanding Government Finance.)

(c) Brian Romanchuk 2016


  1. Going back to your post on the history of money, I would say that there is also another embedded assumption in Nick Rowe's statement. And that is that money is mostly used as a proxy for barter. That is why people want money, that is why people accept money, and that is why money came about. Once you have enough for your taxes, and what you want to trade for, and maybe a little in reserve, money is a nearly worthless hot potato thingy that you are going to pass off to whatever sucker will trade you for it just as soon as you can.

    1. That's related to Alex Douglas' discussion of uncertainty -- you hold money to guard against uncertainty, which a barter model (relative price vector of commodities which tells us all we need to know about value) does not incorporate. Although I agree, you end up debating the metaphysics of uncertainty. I wanted to point out that even if we grant almost all other assumptions, just removing the assumption that everyone is identical kills the argument.


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