That's going to stir the pot. It's good to find out what's in the pot, particulary since we have been eating this stuff for a long time. I thought it was beef bourguignon, Prof. Cochrane says it is roadkill. Let's find out. Time for the science of economics to confront the rebutable presumption.
I would add...why not use QE to build the Fed's balance sheet?
If interest rates are going to rise as lenders fear the US Treasury cannot meet its debt obligations...then surely, if the Fed owned, say half the national debt and fed interest back into the Treasury, that would help alleviate those concerns.
Yes, I would prefer roughly balanced federal budgets. And a smaller government. And peace on earth, and less vulgarity in modern entertainment and political discourse.
So I take from this - it’s complex and it might just be there are some economics of repute behind the Trump policies ? Or have i got that wrong 😑. I love economics - I am a total amateur- but f@“k me - can you agree on anything. And if we cant can economics be ideologically neutral - probably not. I always thought law was about application of principles of evidence in the pursuit of truth but then realised it was about power and control of the evidence. Anyway going give this another read - when is the WSJ publishing?
Good points! Keynes set the science back a century and it hasn't fully recovered. All economists agree on micro. But there are two schools of macro, mainlinstream and mainline. Mainstream dominates and is mostly Keynesian, although Chicago has been a slight holdout. Mainline is also called Austrian after Mises and Hayek whi immigrated from Austria. Austrian is mainline because it furthers the progress of pre-keynesian econ and is built up from micro truths.
Among tge mainstream are Marxists like Krugman who use their PhDs to promote anti-economics.
No, it's a real science. It's not physics. It's much more complex, so complex it makes physics look like child's play. Complexity doesn't prevent it being science. It's funny how many physicists have become bored with physics and thought they would transform economics only to founder. Check out the Santa Fe Institute's complexity economics.
“And if we cant can [sic] economics be ideologically neutral…”
Whatever else it is - economics as practiced is not politically neutral.
And probably can’t be.
Yes, there is a powerful argument that classical liberalism is *less* political - and no doubt far better at delivering prosperity and freedom - than other economics, but even there there is some political choice involved.
Friends, in this essay you read an honest, intelligent, informed professional economist who has no bone to pick. Is it not refreshing and inspiring? I am but the first adjective, but I agree completely with professor Cochrane's assessment of the 40-year blind alley.
My model, based on 40 years of data, shows that raising the Fed funds rate today will be followed by a higher year over year inflation some 22 months later. Adjusted r-squared 0.69. So yes, the Fed is flying blind with interest rates and so is everyone else.
“We economists don’t know with certainty just if, how, under what circumstances or how quickly low interest rates lead to inflation.” ? ? See above link exhibit A :) Arthur Burns “Anguish of Central Banking”
I have known John‘s knack for arguing against established wisdom since 1988 (code word: output persistence). But this is not really about JHC. It’s about a clear trend in the American academy to now bend the knee to every confused utterance that comes from Trump‘s brain.
I disagree strongly, and perhaps not respectfully, since you insist on using the phrase “bend the knee”.
To a reasonable, objective person who is economically right of center, Trump is getting between 60% and 80% of his policies right (Last time around it was more like 80%-90%). Reasonable people can surely disagree within that range, or even argue that the stuff he’s getting wrong is worse than all the things he is getting right.
Only those with TDS, or those with a leftist axe to grind, or those accepting of the largely false leftist narrative actually believe that most of the policy coming from the Trump administration is confused or bad or whatever negative adjectives you wish to throw at them.
Defending those 60% - 80% of policies - and JHC here didn’t defend utterances, he defended policies - is not “bending the knee”.
No matter how much that leftists want to spin it that it is so.
I actually feel sane reading your comment. If anything this felt like abysmal sanewashing for no good reason and a level of charity I doubt would have been offered to Biden if he engaged in the same behaviour as Trump
Thank you for doing this and for all your work, and for always showing your work which is rare these days.
While I appreciate your carefully hedging, bottom line is any reasonable model whether in equation form (yours) or in prose (Keynes), makes clear that at the current USA operating point our fiscal incontinence is the problem. Any tactic taken by Fed or via executive order, whether that produces short run or long run effects, persistent or not, will ultimately not avoid a catastrophe. Absent congress taking on its underlying causes of entitlement growth and revenue/cost impairment due to regulatory capture, they will just be re-arranging the deckchairs on the Titanic. We are not Japan, or Britain, or Turkey, or Argentina, and cannot behave as such.
I would like for Powell before he retires to just stand up in congress and bluntly say "We've done all we can. Whether we lower or raise interest rates, the ball is in your court, fix your mess or we go down". Markets will go nuts for a few days but it might be worth it.
Trump seems to have hit on the approach of acknowledging problems, which -- given Democrats refuse to acknowledge them, or at least any tradeoffs -- gives him credibility. Unfortunately when he does take them on he does so in destructive and even if correct needlessly self-defeating ways. But so long as the Democrats just call for more spending and confiscatory tax regimes there will be no actionable alternative. Has anyone heard any Democratic faction offer a centrist economic plan in recent memory?
Depressing. But please keep talking, we need sane voices. Pity Krugman and others highly regarded on the left blew their credibility so badly both culturally, and economically. Krugman with his enthusiasm for massive borrowing at recent low interest rates. Bernanke with his QE and unwinding fiasco, and Yellen with her mismanagement of the TY maturity. It would have been really good if economists across the spectrum could provide air cover for a spineless congress.
I'm surprised that WSJ has agreed to print an OpEd that is even remotely neutral or (pearl-clutching begins here) supportive of Trump's monetary policies. For many decades I was a regular subscriber to WSJ until I noticed that their OpEd section was where news could be found, and their news section was all OpEds. Then even their OpEds became OpEds and I cancelled my subscription
Today's wall street has little interest in investing. They money spin!
I call for a low, say 2% tax on all wall street trades(bonds, stocks, etc), that would encourage investing(long term)...not trading billions of shares to front run everything! Also a 2% tax on all money leaving the USA.
Since 2008 the FED printed $10 Trillion the US government printed $30 Trillion, to RESCUE the BAD gambles of Wall Street, virtually no one was really punished, all the lehman guys I know, got jobs at Bank America and just kept rolling.
Go visit Update NY or vast swaths of America where houses go unpainted, there are no restaurants, few grocery stores, businesses....as THEY didn't get one DIME of the TRILLIONS given to Wall Street!
I want actual capitalism, not this crony fraud of DC and Wall Street and Tech....just hyper gambling taxpayer money!
I think those people with unpainted houses, no grocery stores, no businesses are welfare recipients. Probably live in Chicago where they steal everything and are taxed to death with taxes on everything.
So the bottom line is that the ever growing deficit is going to get us in the end and that lowering interest rates now may (or may not) have a short term impact on interest rates--and more to the point, might spark a rate rally (lower rates) for a while which, if deficits continue to mount, could result in a sharp spike in rates in the not so distant future.
Your thoughts on the increasingly important role of the Fed is a good one. Too bad we don't have an academy or a functioning government that could look into this in a reasoned, rational and non-political manner. The issue sure seems ripe for reconsideration.
Lower rates inflated housing and the bond and stock markets. Federal spending increases cause cpi inflation. Cheaper interest rates increase inequality as fewer people can afford housing.
I have a question. What if debt is unsustainable and the government fails to signal fiscal surpluses credibly. If you interpret this "permanently lower rates -> low inflation" logic as observationally equivalent to "lower inflation targets -> lower rates in the long run, conditional on fiscal", in cases where you don't have this "conditional on fiscal" part, should, then, inflation targets be set higher?
That's going to stir the pot. It's good to find out what's in the pot, particulary since we have been eating this stuff for a long time. I thought it was beef bourguignon, Prof. Cochrane says it is roadkill. Let's find out. Time for the science of economics to confront the rebutable presumption.
Clever
I enjoyed this post.
I would add...why not use QE to build the Fed's balance sheet?
If interest rates are going to rise as lenders fear the US Treasury cannot meet its debt obligations...then surely, if the Fed owned, say half the national debt and fed interest back into the Treasury, that would help alleviate those concerns.
Yes, I would prefer roughly balanced federal budgets. And a smaller government. And peace on earth, and less vulgarity in modern entertainment and political discourse.
But given realities...is QE such a bad iea?
The first step is to stop QT or tightening
So I take from this - it’s complex and it might just be there are some economics of repute behind the Trump policies ? Or have i got that wrong 😑. I love economics - I am a total amateur- but f@“k me - can you agree on anything. And if we cant can economics be ideologically neutral - probably not. I always thought law was about application of principles of evidence in the pursuit of truth but then realised it was about power and control of the evidence. Anyway going give this another read - when is the WSJ publishing?
Good points! Keynes set the science back a century and it hasn't fully recovered. All economists agree on micro. But there are two schools of macro, mainlinstream and mainline. Mainstream dominates and is mostly Keynesian, although Chicago has been a slight holdout. Mainline is also called Austrian after Mises and Hayek whi immigrated from Austria. Austrian is mainline because it furthers the progress of pre-keynesian econ and is built up from micro truths.
Among tge mainstream are Marxists like Krugman who use their PhDs to promote anti-economics.
Not a science. It’s a liberal ART
No, it's a real science. It's not physics. It's much more complex, so complex it makes physics look like child's play. Complexity doesn't prevent it being science. It's funny how many physicists have become bored with physics and thought they would transform economics only to founder. Check out the Santa Fe Institute's complexity economics.
hahahah WTF
“And if we cant can [sic] economics be ideologically neutral…”
Whatever else it is - economics as practiced is not politically neutral.
And probably can’t be.
Yes, there is a powerful argument that classical liberalism is *less* political - and no doubt far better at delivering prosperity and freedom - than other economics, but even there there is some political choice involved.
Friends, in this essay you read an honest, intelligent, informed professional economist who has no bone to pick. Is it not refreshing and inspiring? I am but the first adjective, but I agree completely with professor Cochrane's assessment of the 40-year blind alley.
Except he is literally paid to grind specific bones.
He is? Point which bones he is grinding, please.
https://fraser.stlouisfed.org/files/docs/publications/FRB/pages/1985-1989/32252_1985-1989.pdf
My model, based on 40 years of data, shows that raising the Fed funds rate today will be followed by a higher year over year inflation some 22 months later. Adjusted r-squared 0.69. So yes, the Fed is flying blind with interest rates and so is everyone else.
Can you post a link?
“We economists don’t know with certainty just if, how, under what circumstances or how quickly low interest rates lead to inflation.” ? ? See above link exhibit A :) Arthur Burns “Anguish of Central Banking”
I guess putting some type of rational spin on whatever Trump puts on Truth Social as an „economic insight“ is the latest academic fashion.
You must not be a regular reader here if you think that JHC does, or is even inclined towards, “the latest academic fashion”.
I have known John‘s knack for arguing against established wisdom since 1988 (code word: output persistence). But this is not really about JHC. It’s about a clear trend in the American academy to now bend the knee to every confused utterance that comes from Trump‘s brain.
I disagree strongly, and perhaps not respectfully, since you insist on using the phrase “bend the knee”.
To a reasonable, objective person who is economically right of center, Trump is getting between 60% and 80% of his policies right (Last time around it was more like 80%-90%). Reasonable people can surely disagree within that range, or even argue that the stuff he’s getting wrong is worse than all the things he is getting right.
Only those with TDS, or those with a leftist axe to grind, or those accepting of the largely false leftist narrative actually believe that most of the policy coming from the Trump administration is confused or bad or whatever negative adjectives you wish to throw at them.
Defending those 60% - 80% of policies - and JHC here didn’t defend utterances, he defended policies - is not “bending the knee”.
No matter how much that leftists want to spin it that it is so.
I actually feel sane reading your comment. If anything this felt like abysmal sanewashing for no good reason and a level of charity I doubt would have been offered to Biden if he engaged in the same behaviour as Trump
Thank you for doing this and for all your work, and for always showing your work which is rare these days.
While I appreciate your carefully hedging, bottom line is any reasonable model whether in equation form (yours) or in prose (Keynes), makes clear that at the current USA operating point our fiscal incontinence is the problem. Any tactic taken by Fed or via executive order, whether that produces short run or long run effects, persistent or not, will ultimately not avoid a catastrophe. Absent congress taking on its underlying causes of entitlement growth and revenue/cost impairment due to regulatory capture, they will just be re-arranging the deckchairs on the Titanic. We are not Japan, or Britain, or Turkey, or Argentina, and cannot behave as such.
I would like for Powell before he retires to just stand up in congress and bluntly say "We've done all we can. Whether we lower or raise interest rates, the ball is in your court, fix your mess or we go down". Markets will go nuts for a few days but it might be worth it.
Trump seems to have hit on the approach of acknowledging problems, which -- given Democrats refuse to acknowledge them, or at least any tradeoffs -- gives him credibility. Unfortunately when he does take them on he does so in destructive and even if correct needlessly self-defeating ways. But so long as the Democrats just call for more spending and confiscatory tax regimes there will be no actionable alternative. Has anyone heard any Democratic faction offer a centrist economic plan in recent memory?
Depressing. But please keep talking, we need sane voices. Pity Krugman and others highly regarded on the left blew their credibility so badly both culturally, and economically. Krugman with his enthusiasm for massive borrowing at recent low interest rates. Bernanke with his QE and unwinding fiasco, and Yellen with her mismanagement of the TY maturity. It would have been really good if economists across the spectrum could provide air cover for a spineless congress.
I'm surprised that WSJ has agreed to print an OpEd that is even remotely neutral or (pearl-clutching begins here) supportive of Trump's monetary policies. For many decades I was a regular subscriber to WSJ until I noticed that their OpEd section was where news could be found, and their news section was all OpEds. Then even their OpEds became OpEds and I cancelled my subscription
Today’s WSJ is indeed the worst form of mainstream media ever…
…except for all the others.
WSJ is becoming like the Atlantic, all rhetoric and few facts.
The Fed needs to be independent of Wall Street!
Today's wall street has little interest in investing. They money spin!
I call for a low, say 2% tax on all wall street trades(bonds, stocks, etc), that would encourage investing(long term)...not trading billions of shares to front run everything! Also a 2% tax on all money leaving the USA.
Since 2008 the FED printed $10 Trillion the US government printed $30 Trillion, to RESCUE the BAD gambles of Wall Street, virtually no one was really punished, all the lehman guys I know, got jobs at Bank America and just kept rolling.
Go visit Update NY or vast swaths of America where houses go unpainted, there are no restaurants, few grocery stores, businesses....as THEY didn't get one DIME of the TRILLIONS given to Wall Street!
I want actual capitalism, not this crony fraud of DC and Wall Street and Tech....just hyper gambling taxpayer money!
consumption taxes are better!
explain it to me? Where Warren Buffet who consume almost nothing but gets Billion in Renewables credits and access to ZERO Interest Rates Fed Loans?
I think TAX to encourage Investment is much better.
The rich man in NJ a smart physics and math major...got rich by front running the stock market. Explain how that is GOOD for society?
I think those people with unpainted houses, no grocery stores, no businesses are welfare recipients. Probably live in Chicago where they steal everything and are taxed to death with taxes on everything.
find me a FED member not getting $100k speaking fees from Goldman Sachs?
Excellent food for thought, thanks.
So the bottom line is that the ever growing deficit is going to get us in the end and that lowering interest rates now may (or may not) have a short term impact on interest rates--and more to the point, might spark a rate rally (lower rates) for a while which, if deficits continue to mount, could result in a sharp spike in rates in the not so distant future.
Your thoughts on the increasingly important role of the Fed is a good one. Too bad we don't have an academy or a functioning government that could look into this in a reasoned, rational and non-political manner. The issue sure seems ripe for reconsideration.
Lower rates inflated housing and the bond and stock markets. Federal spending increases cause cpi inflation. Cheaper interest rates increase inequality as fewer people can afford housing.
Long term lower interest rates, lower inflation ... is ZIRP an example of this?
I have a question. What if debt is unsustainable and the government fails to signal fiscal surpluses credibly. If you interpret this "permanently lower rates -> low inflation" logic as observationally equivalent to "lower inflation targets -> lower rates in the long run, conditional on fiscal", in cases where you don't have this "conditional on fiscal" part, should, then, inflation targets be set higher?