39 Comments

• Richard Dean 11th Jan '13 - 9:45am

  While I’m not against exploring targeting options, I do wonder whether they’re the right place to focus attention. Is there evidence that it might be?

  Are you asking people to believe that the large Nikkei and FTSE rises were caused by the Bank of Japan accepting a target to boost NGDP by 3%? Other things do happen, or don’t they?

  Are you also asking people to believe that stock market performance is what counts? For many people these days, stock markets and banks are places where criminals play.

• Bill le Breton 11th Jan '13 - 11:05am

  Every good wish to you in 2013, Richard.

  Taking your points in reverse order: critics of Market Monetarism and to fiscal stimulus are usually also believers in the Efficient Market Hypothesis (EMH), but tend not to change their minds when markets respond in ways counter to their theories.

  Stock markets have been great judges of unexpected monetary policy changes, implying that they have already factored in the expected (as the EMH would suggest) and react rapidly to unanticipated changes, like that of Mr Abe.

  The recovery of the Nikkei is a case in point and the turn stems from the very day Mr Abe (the favourite to become PM) announced his commitment to an expansionary NGDP target. I also think that most markets expected a solution to the ‘fiscal slope’ in the US so the recovery there has much to do with Abe’s pronouncement too. Also China has been very good at maintaining a steady trend rate of growth in NGDP.

  There is a wonderful article here: http://www.theatlantic.com/business/archive/2013/01/the-1-thing-the-worlds-smartest-people-dont-get-about-the-fed/266812/ suggesting why people find it counterintuitive to see how monetary policy works – especially when rates appear low or are nominally low.

  And a great set of graphs showing how for instance the Bank of Canada (it is similar for the Bank of England) have kept close to a 2% trend for core inflation – ie have succeeded in its inflation target – but has failed to prevent the tail off in nominal GDP which in the UK means that since the crisis NGDP is 15% below its long term trend: http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/01/the-bank-of-canadas-success-and-failure.html

  Abe’s policy of first ensuring the central bank is committed to a higher target and then supplementing this with a fiscal boost ensures that the central bankers don’t actively or passively offset the fiscal stimulus.

  I know back in October you doubted that we had lessons to learn from Japan, but I still think we do.

• Richard Dean 11th Jan '13 - 1:42pm

  Happy New Year to you too Bill.

  I just heard the tail end of Sky News that jobs are being lost at Honda UK, blamed on a 1 million drop in car sales in Europe between 2011 and 2012, and in spite of rather a lot of government cash being given to Honda. I notice also that five million Greek people are no longer demanding the things they used to, and the nine million or more unemployed Spaniards aren’t either – we now have beggars regularly knocking on doors here near Barcelona, and indeed my own consultancy business is seeing less prospects than it used to.

  All this appears to be because of debt, or bad debt. Promises to pay not kept. It’s madness. My gut says that, while it’s nice to discuss the finer academic points of targeting, monetary policy is not where it’s at.

• Tony Dawson 11th Jan '13 - 1:43pm

  Bill le Breton for Bank of England governor? 🙂

• Bill le Breton 11th Jan '13 - 2:56pm

  Or … ECB sets monetary policy for Germany and consigns most of the rest of the Eurozone to deflation. The ECB is the worst offender and will be the last of the important central banks to do the right thing: condemning millions to permanent recession/depression, fueling extremism, destroying social cohesion and jeopardizing the advantages of a European community.

• JoeBourke 11th Jan '13 - 3:55pm

  Bill,

  Shinzo Abe heads Japans Liberal Democrat Party, the party that was in power when I lived in Japan in the nineties and for much of the post-war period. He has appointed a cabinet, that like himself, hold to extreme nationalist views and are closely intertwined with the big trading houses that dominate the Japanese economy.

  For the moment Mr Abe is trying hard to kick-start the economy. He is pressing the Bank of Japan to introduce a 2% inflation target as a way to jolt Japan out of its long deflationary funk. And he has instructed the new finance minister, Taro Aso, to come up with a new fiscal stimulus, regardless of set borrowing limits. Mr Aso, a former prime minister himself, may be one of the few politicians with the clout to overcome the bureaucrats at the Ministry of Finance, who will be appalled by any extravagance—the national debt already stands at over 200% of GDP. Mr Abe denies that this is a return to the big-spending days of past LDP governments, which were addicted to construction and public works . But he has yet to show how new spending will be any better than the old sort. The risk is that, at some point, new borrowing will spark a sudden, sharp rise in the interest rates the government has to pay on its debt.

  The Economist article on Japans fiscal stumulus Japan’s economy notes the government’s supporters have christened the fiscal and monetary strategy “Abenomics”. But it appears to be ripped largely from John Maynard Keynes.

  This traditional Keynsian stimulus may well be a necessary precursor to economic regeneration, but it has been tried before, several times over the past twenty years in Japn, without lasting success. The reasons are well known. Large scale investment in projects with no economic return designed only to maintain business for the big trading houses.Bridges and roads to nowhere, empty airports etc. The propping up of failed real estate companies and zombie banks. Structural problems that include an ageing population; slow progress in deregulating the economy and opening the country to international competition through free-trade deals.

  Loosening the inflation target from 1% to 2% is a necessaey component of allowing the fiscal stimulus to take effect. It has to be remembered though that monetary and fiscal stimulus are jolts to restart a stalled economy. When long-term structural issues are the principal impediment to maintaing economic growth, than any stimulus will have only short-term effects.

  In the UK at this point in time, Vince Cable’s conference speech (referenced in your article) spells out what is required:

  “The need is for a demand stimulus. And that does not just mean pumping more money into the banks. That great Liberal Keynes had exactly the right analysis of the problem we now have – not enough spending power in the economy. And not only him – but also the International Monetary Fund, who no one could accuse of financial irresponsibility and the coalition understands this very well.

  One big step will be carrying out our commitment this month to get more houses built. The numbers of houses completed are currently the lowest in peacetime since the 1920s. Millions of families are in housing need. There is distress in the construction industry. The private market will only heal slowly. Because mortgages are scarce. What we need is an aggressive programme of house building by housing associations and local councils, with government providing guarantees so they can build, in large numbers, now. We need an extra 100,000 houses a year to meet demand. That would create half a million new jobs.

  The central point is that the country must not get stuck on a downward escalator where slow or no growth means bigger deficits leading to more cuts and even slower growth. That is the way to economic disaster and political oblivion. We will not let that happen.”

• Andrew Suffield 11th Jan '13 - 8:55pm

  All those doom-and-gloom nay-sayers and zombie watchers who said recovery by monetary stimulus would be held back by the supply side (Vince Cable has been busy fixing that), that any boost in demand would just increase inflation and that getting the deficit down was the priority were wrong.

  I summarise what you appear to be saying in the next paragraph:

  The government did a bunch of things that you’ve been objecting to for the past couple of years, and now you’ve found evidence that suggests the economy is growing, and you claim that “government does things I don’t like” followed by “economy grows” is evidence that the things you don’t like were bad?

  So do I understand your argument correctly? Because that argument doesn’t make any sense. The obvious argument for you to be making would be that the economy would have grown much more if the government had followed your proposals, but you clearly haven’t made that argument or provided anything that could substantiate it. The evidence that you’re pointing to is thin – it’s a poor idea to extrapolate from one quarter’s results – but if you really want to take 2012Q3 in isolation then there’s no way to avoid the fact that (a) it’s a good quarter, and (b) good quarters tend to indicate that current policy is working.

• JoeBourke 11th Jan '13 - 9:53pm

  Bill,

  have you seen the FT piece asking the questions: Will the Treasury change the Bank of England monetary policy remit? Should it? Monetary Policy

• Bill le Breton 12th Jan '13 - 10:09am

  Andrew, the policy I have consistently criticized since it was first articulated by the Conservatives and later taken up by the Coalition was accelerating the attempted speed of reducing the deficit based on the unproven and disastrous fallacy of ‘expansionary deficit reduction’ without resetting the mandate of the Bank of England.

  That policy palpably has not worked as the horizon for achieving it – set at five years to 2015 in the 2010 budget – has been pushed back year after year and is still ‘five years from now’. Jam tomorrow.

  What I have consistently argued since 2007/8 and here since my first piece in 2009 was that tight monetary policy was restraining any recovery. Specifically that we had forgotten the point well made by Friedman that low nominal income or NGDP and low central bank policy rates were the sign of money being too tight and not sufficiently accommodating.

  It would seem that the New Governor of the Bank of England recruited by the Quad is of a similar opinion and thus there may be a growing realization that a) the fiscal policy in 2010 and since then has been wrong and has created the very expectations that have guaranteed caution by investors and firms; ensuring that in the private sector savings exceeded investment – which, by the accounting identity is the underlying cause of the persistently intractable public sector deficit.

  I appreciate that one quarter (and an Olympic quarter at that ) does not make a summer, but if we do not seize this opportunity to change expectations by talking up the situation we shall allow any dip in the fourth quarter to negate the progress – it is much more about expectations than anything.

  If we had further relaxed monetary policy early on, if we had cut rates in 07 and not waited until six months after Lehman’s collapse, if we had not set a limit to QE1 but left it open ended with a target set to ‘catch up’ the lost NGDP of 2008 over the years 2010/11 (and NGDP had returned to 5% by 2010) we would have been out of the recession first time and the deficit would be much lower now than it is.

  The existing regime at the Bank finds it difficult to admit that it should have asked the Chancellor to change its mandate/target and the existing Quad finds it difficult openly to admit its 2010 strategy was wrong (not that Labour’s was any less wrong) and that it should have changed that mandate itself. Both may now be doing that by stealth – with the appointment of Carney.

  The shame is that stealth means it cannot use an overt communications policy to maximize the effect of expectations and of course, whilst the lame duck Governor remains in post until June, the Bank cannot play its full part in demonstrating a change in monetary policy.

  Andrew, I have to say that sarcasm ill becomes you. A feature of the Liberal Democrat debate on the economy has been the failure to respect those with other views, to give them the benefit of the doubt and to argue and think about what they say with respect. The failure of expansionary deficit reduction in a deep recession should mean that reasonable people look elsewhere and give other ideas a fair hearing.

  As Joe points out, the FT asked 90 economists for their opinion on the question: will the Bank change its target and is that a good thing? If the idea was not worthy of consideration why would the FT waste its space? If the idea unites Sam Britton and Bill le Breton 😉 isn’t it worth a bit more thought?

  Tony Dawson … and leave the great North West???

• Richard Dean 12th Jan '13 - 3:33pm

  Isn’t house building just another road to nowhere?

  What are the macro-economic effects of building a house? A builder takes out a loan. The loan is paid to staff and for materials. A buyer takes out a loan and pays the builder. The buyer moves is, so the cash-flows that the buyer would have paid to rent a house now go to paying off the loan. The net effect is (a) an increase in householder debt, which means a reduction in future consumption (b) a one-off transfer of some money to builders, staff, and suppliers.

  Is this a sustainable macro-economic result? Or even a desirable one? Will it repeat itself for ever, r will it just stop after a while?

  Shouldn’t we be thinking, not of asset creation, but of cash-flows? Of making flows easier, rather than making things? The feeling you get from austerity is not an absence of assets, but an absence of cash to use – an absence of the cash-flows that accompany the consumption of consumables.

  A body needs, not only blood and veins and arteries, but blood flowing through the veins and arteries. The flowing of it is important, not just the static assets.

• JoeBourke 12th Jan '13 - 5:08pm

  Richard,

  “Isn’t house building just another road to nowhere?” Decidely not. You have literally millions of families in this country in need of improved housing and hundreds of thousands of workers willing and able to build housing units given the opportunity.

  As Vince Cable notes “The numbers of houses completed are currently the lowest in peacetime since the 1920s. Millions of families are in housing need. There is distress in the construction industry. The private market will only heal slowly. Because mortgages are scarce. What we need is an aggressive programme of house building by housing associations and local councils, with government providing guarantees so they can build, in large numbers, now. We need an extra 100,000 houses a year to meet demand. That would create half a million new jobs.”

  The half a million new jobs created will be pemanent and last for a generation or more until we reach a point where housing demand and supply are closely matched.

  There is no limit to the amount of liquidity or guartantees that the UK government can make available to facilitate such policies. This was seen clearly during the financial crisis when a trillion pounds of support in the form of capital, liquidity and guarantes was made available, at short notice, to support the banking industry.

  The obstacles are ideological and political not financial.

• Oranjepan 12th Jan '13 - 5:33pm

  Bill,
  I don’t accept that current decisions relating to the Japanese economy represent either a model or a precedent for Britain or Europe.

  On the contrary the case is a model for foreign policy because spare capacity has been gradually bottled up in the world’s third largest market over more than a decade, and a boost to international trade will help the global economy.

  The global community must coordinate the response to the global crisis, and this requires different policies in different countries to adjust for national legacies. A ‘one-size fits all’ global economic policy is not the way forward.

  It is also worth pointing out that aggregate demand is best created by new private sector jobs, so the successes of the coalition in developing business negates need for a new stimulus.

• Richard Dean 12th Jan '13 - 6:05pm

  Vince Cable is in government, near the top. If he meant what he wrote it would be done. It isn’t, so he doesn’t. If the half million jobs will last a generation, I can see there’s an attraction, but what then? Do you plan another crash, one that will be worse because it won’t have the same house building as a solution? Did Japan build houses? Did Spain?

  I am keen to be convinced, but this really doesn’t look to me like a responsible way to address the macro-economic problems of a country or continent. Is it any different from a third-world political party hijacking a crisis and using it as a way for its supporters to grab assets cheap!

• JoeBourke 12th Jan '13 - 6:57pm

  Richard,

  the purpose of economic organisation or planning is to satisfy basic human needs. Macroeconomic objectives are achieved principally by steering economic behaviour and creating confidence/stability through the employment of two broad policy tools – monetary policy and fiscal policy.

  Maslow’s Hierarchy of Needs defined basic human needs in terms of a triangle. The base of the triangle was the physical requirements for human survival that need to be met first .Air, water, food,clothing and shelter. These are the essential base for any economic activity.

  As an economy develops the next hierachy of needs comes into prominence. In the absence of economic safety – due to economic crisis and lack of work opportunities – these safety needs manifest themselves in ways such as a preference for job security, grievance procedures for protecting the individual from unilateral authority, savings accounts, insurance policies, reasonable disability accommodations, etc

  After physiological and safety needs are fulfilled, the third level of human needs is interpersonal and involves feelings of belongingness – Frienship, intimacy and family.

  With these basic needs fulfilled human behaviour seeks esteem and self-actualisation.

  Investment in housing development is an economic and fiscal policy that targets this basic hierachy of needs with the creation of essential shelter, crestion of employment and job security and the fostering of familial household development.

• Richard Dean 12th Jan '13 - 7:20pm

  So, Joe, you have no answer?

• JoeBourke 12th Jan '13 - 8:09pm

  Richard,

  Giving housing associations the ability to issue government backed bonds for the construction of new homes will lay the foundations for economic growth.That is the view of CentreForum’s chief economist Dr Tim Leunig and former MPC member Prof Tim Besley, who are urging the government to adopt this strategy for getting Britain building again.

  Writing in the Financial Times, A canny way to revive our moribund housing sector Tim Leunig and Tim Besley said:

  “The construction industry has ground to a halt. The Office for National Statistics reports that house building in the first quarter was 20 per cent down on a year ago, 50 per cent down on 2005, and 80 per cent down from levels that prevailed in the late 1960s. This is bad for growth and bad for employment.”

  “We propose that government should give the best housing associations a new role. They would issue bonds – underwritten by government – at low interest rates, secured on their (new) income stream.”

  “Housing associations would then contract with developers to build houses and flats, which the association would sell or rent in the open market.”

• Richard Dean 12th Jan '13 - 8:20pm

  In the US, a few years ago, did the housing association type of solution not lead to a sub-prime mortgage crisis that triggered the present global crisis?

  It’s all very well quoting Maslow, but macroeconomic disasters affect people’s ability to satisfy their needs too. The country therefore needs the macroeconomics to be right.

• Joe Bourke 13th Jan '13 - 12:05am

  Richard,

  “did the housing association type of solution not lead to a sub-prime mortgage crisis that triggered the present global crisis? ”

  Again,the answer is definitively no. The sub-prime mortgage crisis lies firmly at the feet of the big Wall Street investment banks. I worked in the States in the eighties and early nineties, in the real estate management business, during the Reagan and Bush Snr administrations. I was able to see at close hand the effects of deregulation and saw the same thing underway with UK building societies when I returned here in the mid-nineties.

  Fannie Mae and Freddie Mac have served the US very well since their creation during the ‘great depression’ era. They have enabled generations of American since WWII to access low cost 25 year fixed rate mortgages and made homeownership widely affordable to ordinary working families.

  Threre was however an inherest flaw in the creation of these government sponsored enterprises (GSE’s)as private shareholder companies. The government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk-taking and profitability.

  There were two other parties—Congress and the taxpayers—that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSEs’ ability to hold down mortgage rates, but it garnered even more political benefits from GSE support for affordable housing.

  In 1992 in the wake of the US Savings and Loan crisis, and over concern similar lending problems would develop, the Office of Federal Housing Enterprise Oversight was created. While Senate and House leaders voiced their intention to bring about the needed legislation for oversight, nothing was actually done and both Fannie Mae and Freddie Mac were left unreformed and unsupervised to ultimately pursue the same highly leveraged and risky strategies that other investors in the real estate markets were developing.

  In the United Kingdom these conflicts do not exist. UK housing associations are private, non-profit making organisations that provide low-cost “social housing” for people in need of a home. Any trading surplus is used to maintain existing housing and to help finance new homes. Although independent they are regulated by the state and commonly receive public funding. They are now the United Kingdom’s major providers of new housing for rent, while many also run shared ownership schemes to help those who cannot afford to buy a home outright.

• Paul in Twickenham 13th Jan '13 - 12:09am

  Bill – the Nikkei has risen because of the current and future monetary blitzes of the new Abe government.

  In the same 2 month period as you mention above, the Yen has plunged against pound from 126 to 144 – a fall of 13%. As you well know, the reduction in the purchasing power of the yen simply means that the market is dragged up in response. This is not wealth creation nor a sign of confidence in the government – it is a mechanical response to an explicit policy of currency debasement.

  The policy of the Abe government is to deliberately reduce the value of the yen. The likely effect is that the yen carry trade will explode (I would suggest initially with South Korea) with dire repercussions as the covert currency debasement efforts of the central banks explodes into open warfare.

  There is a race to devalue going on around central banks globally. Everyone is determined to pull their currency down below its current level relative to the other chaps. I am reminded of the old joke about the government determined to ensure that most school children got above-average test scores.

  You clearly consider the Abe government’s policy a model for this country. I see it as the lighting the fuse for a return to the disastrous beggar-thy-neighbour policies of the 1930’s.

• Richard Dean 13th Jan '13 - 12:47am

  The macroeconomic effects of building and selling a house to a new homeowner are certainly

  1. a one-time (short period) transfer of cash to the builder and staff and suppliers
  2. a removal of a cash-flow from one place, where the new owner was renting before
  3. a removal of a cash-flow from the future consumption that the new owner would otherwise have purchased
  4. a set of replacement cash flows to a source of finance to pay of the debt
  5. (maybe) an alteration in the price of housing, with knock on effects on collateral and the cost of credit
  6. (maybe) an alteration in the price of building materials, etc …

  It’s fine as a way of addressing people’s needs for housing. But in what way does it provide any solution at all to the country’s present financial problems? It looks like quite the opposite – creating more debt, not solving the problem, just kicking it into long grass where it will eventually cause even worse mayhem, and probably sooner than anyone thinks.

• Joe Bourke 13th Jan '13 - 1:29am

  Richard,

  you make the common mistake of assuming that creating more debt for investment is not a solution to the problem. Money is debt and it is a function of efficient government to ensure an adequate supply of money to facitate the desired level of fiinancial transactions in theeconomy.

  Macroeconomics refers to the performance, structure, behavior, and decision-making of an economy as a whole, rather than that of individuas, firms or specific markets.At issue here is a long recognised macroeconomic problem – the paradox of thrift.

  When individuals and firms are concentrated on paying down debt, as they have been for some time, then the government needs to facilitate that desire for deleveraging and reduction in the money supply by enabling compensating borrowing for investment – both public and private

  As the leading economic commentator, Jonathan Portes noted last summer The pasty tax could pay for a £30 billion infrastructure programme:

  “with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macroeconomics, it is common sense. “

• Paul in Twickenham 13th Jan '13 - 8:02am

  Joe – I agree that there is a distinct difference between borrowing for consumption and borrowing for investment. But we must be clear on what “investment” is and what end it serves.

  For example, if you go to Spain you will find a modern country replete with excellent, modern air terminals and efficient well-maintained roads and railways. If “investment in infrastructure” was all it took to grow an economy then Spain would be a showcase for the world.

  But Spain is a country with 26% unemployment, a mountain of unserviceable public and private debt and no prospect of improvement. It is in the twilight zone – suspended somewhere between a Fisherite death spiral and the Draghi put.

  It is my view that the BoE’s QE programme is delivering no value as little of the money is leaking out from the banks to the “real economy”. This is a gross error by King and others – mirroring the groupthink that resulted in the horrendous failure of the OBR and others to correctly calculate the GDP impact associated with reduced government spending.

  I have long held the view that if we must have QE then it should be used for direct purchase of high quality (AA or better) bonds – bonds from social housing providers that build decent homes, and from regional and specialist banks that provide funding for SMEs. But that won’t happen because there is no benefit to the banks in it.

• Richard Dean 13th Jan '13 - 11:47am

  Multiply the macroeconomic effects of one house by 100,000 and you get a lot of reduced future consumption!

• Richard Dean 13th Jan '13 - 12:37pm

  I mean that they won’t have money to buy things if it’s all tied up in mortgage payments. Not much point in having a house if you can’t live in it. I grew up in a rented council house and there was no sense at all that it wasn’t my home.

  The financial problems we have at the moment are caused by people in the past not managing the future responsibly. We’ll fix that later. We’ll buy now and pay later. We’ll plan on the assumption that we’ll be richer later. We’ll introduce a new product line on the basis that people will be able to pay for it in future, although they can’t now.

  To avoid these mistakes, we need to manage the future a lot more responsibly than we have done in the past. No point starving in an owner-occupied house in the future if we could have feasted in a rented home.

• Joe Bourke 13th Jan '13 - 3:37pm

  Richard,

  avarage mortgage payments are currently £100 per month less than renting Renting versus buying: which is cheaper?i .

  I would strongly agree with Paul in Twickenhams comment above:

  “It is my view that the BoE’s QE programme is delivering no value as little of the money is leaking out from the banks to the “real economy”. This is a gross error by King and others – mirroring the groupthink that resulted in the horrendous failure of the OBR and others to correctly calculate the GDP impact associated with reduced government spending.

  I have long held the view that if we must have QE then it should be used for direct purchase of high quality (AA or better) bonds – bonds from social housing providers that build decent homes, and from regional and specialist banks that provide funding for SMEs. But that won’t happen because there is no benefit to the banks in it.”

• Richard Dean 13th Jan '13 - 3:53pm

  Repeating something does not make it right.

  Nor does a three-year view amount to any kind of responsible forward planning. A key sentence is “Three years ago, the average cost of buying was 43% more than the typical rent paid”. If the rent/buy comparison is that volatile, who’s to say what will be happening over a 25-year mortgage period? Risk has its price, as anyone who has actual experience in these matters will confirm. At the moment it appears to be £100 per month.

  http://www.talktalk.co.uk/money/latest-features/mortgages/buying-verses-renting-may-2011.html

• Bill le Breton 13th Jan '13 - 5:19pm

  Paul in Twickenham, there is another line of argument on this.

  Abe is forcing his central bank to create a 3% higher level of NGDP, the depreciation of the currency is a side effect of the monetary loosening or more accurately of the expected monetary loosening thought necessary to achieve that 3% NGDP growth – a significant boost in aggregate demand. Depreciation is a by-product, not the prime aim.

  If other nations decide to follow suit by there own similar pronouncement of monetary loosening , any downside from competitive devaluation will be more than compensated for by the benefits of monetary loosening in increasing aggregate demand first in Japan and then in those countries trying to match the devaluation.

  This process in the 1930s began when Britain left the gold standard and she led the way for others to follow that lead (just as Japan may be doing today). It did not beggar neighbours so much as get countries off the deflationary hook of the gold standard. It allowed country after country to loosen monetary policy. The speed of the recovery in the US following FDR’s Executive Order 6102 (April 5, 1933), in which he increased the price of gold, was dramatic.

  It was only the timid response of central bankers to that recovery, tightening again before recovery had locked in, that plunged the globe back into depression.

  Clearly it would be better if today there was a world wide co-ordination of monetary loosening but perhaps this will happen. All eyes are on Japan. If it works I think we shall see a future G20 implementing a global scheme. Certainly Carney is in a great position not only to influence UK but also global monetary policy.

  Here is a similarly argued piece from the Guardian in 2009! http://www.guardian.co.uk/commentisfree/2009/mar/17/g20-globalrecession

  It is interesting that Vince Cable’s first mention of NGDP targeting (in the Will Hutton interview) states as his principle attraction to the policy the need to maintain the currency depreciation engineered by King and Darling. Since then of course the pound has risen 12%, leading to significant passive tightening of monetary policy, feeble NGDP growth (average 2.5% since 2010) and the second ‘dip’.

  My sense is that the Quad is able to admit the second dip was caused by monetary tightening and ‘would not allow this to happen again’,

  If this is indeed so, why don’t they come out publicly and say this – as it would be helpful in terms of expectations management. And why don’t they use it not just in the event of further decline, but to manage a sustained recovery?

  In the 1930s there was a huge advantage in leaving the Gold Standard early, as the laggard France found to its cost, as I believe the Eurozone and the ECB will discover to the cost of all of us.

• Bill le Breton 13th Jan '13 - 6:17pm

  Nominal GDP targeting may appear wonkish stuff, but the stakes on getting the decision right are enormous.

  Asked at the last Treasury Select Committee what he thought should be the answer, The Chancellor of the Exchequer said that it was not for him to air his views yet but he would welcome debate and consideration of the topic by academics.

  As if responding to the Chancellor, Professor Wren-Lewis of Oxford University has just begun a series of postings on the matter, writing ‘One of my projects for the year ahead is to come off the fence (one way or another) on nominal GDP targeting. As an experiment, I’ll try and track my progress on this project with blog posts…’

  He begins here: http://mainlymacro.blogspot.co.uk/2013/01/is-there-case-for-inflation-targets-uk.html

• Joe Bourke 14th Jan '13 - 12:50am

  Bill,

  judging by the responses to the FT question, it appears unlikely that the grear majority of the academic community will endorse NGDP targeting as anything more than a potential technical improvement on flexible inflation targeting or as part of a broader mandate that encompasses unemployment and/or other economic indicator’s.

  Samuel Brittan has put forward some interesting proposals The harmful myth of the balanced budget in which he says:

  “I suggest a threefold division of the national budget. The first would be normal current expenditure, such as spending on teachers or soldiers, which would be always covered by revenue. The second would be a capital budget some of which governments could borrow, but strictly at market rates of interest.

  The third section would be a stabilisation fund which would inject purchasing power when depression threatens and remove it during periods of inflationary pressure. It would not be confined to the traditional public works but could include any types of public spending and also tax remissions. This approach would help to distinguish economic arguments about fiscal stimuli from political arguments about the size of the state.

  This third section could best be financed at zero or low interest rates by advances from the central bank, as it would be a respectable form of the helicopter drop. The threefold division could perhaps be policed by a body such as the Office for Budget Responsibility. And in the background there needs to be a national policy goal such as a nominal GDP objective. Nit-pick these ideas as you like, they are more promising than everlasting austerity and slump.”

• Bill le Breton 14th Jan '13 - 9:09am

  Joe thanks as ever for adding thoughts and sources throughout this positing.

  The 90 surveyed by the FT are a mixed bag. Not all are academics. Those that are will therefore be subject to peer review. Then there are those who actually ‘put their money where there mouth is’ – a great Darwinian test. Finally there are pundits.

  It will be very interesting to see Wren-Lewis picking through the issues. I feel sure their will be people in the Bank and at the Treasury keeping an eye on them. The quality of his first post is without question.

  Britton is a fascinating person. I read him regularly in the early 1980s. I think he is also a long standing campaigner for a Basic Income/Citizens Income.

  As he concludes in the extract you pasted above, “Nit-pick these ideas as you like, they are more promising than everlasting austerity and slump.”

• Paul in Twickenham 14th Jan '13 - 2:06pm

  Bill – I enjoyed reading Eichengreen’s article from The Guardian that you linked. As you say, he repeats the central message of his 1984 paper – that the 1930’s piecemeal devaluation had the effect of beggar-thy-neighbour but it needn’t have been that way if governments had co-ordinated their actions.

  That article was published in March 2009 – just as the stock markets (and especially bank shares) reached the crisis low-point. We have now had 4 years and £325 billion of QE in this country, and vast amounts of QE, Operation Twist, Credit Easing, LTRO (call it what you like) elsewhere… and we’re still on a precipice.

  After 4 years I see markets that are hooked on central bank largesse; incomes that are declining relative to inflation; systemic and endemic unemployment in Euroland; annuities and pensions that are experiencing Weimar-like destruction; and banks and companies that continue to retrench.

  It is my view that we are at a point where traditional remedies will simply not do – the traditional Keynesian model is premised on an assumption of a cyclical trend, but I am in the group of people who see strong evidence that our current recession(s) cannot be regarded as cyclical, but secular.

  I would echo your statement that “Japan is in the lead” – but I would use that statement in the context of a secular downturn/recession that has no precedent. Where Japan is today we will all be tomorrow. Like you, I will watch for the effect of their latest stimulus with interest.

• Bill le Breton 14th Jan '13 - 3:26pm

  Paul, in which case a jubilee? The Great Reset??? Is that what you are saying? B

• JoeBourke 14th Jan '13 - 4:47pm

  When the Japanese housing bubble burst in 1990 the economy was left in disarray. Hard to believe that this happened 23 years ago, but real estate prices in Japan today are at levels last seen in 1983. In other words, thirty years of virtually no real growth in property values. In a system conditioned by inflation this is a perfect example of asset deflation.

  The Nikkei reached a peak of 38,916 at the end of 1989. By March 2009 the stockmarket index had fallen to 7,055 and stands at 10,801 today.

  In the UK, a low interest rate policy and aggressive quantative easing have shorn up property and stock prices, similar to the measures undertaken by the Bank of Japan in the late nineties and noughties. The BofE efforts to prevent asset price deflation and a continuing shortage of housing supply (the current level of new housing starts being at the lowest seen since the 1920’s) have held-off the kind of drop in property prices seen in Japan, at least in London and the Southeast. Yet when we look at what Britons can afford on a monthly basis, it is virtually locked because household incomes have been stagnant for well over a decade and real incomes are falling.

  This FT editorial welcomes the new round of stimulus measures in Japan Tokyo’s stimulus but points out there have been 14 stimulus packages since November 1999 and none of them has put the economy back on its feet. The article goes on to say:

  “to secure long-term growth, Japan needs structural reforms. Since the labour force is shrinking, more imaginative policies on immigration and to keep more women in the workforce are needed. The service sector has to be deregulated to increase its productivity. Last week’s fiscal stimulus, while welcome, was the easy part. It is now time for Mr Abe to be more ambitious.”

  We too need to be more ambitious, if we are to avoid the fate of Japan’s lost decades.

• JoeBourke 14th Jan '13 - 7:36pm

  Paul in Twickenham.

  “I am in the group of people who see strong evidence that our current recession(s) cannot be regarded as cyclical, but secular.”

  I came across this speech from William C. Dudley, the New York Fed Pesident and CEO recently, where he refers to the impact of secular or long term trends on the US Economy The Recovery and Monetary Policy ;

  “A third reason for the weaker than expected recovery likely lies in the interplay between secular and cyclical factors. In particular, I believe that demographic factors have played a role in restraining the recovery. The developed world’s populations are aging rapidly. In the United States, for example, the baby boom generation, which is a particularly large cohort, is now beginning to retire. As the population ages, this has two consequences. First, the spending decisions of the older age cohorts are less likely to be easily stimulated by monetary policy. That is because such age groups tend to spend less of their incomes on consumer durables and housing. Second, as the population ages and the number of retirees climbs, the costs associated with Social Security, government pensions, and healthcare retirement benefits increase. This creates budgetary pressure and leads to a choice of raising revenue to fund these costs, cutting other government programs, or cutting benefits.”

  Dudley goes on to remind us:
  “Although I favor an aggressive monetary policy in the current situation, I also recognize that monetary policy is not a panacea. We all know that in the long run money is neutral—that is, that while monetary policy can help the economy return to full employment following a shock, the full employment level of output, employment and real income depends on factors outside of monetary policy. Also, we must recognize that the strength of the current cyclical recovery will depend importantly on non-monetary policy choices.”

• JoeBourke 15th Jan '13 - 3:33pm

  Bill,

  You might find this recent interview with Goldman Sachs Chief Economist of interest Goldman’s Top Economist Explains The World’s Most Important Chart, And His Big Call For The US Economy.

  He uses the multi-sector framework (developed by Cambridge University economics professor, Wynne Godley who passed away a couple of years ago) to look at business cycles in the U.K. and also in the U.S. and notes:

  “There is an accounting identity which is issued, if you start with the global economy, to simplify it, that every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero.That’s the starting point. It’s a truism, basically.

  Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector financial balances.

  If the business sector is basically trying to reduce its financial surplus at a more rapid surplus than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger higher, more income, and ultimately feeds back into spending.

  Conversely, if the business sector reduces its desired surplus by less than the government sector tries to reduce the budget deficit, then you end up with cyclical weakness. It’s a little heavy-going, to put this into words, and can be challenging.

  There’s a reasonable amount of jargon involved (ex post, ex ante type of stuff), and I generally try to avoid having too much jargon and too much heavy going in the sort of things that we write, but in this particular case it is useful and worthwhile to wade through this a little bit. It’s an exception, but I think it is useful in this case.”

  On NGDP targeting he says:

  ” I think it has quite a lot of attraction in the sense that it’s forward guidance about the economic conditions that the Fed is trying to achieve and it’s a very clear forward guidance about the Fed’s desire to bring spending in the economy back to something closer to pre-crisis trends.

  I think at least in economic models, very simplified economic models admittedly, but economic models in which firms and consumers are forward looking and build even relatively long-term expectations about monetary policy into their current decisions, policy like Nominal GDP targeting can be pretty expansionary, can shift expectations about the economy in a way that already delivers a boost at this point in time. So there are some significant attractions about it.

  Of course, there are also some risks. I don’t think it’s a likely switch for the Federal Reserve in the near term. I think the risks and the drawbacks are that the Fed is somewhat uncomfortable with the message that catch-up growth could be achieved regardless whether it comes through higher inflation or higher real growth.

  That is, of course, part of the logic of the framework – we’re going to focus on nominal growth and aren’t going to respond the same way to changes in inflation. That stands in the way of them adopting a framework like this any time soon despite the fact that it’s become talked about more, it’s gained quite a bit of respectability, Woodford presented his long Jackson Hole paper, basically endorsing NGDP targeting this summer, but I don’t think that they’re so close yet.”

• JoeBourke 15th Jan '13 - 7:34pm

  Richard,

  “The financial problems we have at the moment are caused by people in the past not managing the future responsibly. We’ll fix that later. We’ll buy now and pay later. We’ll plan on the assumption that we’ll be richer later. We’ll introduce a new product line on the basis that people will be able to pay for it in future, although they can’t now.”

  That is indeed the case – but instability in a poorly regulated financial sector and the financial crisis was precipated by excessive private sector borrowing and lending, not public sector borrowing. Housing associations are publicly regulated bodies that mainly develop rental property, not homes for sale.

  This Manifesto for Economic Sense makes the case for public policy acting as a stabilizing force and attempting to sustain spending.

• Paul in Twickenham 16th Jan '13 - 11:57pm

  Bill: Apologies for the long pause before replying – pressure of external responsibilities! Yes, I do think that the end-game for all this is the big reset, in fact I actually said that in the first pass of an earlier contribution on this thread and then deleted it because I thought I’d sound like some half-crazed survivalist.

  Ambrose Evans-Pritchard in The Telegraph this evening has picked up on many of the themes we were discussing earlier around competitive devaluation: http://www.telegraph.co.uk/finance/financialcrisis/9807092/Europe-drawn-into-global-currency-wars-as-slump-deepens.html. In particular, he notes the concerns of the Koreans about the potential impact of a resurgence in the yen carry trade. I think that India (which currently has 8% interest rates) will also be in the firing line.

  Joe – I agree with Bill Dudley (and many other people who have made the same important point) that there is a major problem with the unfunded and open-ended liabilities associated with pensions for retirees. This is a bad problem in the USA where social security is only partially funded, but here in the UK of course it’s an absolute nightmare. We all should look at Norway’s government pension fund and hang our heads in shame at how we wasted North Sea Oil.

  More generally, we have had an explosion of debt since the end of Bretton-Woods and there is neither the political will (nor, I suspect the economic capacity) to ever resolve it.

  Like all Liberals I’m basically an optimist, but there’s a great deal to be said for keeping some of that shiny yellow stuff close at hand…

• Joe Bourke 17th Jan '13 - 2:18am

  Paul,

  I was reading a piece by Ambrose Evans-Pritchard last week in which he was warning of a looming sterling crisis
  Sterling crisis looms as UK current account deficit balloons. He also echoes the point you make about squandering the opportunity for fundamental economic reforms while the revenues from North Sea Oil were flowing in.

  I think the weakening of the Yen has more to do with the fast disappearing trade surpluses, that Japan has enjoyed for several decades, than the anticipated effects of quantative easing. Japan has carried out quantative easing several times in the past decade while the Yen maintaned its underlying strength regardless. In recent times, the country has started to run trade deficits, for the first time in 31 years.

  The 25% appreciation in the yen value compared to the euro in 2011/12, makes Japanese exports to Europe very expensive. Combined with the soft euro economies, Japanese exports have taken a tumble.

  The disruption caused by the earthquake and subsequent tsunami is another reason for the trade deficit. Not only did the devastation cause havoc with the manufacturing plants, the electric supply was reduced because of the damaged nuclear plants. About 25% of atomic power, permanently, lost is being replaced with electricity from imported coal, oil and LNG. This energy cost also hurts the trade balance.

  A combination of high energy costs and supply disruptions combined with the strong yen has caused Japanese companies to move production from Japan. Nissan, for example move some production to Thailand, where they have access to cheaper labor as well as energy. Honda has switched production of the Acura to Ohio, and their less expensive models to Mexico. All models can now be produced in North America.

  It is questionable if Japan can maintain its safe haven circumstances in these circumstances. In the past, the Japanese were thrifty savers and funded government borrowing at very low rates of interest, but now as the population is aging the savings rate is being reduced and more reliance on external debt may start to push-up interest rates on bonds.

  NGDP targeting, although an idea that has been around a long time, was an esoteric concept until recently, but is now widely considered as a serious alternative to inflation or price-level targeting. Perhaps a debt jubilee will eventually filter through into mainstream macroeconomic thinking in the same way.

• Bill le Breton 6th Jan '14 - 7:11pm

  Pity this piece from exactly a year ago can’t be re-blogged because we’d be able to see the latest *startling* progress reported here http://marketmonetarist.com/2014/01/06/the-kuroda-boom-remains-all-about-domestic-demand/