Finland continued economic nightmare

This is from an excellent article from Bloomberg:

A chronically depressed economy, rising unemployment and an aversion to free-market reforms. Sound like a familiar European tale?

But it’s not Greece, Spain or Portugal. It’s Finland.

As the indebted and ailing countries in the euro region’s southern rim struggle out of their six-year crisis, some with more success than others, Finland is succumbing to its own.

Its economy, which has contracted every year since 2012, was the worst performer in the common-currency area in the first three quarters of 2015, according to Eurostat data. Its deficit is relatively higher than Italy’s, despite being ranked fourth in the European Union in terms of how much taxes and social charges it demands from its citizens, and its unemployment rate exceeds those of its Nordic neighbors. The latest data published Wednesday by Statistics Finland showed the jobless rate rising to 9.2 percent in December, the highest level since June 2015.

I have written a lot about Finland (see for example here, herehere and here). It is really a textbook example of how to drag out a recession – no currency flexibility and too tight monetary policy (euro membership), extremely rigid nominal wages (collective bargaining and overly generous welfare benefits) and quite a bit of bad luck (Russian recession and negative terms-of-trade shocks – primarily in the pulp and paper industry). And of course the demise of Nokia…

It is not really that different from Denmark. Denmark has just been a lot more lucky in terms of terms-of-trade shocks (LEGO and Novo are doing great, Nokia has died), but the pegged exchange rate regime is causing the same problems for Denmark as euro membership is for Finland. 

That said, Denmark seems to have significantly higher wage flexibility and Danish labour unions seem to have understood much better than their Finnish counterparts that when there is no currency flexibility then you need downward wage flexibility.

Denmark and Finland’s lacklustre economic performance is particularly striking when you compare it with the performance of Sweden, Norway and Iceland – three other Nordic, but with floating exchange rate regimes.

I have used this graph before, but I think it tells the importance monetary policy quite well.

So either the Finns have to leave the euro or hope for a lot more monetary easing from the ECB and then of course it is time for Finland to scrap the 1970s style collective bargaining system. It is a job killer.


Three simple changes to the Fed’s policy framework

Frankly speaking I don’t feel like commenting much on the FOMC’s decision today to keep the Fed fund target unchanged – it was as expected, but sadly it is very clear that the Fed has not given up the 1970s style focus on the Phillips curve and on the US labour market rather than focusing on monetary and market indicators. That is just plain depressing.

Anyway, I would rather focus on the policy framework rather than on today’s decision because at the core of why the Fed consistently seems to fail on monetary policy is the weaknesses in the monetary policy framework.

I here will suggest three simple changes in the Fed’s policy framework, which I believe would dramatically improve the quality of US monetary policy.

  1. Introduce a 4% Nominal GDP level target. The focus should be on the expected NGDP level in 18-24 month. A 4% NGDP target would over the medium term also ensure price stability and  “maximum employment”. No other targets are needed.
  2. The Fed should give up doing forecasting on its own. Instead three sources for NGDP expectations should be used: 1) The Fed set-up a prediction market for NGDP in 12 and 24 months. 2) Survey of professional forecasters’ NGDP expectations. 3) The Fed should set-up financial market based models for NGDP expectations.
  3. Give up interest rate targeting (the horrible “dot” forceasts from the FOMC members) and instead use the money base as the monetary policy framework. At each FOMC meeting the FOMC should announce the permanent yearly growth rate of the money base. The money base growth rate should be set to hit the Fed’s 4% NGDP level target. Interest rates should be completely market determined. The Fed should commit itself to only referring to the expected level for NGDP in 18-24 months compared to the targeted level when announcing the money base growth rate. Nothing else should be important for monetary policy.

This would have a number of positive consequences.

First, the policy would be completely rule based contrary to today’s discretion policy.

Second, the policy would be completely transparent and in reality the market would be doing most of the lifting in terms of implementing the NGDP target.

Third, there would never be a Zero-Lower-Bound problem. With money base control monetary policy can always be eased also if interest rates are at the ZLB.

Forth, all the silly talk about bubbles, moral hazard and irrational investors in the stock markets would come to an end. Please stop all the macro prudential nonsense right now. The Fed will never ever be able to spot bubbles and should not try to do it.

Fifth,the Fed would stop reacting to supply shocks (positive and negative) and finally six the FOMC could essentially be replaced by a computer as long ago suggested by Milton Friedman.

Will this ever happen? No, there is of course no chance that this will ever happen because that would mean that the FOMC members would have to give up the believe in their own super human abilities and the FOMC would have to give up its discretionary powers. So I guess we might as well prepare ourself for a US recession later this year. It seems incredible, but right now it seems like Janet Yellen’s Fed has repeated the Mistakes of ’37.

PS What I here have suggested is essentially a forward-looking McCallum rule.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or


A framework for understanding Tunisia’s economic crisis

The Arab Spring started in 2010-11 in Tunisia and until now Tunisia has been highlighted as basically the only country, where the Arab Spring has not ended in disaster. Unfortunately over the last couple of days social unrest and violent confrontation between demonstrators and police have erupted across Tunisia.

I this blog post I will have a look at the Tunisian economy and try to give my take on what is wrong with the economy. There is of course a lot of ground to cover and I can naturally not cover it all in one blog post, but I will try provide an overall framework for how to understand the economic situation in Tunisia.

The economy has been in crisis since 2011

A look at real GDP growth in Tunisia shows that the economy essentially has been suffering since the outbreak of the Arab Spring in 2010-11.


Prior to 2011 real GDP growth was averaging 4-5% a year – not very impressive given the high growth rate of the labour force and compared to for example Turkey, but nonetheless fairly robust and stable growth.

However, during the 2011 revolution GDP drop in around 2% and after initially recovering in 2011-12 growth have once against slowed significantly and as a consequence the level of real GDP today is more or less unchanged compared to early 2011.

It is hard not to see the latest social unrest and demonstrations in the light of this lackluster economic performance.

AS/AD – a framework for analyzing the crisis

Whenever I want to analyse the economic situation in any country in the world I find it very useful to start out with a simple AS/AD framework. I particularly like the AS/AD framework described in Tyler Cowen and Alex Tabarrok‘s textbook Modern Principles.

This gives us the possibility to think of three kind of shocks to the economy – An Aggregate Demand (AD) shock (essentially a monetary demand shock), a short-run Aggregate Supply (SRAS) shock and a shock to the long-term growth rate of the economy (this is also supply shock). Cowen and Tabarrok terms the long-term growth rate the Solow growth rate after Robert Solow’s famous growth model.

ASAD framework

We can relatively easily apply this model to the Tunisian economy and by looking at the development in inflation and real GDP we can assess whether the development in the economy is driven by supply shocks or demand (monetary) shocks.

Don’t blame monetary policy for the crisis

If the economy is hit by a negative demand shock – either a contraction in the money supply/base or a drop in money-velocity – the AD curve shifts to the left causing both inflation and real GDP to drop and hence therefore also nominal GDP to drop.

The graph below shows the development in real GDP (y), nominal GDP (y+p) and the GDP deflator (p) in Tunisia.


The graph shows that over the past 15 years nominal GDP growth has been relatively stable about 8% and even though there was a slowdown in nominal GDP growth in the period 2008-11 we have since seen a rebound in NGDP growth back to the old trend about 8%, which indicates that there has not been a major negative demand shock to the Tunisian economy.

This is further confirmed by the fact that inflation – measured by the GDP deflator – has in fact shifted upwards since 2010-11. If there had been a negative shock to aggregate demand (AD) we would have expected inflation to drop rather than to increase.

This all indicate that the we cannot blame the the present crisis on monetary policy failure and in fact the Tunisian central bank deserves some credit for – knowingly or not – to have kept nominal GDP on a pretty “straight line”, which in my view certainly is the preferable monetary policy.

NGDP trend

This obviously does not mean that monetary policy is perfect – far from it – and I certainly think that monetary reform is badly needed to ensure that monetary policy failure is avoided in the future, but at least over the past 15 years the Tunisian central bank very broadly speaking has got it more or less right.

The biggest risk as I see it now is that the central bank will be tempted to focus on inflation rather than nominal GDP growth and that that might cause the Tunisian central bank to tighten monetary conditions unduly in response to rise inflation caused by non-monetary factors (a negative supply shock).

The best away of avoiding this is to communicate and explicitly target nominal GDP growth at 8% as de facto has been the policy for the past 15 years. Alternatively the central bank could target nominal wage growth as a proxy for NGDP growth.

The real problem is a real problem

As the discussion above slows the main problem in the Tunisian economy right now is not a lack of demand and monetary policy failure cannot be blamed for the marked slowdown in growth particularly since 2011 and the crisis can therefore not be resolved through an easing of monetary conditions.

As a consequence we have to conclude that the problem is one of real factors (the supply side of the economy) rather than nominal factors (monetary conditions).

The question is, however, whether the the slowdown in growth is permanent or temporary. Said in another way has the crisis been caused by a shift to the left of the Short-run Aggregate Supply (SRAS) or is it rather the Solow growth curve, which has shifted to leftwards?

Whether it is the SRAS curve or the Solow growth curve, which has shifted leftwards does matter in terms of the impact on the economy presently, but only a shift in the Solow growth curve should be expected to cause a permanent decline in the long-term growth rate of the Tunisian economy. Below I will argue that it is a bit of both, but that it likely is short-term shocks that has dominated in the last couple of years.

The horrors of terror 

Tunisia has been hard hit by a number of terror attacks in recent years and particularly in 2015 a number of horrible terror attacks hit Tunisia.

One can think of a terror attack both as a demand shock and a supply shock. Hence, it is obvious that a terror attack will tend to scare tourists away and this is certainly also what we have seen.

This obviously is a negative demand shock. However, as we have seen above the Tunisian central bank has more or less kept nominal GDP growth on a 8% growth path. This means that any drop in tourism revenues will be compensated by higher demand growth other places in the economy. This essentially is a version of the so-called Sumner Critique, which says that if a central banks targets nominal GDP or inflation then it will keep aggregate demand growth stable and this will offset other shocks to aggregate demand.

Obviously Tunisian nominal GDP growth has not been completely stable at 8% and we have indeed seen a drop in NGDP growth over the past year, which do indicate some contraction in aggregate demand growth, which could indicate that the Tunisian central bank has not fully offset the shock to aggregate demand from the drop in tourism revenues, however, if the Tunisian central bank – hopefully – continues de facto to target 8% NGDP the effect on aggregate demand from the tourist attacks should prove to be short-lived.

More worryingly is, however, the fact that the threat of new terror attacks and more generally speaking the rise of islamist extremism is causing a more permanent increase in the cost of doing business in Tunisia.

It is hard to quantify just how big these effects are, but it is notable that real GDP slowed from around 2% to 0% during 2015 so the effects have certainly not been small. Whether they are permanent is another question.

The untold story of the ‘Phosphate Crisis’

When I started to think about the slowdown in the Tunisian economy I initially thought that it mostly was about the terror attracts in 2015 and I was unaware of something, which in reality is at least as important – namely what we could term the ‘Phosphate Crisis’.

This is from an article from Al-Monitor from May 2013:

While phosphate is a pillar of the Tunisian economy, it also represents a social time bomb that nearly ousted the regime of former President Zine El Abidine Ben Ali in 2008, when the residents of the mining basin in southwestern Tunisia rose in rebellion, demanding their rights to employment, development and equitable distribution of wealth. Post-2011, protests paralyzing phosphate production became so rampant that the government announced in April the suspension of negotiations with the protesters. It also began a mass media campaign to explain the “phosphate crisis,” stressing these statistics:

The struggles faced by Tunisia’s economy following its 2011 popular uprising have been exacerbated by a decrease in phosphate production, one of the country’s most lucrative resources.
  • Production fell from 8 million metric tons a year to 2.7 million metric tons in 2012.
  • Financial losses reached 3 million dinars ($1.82 million) a day, amounting to a loss of nearly 2 billion dinars ($1.22 billion) in 2011 and 2012.
  • The phosphate company’s workforce tripled from 9,000 to 27,000 workers over the course of three years.

The government even went so far as to threaten to shut down the Gafsa Phosphate Co. The threat baffled [Tunisians], as the company serves as the only operator in mining basin cities and because phosphate is considered a significant source of hard currency in the country. Additionally, the government is currently experiencing several crises of its own, so this sort of escalation would not balance in its favor. Is the threat a political maneuver or an official admission of failure? If the latter is true, does the admission pave the way for the state to give up on “reforms” in the phosphate sector?

Even though the official rhetoric considers the Jan. 14, 2011, Revolution, which toppled Ben Ali, a societal revolution whose flame has been sparked inside the mining sector, all of the post-revolution governments have only shallowly looked into the problem, resulting in the adoption of ineffective administrative solutions.

The government regards the “phosphate crisis” as a mere blip in the flow of production caused by protests that are first and foremost demanding employment. Through the lens of the government, the crisis is temporary, isolated, and related to a lax security and social situation. Some officials even believe that the crisis has “separatist” aspects, and is even a political conspiracy fomented by “extremists who aim to sabotage the economy for political purposes.”

While this is from a 2013 article the crisis continues to this day. Just have a look at this graph of the output in the Tunisian mining sector.


Hence, mining output dropped sharply in 2011 and has remained more than 30% lower since then. This obviously is a major negative supply shock to the Tunisian economy and it seems of outmost importance to solve this crisis to get the Tunisian economy out of this crisis.

Corruption is just getting worse and worse

At the core of the protests in 2011 was anger over the widespread corruption in Tunisia and corruption remains a main problem for the Tunisian economy and it is certainly something, which is causing long-term growth to be lower than it could be been (permanently shifting the Solow curve to the left).

The graph below illustrates this.


The graph shows Transparency International’s so-called Corruption Perception Index. A lower score in the index indicates more corruption. The development is far from uplifting. In fact of nearly 15 years corruption has been constantly rising in Tunisia as seen by the consistent drop in the Corruption Perception Index.

And the business environment has become less friendly

Another factor that is contributing to shifting the Solow growth curve to the left – permanently lowering real GDP growth – is the fact that despite of the democratic revolution in Tunisia the general business environment has become less friendly.

A way to illustrate this is to look at the World Bank’s Ease of Doing Business survey.


A rise in the index indicates a worsening of the general ‘ease of doing business’ in Tunisia. The picture since 2010 is clear – the business environment has become less friendly in Tunisia. This surely is something, which is lowering Tunisia’s lower term growth potential.

A similarly negative trend is seen in for example Fraser Institute’s Economic Freedom of the World survey, where Tunisia’s overall ranking also have been declining in recent years.

Conclusion – reform is needed to unleash Tunisia’s economic potential

Tunisia is in the midst of a serious political, social and economic crisis. In this blog post I have tried to give an overview of what I believe are the main causes of the economic crisis.

Based on this analysis I would like to offer the following general recommendations for reform and crisis resolution in Tunisia:

  1. Despite the fact that the that Tunisia monetary policy overall has been successful in maintaining nominal stability in the past 15 years monetary reform is needed to ensure that nominal stability is also maintained in the future. A starting point for reform should be to the succes of monetary policy in the past 15 years – that means any new regime should continue to ensure nominal GDP growth around 8%. That would also ensure low and stable inflation in the future.
  2. The threat from terrorism and extremism should to be reduced. That is partly a question of law enforcement, but much more likely it is of outmost importance to empower low-income Tunisians so they to a larger extent are in control of their economic and social destiny and to create economic opportunties for all Tunisians. Other than general economic reform I also think that Tunisians should be given direct ownership of Tunisia’s many government owned companies for example through a Citizen’s account framework.
  3. Bold steps are needed to end the crisis in the Tunisian mining sector. Here privatization of the mining sector should be at the core of these efforts.
  4. Long-term economic growth needs to be increased through massive structural reforms with the purpose to reducing government intervention in the economy and empowering the Tunisian population.

Overall, I think Tunisia has an enormous economic potential – the country has a young and growing population, relatively low public debt, a historical and geographical closeness to (Southern) Europe and by Northern African standards a relatively open economy and access to (some) natural resources.

However, Tunisia cannot unleash this potential without reforms. We have had political revolution – now we need an economic revolution to free up the Tunisian economy.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

Guest post: Tight Money, High Wages: a review of Scott Sumner’s The Midas Paradox

My friend the great economic historian Clark Johnson has written a review of Scott Sumner’s new book The Midas Paradox.

I am very happy that Clark has given me the possibility to publish the review on my blog as a guest post.

If you are interested in the causes of the Great Depression you should certainly read Scott’s new book, but you should not miss Clark’s own book on the Great Depression Gold, France, and the Great Depression, 1919-1932

Here is Clark’s review…

Tight Money, High Wages: a review of Scott Sumner’s The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression (Independent Institute, 2015)

By Clark Johnson

January 2016

Scott Sumner’s new book, The Midas Paradox, uses a “gold market approach” to understand the causes and persistence of the depression of the 1930s.  By wide agreement, the roots of the 1929-1932 depression lay in a shortfall of aggregate demand – which was a consequence of systemic monetary constraint.  Sumner uses the world’s quantity of monetary gold and the ratio of gold-to-money to determine the stance of monetary policy and to identify lost opportunities.  The more usual indicators of interest rates and the quantity of money turn out to be misleading under a gold standard.

He then moves beyond the roots of the downturn to the reasons for persistence of weak economic conditions for years after the underlying monetary problem was solved.  He develops the unexpected view that the US in particular saw a supply-side depression that began in 1933, one driven in large part by New-Deal-driven interferences in labor markets.

Monetary Origins of Depression

Sumner credits what he calls the Mundell-Johnson hypothesis, according to which the roots of the depression were in the post-WWI undervaluation of gold, as a precursor to his study. As the junior placeholder on that hypothesis, I recap my understanding of it here.  The purchasing power of an ounce of gold changed little from the middle of the seventeenth century to the middle of the twentieth.  Gold constraints were typically relaxed during wars to facilitate official spending and borrowing – and allowing price inflation.  But English deflation restored prewar price levels in the years after the Puritan wars of the seventeenth century and the Napoleonic wars of the nineteenth.

A similar deflation was likely to occur after the First World War as major economies of Germany, Britain, and France would return to gold convertibility at the prewar value of $20.67/ ounce during the 1920s.  The low postwar gold value affected monetary reserves in two ways: 1) it depressed the value of outstanding stocks; and 2) it reduced the price incentive for new gold production.  In France, the US, and Germany, which had traditionally had large gold coin circulations, gold was mostly taken out of circulation during and after the war, which lessened confidence in convertible paper money.  Economist Gustav Cassel drew attention to the “gold standard paradox,” by which a gold-based monetary system would require ever-increasing gold production to accommodate economic growth while maintaining reserve ratios.

Yet world gold production during the 1920s was below what it had beezn in the decade before the war; and given the postwar decline in gold’s purchasing power, the real value of new gold produced in the mid-1920s was just over 50 percent of what it had been in 1914.

Read the rest of the review here

‘Currency instability’ should NOT be a concern for Canada

The commodity currencies of the world continues to take a beating on the back of the sharp drop in oil prices. This is now causing some to fear “currency instability”. Just these this story from Canada’s Financial Post:

The Canadian dollar is falling too far and too fast, damaging public and business confidence in Canada, say economists.

National Bank Financial Markets warned in a new report Monday that the loonie is now out of line with fundamentals and the Bank of Canada cannot risk driving it even lower with a rate cut.

“Currency instability has become a concern, and we think the Bank of Canada must take note,” said Stéfane Marion, chief economist at National Bank. “For Canadian businesses, currency depreciation has already sent the price of machinery and equipment (73% of which is imported) to a new record high. This is bound to complicate Canada’s transition to a less energy-intensive economy.”

Marion said that by his team’s calculations, the loonie should have shed about 10 cents against the U.S. dollar in the past few months. But it has fallen by 25 cents.

…“Rarely has it tumbled so far so fast, and against so many currencies,” Marion said. “The steepness of the CAD’s depreciation against the USD is without precedent — 33%, or 3.5 standard deviations, in 24 months.”He warned that in order to help create some stability for the loonie, the Bank of Canada should not cut interest rates at its Wednesday meeting. Doing so would risk sending the currency as low as 66 cents this week.

“In our view, the Bank of Canada would be better to keep its powder dry this month and act, if need be, after the next federal budget when it will be better able to assess fiscal support to the economy,” Marion said.

Economists aren’t the only ones warning about the damage of a lower loonie. Jayson Myers, chief executive of Canadian Manufacturers & Exporters, told Bloomberg Monday that exchange rate volatility has hurt business confidence and put a chill on spending decisions.

“My advice right now would be to even take a look at increasing interest rates by a quarter of a point,” he told Bloomberg. “Interest rates are low already. A little bit of dollar stability would be better.”

Sorry guys, but this is all nonsense. There are absolutely no sign of “currency instability” (whatever that is) and there are no signs at all that the drop in the Canadian dollar is causing any financial distress.

In fact if we look at the development in the Canadian dollar in recent weeks it has developed completely as we would have been expected given the drop in oil prices and given the developments in global currency markets in general.

I have earlier argued that we could think of the Canadian free floating currency regime basically as a regime that shadows an Export Price Norm. Hence, the Loonie is developing as if it is pegged to a basket of oil prices (15%), the US dollar 65% and Asian currencies (yen and won, 20%).

The graph below shows the actual development in USD/CAD and a “predicted” USD/CAD had Bank of Canada pegged the Loonie to 65-20-15 basket.


The graph is pretty clear – there is nothing unusual about the development in the Loonie. Yes, the Loonie has weakened significantly, but this can fully be explained by the drop in oil prices and by the weakening of the Asian currencies (in the basket primarily the drop in the won) and of course by the general continued strengthening of the US dollar.

If anything this is a sign that the Bank of Canada remains credible and that the markets are confident that the BoC will be able to ease monetary conditions further to offset any demand shock to the Canadian economy due to lower export prices (oil prices).

Therefore, it is also obvious that the BoC should not undertake any action to curb the weakening of the Loonie. In fact if the BoC tried to curb the Loonie sell-off then the result would be a dramatic tightening of monetary conditions, which would surely push the Canadian economy into recession and likely also create public finance troubles and increase the risk of a financial crisis. Luckily the Bank of Canada for now seems to full well-understand that there is absolutely no point of intervening in the FX market to curb the Loonie sell-off. Well-done!

HT Dr. Brien.

Yellen’s recession and that horrible Phillips Curve

The global stock markets are taking yet another beating today and as I am writing this S&P500 is down nearly 3.5% and the latest round of US macroeconomic data shows relatively sharp slowdown in the US economic activity and more and more commentators and market participants are now openly taking about the risk of a US recession in the coming quarters.

Obviously part of the story is China, but at the core of this is also is the fact that Fed chair Janet Yellen has been overly eager to interest rates despite the fact that monetary and market indicators have not indicated any need to monetary tightening. It is only the defunct Phillips Curve that could led Yellen to draw the conclusion that monetary tightening is needed in the US.

Back in August I wrote:

To Janet Yellen changes in inflation seems to be determined by the amount of slack in the US labour market and if labour market conditions tighten then inflation will rise. This of course is essentially an old-school Phillips curve relationship and a relationship where causality runs from labour market conditions to wage growth and on to inflation.

This means that for the Yellen-fed labour market indicators essentially are as important as they were for former Fed chairman Arthur Burns in the 1970s and that could turn into a real problem for US monetary policy going forward.

…Central banks temporary can impact real variables such as unemployment or real GDP, but it cannot permanently impact these variables. Similarly there might be a short-term correlation between real variables and nominal variables such as a correlation between nominal wage growth (or inflation) and unemployment (or the output gap).

However, inflation or the growth of nominal income is not determined by real factors in the longer-term (and maybe not even in the short-term), but rather than by monetary factors – the balance between demand and supply of money.

The Yellen-fed seems to be questioning Friedman’s fundamental insight. Instead the Yellen-Fed seems to think of inflation/deflation as a result of the amount of “slack” in the economy and the Yellen-fed is therefore preoccupied with measuring this “slack” and this is what now seems to be leading Yellen & Co. to conclude it is time to tighten US monetary conditions.

This is of course the Phillips curve interpretation of the US economy – there has been steady job growth and unemployment is low so inflation most be set to rise no matter what nominal variables are indicating and not matter what market expectations are. Therefore, Yellen (likely) has concluded that a rate hike soon is warranted in the US.

This certainly is unfortunately. Instead of focusing on the labour market Janet Yellen should instead pay a lot more attention to the development in nominal variables and to the expectations about these variables.

…If we look at nominal variables – the price level, NGDP, the money supply and nominal wages – the conclusion is rather clear. The Fed has actually since 2009 delivered a remarkable level of nominal stability in terms of keeping nominal variables very close to the post-2009 trend.

If we want to think about the Bernanke-Fed the Fed had one of the following targets: 1.5% core PCE level targeting, 4% NGDP level targeting, 7% M2-level targeting or 2% wage level targeting at least after the summer of 2009.

However, the Yellen-Fed seems to be focusing on real variables – and particularly labour market variables – instead. This is apparently leading Janet Yellen to conclude that monetary conditions should be tightened.

However, nominal variables are telling a different story – it seems like monetary conditions have become slightly too tight within the past 6-12 months and therefore the Fed needs to communicate that it will not hike interest rates in September if it wants to keep nominal variables on their post-2009 path.

Obviously the Fed cannot necessarily hit more than one nominal variable at the time so the fact that it has kept at least four nominal variables on track in the past 5-6 years is quite remarkable. However, the Fed needs to chose one nominal target and particularly needs to give up the foolish focus on labour market conditions and instead fully commit to a nominal target. My preferred target would certainly be a 4% (or 5%) Nominal GDP level target.

And Chair Yellen, please lay the Phillips curve to rest if you want to avoid sending the US economy into recession in 2016!

Obviously Yellen did not get the memo and now we are exactly risking that recession that I warned about in August.

And no I am not bragging about my ability to forecast. In fact I am doing the exact opposite. In August the markets were telling us that there was no inflationary pressures (and I was only repeating that), but Yellen has all along insisted that the market expectations about inflation were wrong and that the Phillips Curve was right. That might turn out to be a costly mistake.

Webinar on China, the Renminbi, and the IMF’s Special Drawing Rights

The Bretton Woods Committee is hosting what I think will be a very interesting Webinar on “China, the Renminbi, and the IMF’s Special Drawing Rights”.

Here are the details:

Date:  Wed, Jan 13, 2016 8:00am – 9:00am ET 
Attendance restrictions: Open to the public
Location: GoToWebinar


In November 2015, the International Monetary Fund conducted its 5-year review of the global currencies included in its Special Drawing Rights (SDR) reserve currency basket. The IMF Board of Directors voted to include the Renminbi in its SDR basket which will go into effect in October 2016. What is the significance of the IMF’s decision to include the Renminbi in its SDR currency basket and what are the implications for China, the IMF, and the future of global currencies?


  • Yu Yongding, Senior Fellow, Chinese Academy of Social Sciences (CASS)
  • Warren Coats, Former Assistant Director, IMF Monetary and Capital Markets Department


  • Randy Rodgers, Executive Director, Bretton Woods Committee.

Time will be reserved at the end for audience Q & A.

Please click here to register.

I am unfortunately traveling on Wednesday so I will not myself be able to listen in but I clearly recommend the webinar to anybody interested in global exchange rate issues and in the China to sign up for the webinar.



Larry Kudlow is of course right – the Fed should not base policy on labour

Watch this wonderful rant from legendary economist and commentary Larry Kudlow.

Larry is of course right – it is highly problematic that the Federal Reserve now seems to have gone back to the kind of Phillip curve inspired monetary policy that caused the inflationary failures back in the 1970s. This time around it will led to deflation rather than inflation. The Fed should focus on nominal (NGDP or inflation) rather than real (unemployment or RGDP) variables.

I have of course written extensively about this. See here:

Yellen should re-read Friedman’s “The Role of Monetary Policy” and lay the Phillips curve to rest

Talking to Ambrose about the Fed

Yellen is transforming the US economy into her favourite textbook model

The market’s message to Yellen: You have become too hawkish

Inching closer to a US recession, while Yellen is eager to hike


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

Fear strikes policymakers as ‘dollar bloc’ begins to unravel

I am happy to announce that I in the future will be contributing to Geopolitical Information Service (GIS).

The fact that I will be contributing to GIS will not change anything in terms of what I write on this blog, which will continue to be focused on monetary policy issues, but it will give it me an opportunity to write about broader macroeconomic issues particularly from a geopolitical perspective. This is something I have long wanted to do.

Contributing to GIS also gives me the opportunity to work closely with two old friends of mine – veteran financial journalists David McQuaid and Andy Kureth. Both David and Andy are American, but both have lived in Poland for many years and share my fascination and love of Poland. David and Andy are editors at Geopolitical Information Service, along with managing editor Mariusz Ziomecki.

My first piece for GIS is on the unfolding break-up of what I have termed the ‘Dollar Bloc’ and given what has been going on in the global financial markets this week I think my first piece for GIS is rather timely.

Here a little appetizer for my first article for Geopolitical Information Service:

On December 11, 2015, the Chinese authorities unveiled a trade-weighted index to track the renminbi’s movements against 13 foreign currencies. Financial markets saw this announcement as a clear signal that the People’s Bank of China – the country’s central bank – would strive to keep the currency stable against the basket, rather than continuing its long-term policy of shadowing the U.S. dollar. Ultimately, this relaxation of the dollar peg could be China’s first step toward adopting a floating exchange rate.

The official policy of shadowing the dollar meant that the Fed has been setting monetary conditions in China for at least 35 years. In a nutshell, for decades the world’s two largest economies have been operating in a quasi-currency union.

Among the members of this unspoken union are the Persian Gulf States, which (with the exception of Kuwait) all peg their currencies to the dollar. The most important of these is Saudi Arabia, which has maintained the riyal in a hard peg to the dollar since 1986. Hong Kong has used a currency board to manage its own hard peg against the dollar. In Africa, Angola also retains a fixed exchange rate against the greenback – even though it was forced to undertake a major devaluation in 2015.

Read the rest of the article here (subscription only)

And finally, we all see what is going on in the global financial markets today. It is hardly surprising when the Fed insists on continuing to tighten monetary conditions – and ignoring monetary data and the signals from the markets – and the PBoC is too scared to float the Renminbi that we are seeing a market meltdown in China, which is spreading to global stock and commodity markets. And it is not over yet…


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or






Inching closer to a US recession, while Yellen is eager to hike

Today we got the Minutes from the December 15-16 FOMC meeting where the Fed hiked interest rates.  That in itself is not terribly interesting and there is not much news in the Minutes to shock the markets.

Nonetheless it is another day of tightening of US monetary conditions – stronger dollar, lower inflation expectations, lower commodity prices and lower stock markets. But maybe the most alarming set of information comes from the Atlanta Fed that today published a so-called Nowcast for US real GDP growth in Q4 2015 (GNPNow) indicating the US real GDP slowed to just 1% (annualized quarterly growth rate) in Q4.



It is in this environment the Fed continues to signal that more monetary tightening is warranted.

So why is the Fed so hawkish despited very clear signs of continued growth deceleration in the economy and despite the fact that basically all monetary indications that we can think of indicates that monetary policy has become too tight?

To me it we should blame the unholy alliance between those FOMC members that are obsessed with looking at labour market data (to the same extent Arthur Burns was in 1970s) and the macro prudential crowd who worry that the Fed is inflating a bubble (somewhere in some asset market).

Needless to say there are no monetarists on the FOMC and as a consequence the FOMC continues to ignore both the signals from monetary indicators and from the market and as a consequence the risk of a US recession during 2016 (or 2017) continues to rise day-by-day.

PS maybe it is about time to start tracking Google Trends for the trend in Google searches for “recession”.

HT Michael Darda


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

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