This is PIMCO’s Bill Gross:
“The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter. A multitude of liability structures dependent on a certain level of nominal GDP growth require just that – nominal GDP growth with a little bit of inflation, a little bit of growth which in combination justify embedded costs of debt or liability structures that minimize the haircutting of or defaulting on prior debt commitments. Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels as is fiscal deficit spending that substitutes for a delevering private sector.”
HT Cthorm
Marcus Nunes
/ February 6, 2012Sure reads that way!
Lars Christensen
/ February 6, 2012Marcus, that part at least do. It is certainly not all Market Monetarist, but it nonetheless shows what direction the general thinking is moving around the world. By the way I think he is right – both the ECB and the Federal Reserve deep down understand the logic of NGDP level targeting – especially in the present situation – but does not dare to say it out loud.
Marcus Nunes
/ February 6, 2012“Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels”.
That´s not what can be surmised from Bullard´s speech today!
http://thefaintofheart.wordpress.com/2012/02/06/benjamin-cole-was-right-first-lower-expectations-than-lower-standards/
Lars Christensen
/ February 6, 2012Agreed Marcus – I think that both the Fed and ECB is getting “soft” and is moving in “our” direction, but a key problem is that they have not communicated this explicitly and as I result they might very well move in the wrong direction once the policies start to work.
Lars Christensen
/ February 6, 2012…and no Bullard is NOT saying anything that should make us the least happy.
cthorm
/ February 6, 2012“Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels”.
That is the part I find most interesting. What does he see? The end of the letter is pretty pessimistic, but if ‘global central bank monetary policy’ was really going in that direction it should be optimistic. I feel pretty confident that someone close to BG, probably a trading assistant, reads at least one MM blog. There is a mix of ideologies at the Managing Director level, and IMO that influence shows in the mash up of Austrian, Keynesian, and MM themes that show up in the letter. Thanks for picking it up and the H/T Lars.
Lars Christensen
/ February 6, 2012cthorm, I am not sure what BG is seeing, but I would agree that judging from the market reactions over the past month this also seems to be the view of the market. Long-term US bond yields are rising, inflation expectations are inching up and commodity and stock prices are up. That is normally a pretty good indication of monetary easing. I think ECB’s LTRO is playing a key role. Furthermore, broad money measures in the US continue to expand and there are even signs that broad money velocity is picking up. Is that implicit NGDP level targeting? I don’t know but I think that it is pretty clear that there has been a shift especially in the attitude of the ECB.
Lars Christensen
/ February 6, 2012See here: http://marketmonetarist.com/2012/01/30/evans-pritchard-on-the-latin-blocs-monetarist-avenger/
David Beckworth
/ February 7, 2012Sorry to burst the Bill Gross party, but he does not sound very Market Monetarist to me. Central banks have not been returning NGDP to historic levels and his concerns about low interest rates means he views low interest rates as indicating loose policy. I wish he would wrestle with the notion of a natural interest rate.
cthorm
/ February 7, 2012David – I don’t see how he indicates “low interest rates as indicating loose policy”. In fact he sees the ZIRP as forcing delevering, which is about as tight/deflationary as you can get. The natural interest rate idea is kind of an odd thing for investors to think about, in the same way as fundamental prices; it’s a useful idea, but in practice investment decisions operate more on a bayesian scenario analysis. If that is a poor representation, by all means point me to a better explanation.
The fact that he is even looking at monetary policy in the framework of NGDP is notable, even if in an incomplete way. Like I said above, there is kind of a muddle going on in the terminology and indicators he points to.
David Beckworth
/ February 7, 2012Cthorm,
This recent piece by Gross is part of a spate of recent articles/op-eds where he has argued that Fed is the source of the problem in the financial system by depressing yields and squeezing net interest rate margins. In his view, the Fed is responsible for the drop in long-term yield too by keeping the expected path of the federal funds rate low. Maybe “loose” isn’t the right term for this, but it certainly is a case of pointing to the Fed as the source of low interest rates.
Here is what is wrong with this view. It ignores the fact that interest rates are determined ultimately by the state of the economy. For example, If firms and households aren’t borrowing because these see greater uncertainty and expect lower incomes in the future,then the demand for credit falls. Also, in such circumstances savings would increase too. Ultimately, these developments would depress interest rates. And if these conditions are expected to persist then long-term rates go down too. Note, there is no need for the Fed in this story. Interest rates are simply a function of the economy. That is why the natural interest rate is a very important idea here. It is the equilibrium interest rate implied by the state of the economy. Investors don’t need to think explicitly about it, but it is falls out of their decisions. And it provides a benchmark of sorts against which to evaluate whether the Fed is really being distortionary. Bill Gross ignores it completely in his analysis. If he did wrestle with it, he would find his argument would be much harder to make.
Another way of saying this is that the Fed’s policies are simply playing catch up to the natural interest rate. When the FOMC extended their forecast for when they would raise the federal funds rate they weren’t setting the path of short-term interest rates, but simply revising their forecast down to reflect a weaker expected economy. In other words, they were adjusting the federal funds to come into line with a now lower natural interest rate. They were responding to, not dictating, the change in market expectation.
Benjamin Cole
/ February 7, 2012I am beginning to wonder if Bill Gross needs to retire. I have actually talked to him a few times, many years ago, and he is friendly and smart. But lately, his pronouncement have been off the mark.
He seems to be grappling here, nearly incoherently so, with the idea of nominal GDP targeting. He makes some accurate assessments about the need for moderate inflation in modern economies, and then surmises that central banks are not hip to that need.
How this fits with Gross’s calls for a tighter Fed policy I can’t tell you.
Maybe he is converting to Market Monetarism, but like many, will have to do so in cathartic and flatulent excretions, such as this. A few more epiphanies, and we will have another convert!
cthorm
/ February 7, 2012Ben – I think you have the right of it. I see these as fits and starts of grappling with the idea. By no means do I think he has it ‘figured out’. Nor do I think he is calling for tighter Fed policy, but his narrative is often confusing to read. The common threads I see are a lamentation of the harm ZIRP does and it’s ineffectiveness as a policy tool.
As David says, the ‘natural interest rate’ is negative now, but why should that remain the status quo? I think it’s much better to take a dose of inflation now and lurch to a new policy framework that will push the ‘natural interest rate’ to a more normal positive level. But that isn’t really a surprise.
David Beckworth
/ February 8, 2012chthorm,
Here is my latest post on the Bill Gross piece. I end on a hopeful note for Gross becoming a NGDP level target advocate.