Kelly Evans interviews Scott Sumner

The Wall Street Journal’s Kelly Evans interviews Scott Sumner

Good to see the Journal is opening the door for Scott.

HT Marcus Nunes

UPDATE: Scott has a comment on his interview as well.



Scott’s prediction market

Scott Sumner has long argued that the Federal Reserve or the US Treasury should help set-up a NGDP futures markets and conduct monetary policy based on market expectations of NGDP. This is a great idea, but so far it does not really look like the Fed is interested in the idea.

However, there is another and far more simple possibility. Scott should just drop the good people at Iowa Electronic Markets (IEM) a mail and ask them to set up a “prediction market” on future US NGDP. They would probably be happy to play along – after all this is the sexiest idea in US monetary debate today.

So what is IEM? It is “a group of real-money prediction markets/futures markets operated by the University of Iowa Tippie College of Business. Unlike normal futures markets, the IEM is not-for-profit; the markets are run for educational and research purposes. The IEM allows traders to buy and sell contracts based on, among other things, political election results and economic indicators. Some markets are only available to academic traders. The political election results have been highly accurate, especially when compared with traditional polling. This may be because it uses a free market model to predict an outcome, instead of the aggregation of many individuals’ opinions. The speculator is more interested in a correct outcome than in his or her desired outcome.” (Stolen from Wikipedia).

Prediction markets have been very successful in predicting the outcome of for example US presidential elections so why should prediction market not be able to predict NGDP two, three or fours year out in the future? At least prediction market based forecasts of NGDP will be as good as any in-house forecast from the Fed.

How would it work? IEM would set up a bet on US NGDP for 2012, 2013 and 2018. Scott is presently recommending that the Fed should aim for bringing back NGDP to the pre-crisis trend and thereafter target a growth path of 5%. The outcome from the prediction market can then be compared with Scott’s target path – if the predicted numbers are below Scott’s preferred path then he has “market backing” for claiming US monetary policy is too tight…and maybe even Ben Bernanke would play a long…

PS If IEM are not up for the challenge then the good people at the Holly Stock Exchange might be up for it – Scott after all is fast becoming a big celebrity.


UPDATE: Just found out somebody else got the same idea (before me) – see Chris Fox and John Salvatier at  “Good morning, Economics”.

A history of bunganomics

Market attention has changed from Greece to Italy. As in Greece the centre of attention is the dual concerns of public finance trouble and political uncertainty.

A look at Italian economic and monetary history, however, reveals some interesting facts. While Greece is a serial defaulter Italy has in fact only defaulted on it’s public debt one time since Italy become an independent and unified nation in 1861. Contrary to this Greece has been in default in more than 50% of the time since it became an independent nation in 1822 (1830).

Minimal knowledge of Italian history will teach you that the country is notorious unstable politically and that public finance trouble historically as been as much a norm as in Greece so how come that the Italian government has not defaulted more than once?

Some Unpleasant Monetarist Arithmetic will help us explain that. Sargent and Wallace teach us that public deficits can be financed by either issuing public debt or by printing money. Historically Italian governments have had a clear affinity for printing money.

Rogoff’s and Reinhardt’s “This Time is Different” provides us with the statistics on this. Hence, among the present euro countries Italy has been the third most inflation-prone country historically – after Austria and Greece. Hence, since 1800 Italy has had inflation above 20% in more than 11% of the time. The similar numbers for Austria and Greece are 20% and 13% respectively.

Michele Fratianni, Franco Spinelli and Anna J. Schwartz have written the “Monetary History of Italy” and the authors reach the same conclusion – that the core of Italy’s inflationary problems is the Italian government’s lack of ability to balance the budget.

This time around the money printing option is not easily available – at least not if the Italian government wants to keep Italy in the euro zone. Sargent and Wallace would tell us to watch inflation expectations to see whether the Italian government is credible or not when it says it will not leave the euro.

Selgin is right – Friedman wanted to abolish the Fed

I guess George Selgin is right  – Milton Friedman at the end of his life had come to the conclusion that the Federal Reserve should be abolished. See for yourself here. This is six months before his death in 2006.

See George’s excellent paper “Milton Friedman and the Case against Currency Monopoly”.

Sumner, Glasner, Machlup and the definition of inflation

David Glasner has a humorous comment on Scott Sumner’s attempt to “ban” the word “inflation”.

Here is Scott:

“Some days I want to just shoot myself, like when I read the one millionth comment that easy money will hurt consumers by raising prices.  Yes, there are some types of inflation that hurt consumers.  And yes, there are some types of inflation created by Fed policy.  But in a Venn diagram those two types of inflation have no overlap.”

While David partly agrees with Scott he is not really happy giving up the word “inflation”:

“So Scott thinks that if only we could get people to stop talking about inflation, they would start thinking more clearly. Well, maybe yes, maybe no…At any rate, if we are no longer allowed to speak about inflation, that is going to make my life a lot more complicated, because I have been trying to explain to people almost since I started this blog started four months ago why the stock market loves inflation and have repeated myself again and again and again and again.”

The discussion between these two light towers of monetary theory reminded me of something I once read:

“When I began studying economics at the University of Vienna, immediately after the First World War, we were having a rapid increase of prices in Austria and, when asked what the cause was, we said it was inflation: By inflation we meant the increase in that thing which many are now afraid to mention – the quantity of money” (Fritz Machlup 1972)

But hold on for a second Fritz! That’s wrong! Lets have a look at the equation of exchange (in growth rates):


If the rate of growth in the quantity of money (m) equals inflation then inflation must be defined as p+y-v. And then if we assume (rightly a wrongly) that v is zero then it follows that inflation is defined as p+y.

What is p+y? Well that is the growth rate of nominal GDP! Hence, using the Machlup’s definition of inflation as the growth of the quantity of money then inflation is in fact nominal GDP growth.

So maybe David and Scott should not disagree on whether to ban the word “inflation” – maybe they just need to re-state inflation as the velocity adjusted growth of the quantity of money also known as NGDP growth.

PS this definition of inflation would also make David’s insistence that the stock market loves inflation a lot more reasonable.

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