How can you tell an internet “Austrian”?

Here is Lorenzo from Oz in a comment on Scott’s blog:

Q: How can you tell an internet “Austrian”?
A: They have successfully predicted 10 of the last 0 bouts of hyperinflation.

Lorenzo is a genius!

HT Michał Gamrot

Military dictators are independent as well…

Over the last couple of decades independent central banks have become the norm and it is seen as dangerous if politicians threaten the independence of the central banks. Judging from the short-termism of politicians this in many ways makes perfectly good sense and any modern economist would acknowledge that central bank independence is a good way to ensure a rules based monetary policy – contrary to they discretionary monetary policies normally dominating politicized central banks.

I have long been a strong proponent of this mainstream view among economist and if you are going to have central banks then it is better that they are independent rather than an extended arm of the Finance Ministry. I normally I like to mention the Turkish central bank as an example of how the de-politicization of the central bank led to a marked drop in inflation and general significantly better performance for the Turkish economy over the past decade. However, I have increasingly come to question this view as I have come to think that independence often has to mean unaccountable.

We want independent central banks because we want to protect them from political interference when they are doing a task that they have been asked to do. We do not want central banks to be independent to do whatever the management of the central bank find in their own personal interest.

Imagine that the independent central bank of Phantasia (CBP) desired that the democratically elected government if Phantasia had moronic economic policies and as a consequence should be punished and that the best way to do this would be to cut the money base in half and throw the Phantasian economy in to deflationary depression. Would that be ok? Obviously not. 99% of all people would say that that is completely unacceptable haviour and that the CBP had misused its monetary monopoly.

So central bank independence should obviously not be interpreted as meaning that central banks can do whatever think is in their own subjective interest.

So obviously we only want central banks to be independent if they implement monetary policies that are in the interest of those who have given them this monopoly on monetary power. Therefore, central banks should be given a task to fulfill. Furthermore, you want the task given to the central bank to be easily controllable. Luckily it is easy to measure how far the central bank is from hitting nominal targets – for example an inflation target or a NGDP target or a exchange rate target for that matter.

What you don’t want is fuzzy and unclear targets because then you are clearly reducing the accountably and increasing the room for Phantasian style monetary policy. Even though most central banks in the Western world today have some kind of nominal targets they are rarely defined very clearly. Furthermore, performance pay is not widespread among central bankers – the New Zealand Reserve Bank is the only exception as far as I know. And when was the last time you heard of a central bank governor that was kicked out because he failed to hit the nominal target he promised to hit?

Therefore, if you want independence for central banks – which I continue to believe it the best solution if you are going to have a monetary monopoly – then you also want to make sure that you have the highest degree of accountability. Therefore, any central bank law should clearly stipulate what nominal target the central bank should aim at and what consequences it will have for the central bank management if these targets are no hit. Central banks can hit whatever nominal target they are ask to hit so the least you can ask them to do is to hit those targets and if they don’t hit the target it should have consequences.

George Selgin would of course tell us that the real problem is that central banks are given a monopoly in the first place – I find it hard to disagree, but I will leave that debate for another day…

UPDATE: Scott Sumner also has a comment on central bank accountability.


Scott Sumner on Lars von Trier

I never thought I would mention the Danish movie director Lars von Trier in one of my posts, but here we go. After all I am Danish and I share the first name with von Trier.

Other than being a leading Market Monetarist Scott Sumner also is a movie buff. He has a post today in which he has list of movies he likes. Number 3 on the list is von Trier’s Melancholia.

Here is what Scott has to say about it:

“Melancholia (Danish/English) 3.7 From the opening image you know you are in the hands of a master filmmaker. The only thing that keeps him from being universally recognized as a great director is that his subject matter doesn’t make people feel “comfy.” Completely unrealistic and yet utterly authentic.”

I am no big fan of von Trier and surely has a hard time understanding what is point is in most of his movies, but I never watched Melancholia and now Scott has recommend it I think I better watch it.

And then a little secret. I never met Scott in real life, but I met von Trier. In fact I have a minor roll in von Trier’s The Kingdom (In Danish Riget) and I mean minor (7 seconds or so…).

Repeating a (not so) crazy idea – or if Chuck Norris was ECB chief

Recently I in a post came up with what I described as a crazy idea – that might in fact not be so crazy.

My suggestion was based on what I termed the Chuck Norris effect of monetary policy – that a central banks can ease monetary policy without printing money if it has a credible target. The Swiss central bank’s (SNB) actions to introduce a one-sided peg for the Swiss franc against the euro have demonstrated the power of the Chuck Norris effect.

The SNB has said it will maintain the peg until deflationary pressures in the Swiss economy disappears. The interesting thing is that the markets now on its own is doing the lifting so when the latest Swiss consumer prices data showed that we in fact now have deflation in Switzerland the franc weakened against the euro because market participants increased their bets that the SNB would devalue the franc further.

In recent days the euro crisis has escalated dramatically and it is pretty clear that what we are seeing in the European markets is having a deflationary impact not only on the European economy, but also on the global economy. Hence, monetary easing from the major central banks of the world seems warranted so why do the ECB not just do what the SNB has done? For that matter why does the Federal Reserve, the Bank of England and the Bank of Japan not follow suit? The “crazy” idea would be a devaluation of euro, dollar, pound and yen not against each other but against commodity prices. If the four major central banks (I am leaving out the People’s Bank of China here) tomorrow announced that their four currencies had been devalued 15% against the CRB commodity index then I am pretty sure that global stock markets would increase sharply and the positive effects in global macro data would likely very fast be visible.

The four central banks should further announce that they would maintain the one-sided new “peg” for their currencies against CRB until the nominal GDP level of all for countries/regions have returned to pre-crisis trend levels around 10-15% above the present levels and that they would devalue further if NGDP again showed signs of contracting. They would also announce that the policies of pegging against CRB would be suspended once NGDP had returned to the pre-crisis trend levels.

If they did that do you think we would still talk about a euro crisis in two months’ time?

PS this idea is a variation of Irving Fisher’s compensated dollar plan and it is similar to the scheme that got Sweden fast and well out of the Great Depression. See Don Patinkin excellent paper on “Irving Fisher and His Compensated Dollar Plan” and Claes Berg’s and Lars Jonung’s paper on Swedish monetary policy in 1930s.

PPS this it not really my idea, but rather a variation of an idea one of my colleagues came up with – he is not an economist so that is maybe why he is able to think out of the box.

PPPS I real life I am not really a big supporter of coordinated monetary action and I think it has mostly backfired when central banks have tried to manipulate exchange rates. However, the purpose of this idea is really not to manipulate FX rates per se, but rather to ease global monetary conditions and the devaluation against CRB is really only method to increase money velocity.

“Bernanke invites Scott Sumner for lunch”



“Oct. 31 (Boomberg) US stock market closed sharply up after the Federal Reserve Bank announced that Federal Reserve chairman Ben Bernanke has invited Bentley University economics professor and advocate of nominal GDP targeting Scott Sumner for lunch at the prestigious Washington D.C. restauranSkærmbillede 2017-06-16 kl. 15.38.15

FOMC 7-11.pngFOMC 2-6.pngFOMC 1.pngSkærmbillede 2017-06-16 kl. 15.38.15t CityZen.

Unnamed officials at the Federal Reserve said that chairman Bernanke ‘wanted to pick Dr. Sumner’s brain on monetary matters’. Dr. Sumner declined an interview, but at his blog he asked readers ‘What do you wear when you go out for lunch in Washington DC?’

The news of the scheduled lunch between chairman Bernanke and Dr. Sumner sparked a sharp sell-off in US treasury bonds and 30-year bond yields were up more than 30 basis points in today’s trading.

The US dollar was the worst performing currency of 52 currencies that Boomberg tracks losing more than 4% against the euro on the day. “

Okay this is all a complete fabrication and there is no “Boomberg” news agency, but imagine that this story was really. Would the market react like this? I think it fundamentally would – I no clue about the size of the market direction, but I am pretty sure about the direction.

This illustrates a point that Scott himself has made over and over again: Monetary policy works with long and variable leads.

If Bernanke indeed had invited Scott for lunch and it was made public then it is pretty certain that it would trigger market expectations of what direction Fed policy was going. So in a sense Bernanke can loosen monetary policy by inviting Scott for lunch. Obviously any market reaction would obviously be based on expectations of what direction the thinking of Ben Bernanke was heading and if the Federal Reserve then failed to deliver the markets would just conclude – well, this Scott is nice to hangout with but it is not changing Fed’s policy so the market impact should be revised and gone would be any impact on the future path for NGDP of Scott’s and Ben’s nice lunch.

I nonetheless dare chairman Bernanke to invite Scott for lunch…(Scott do you have the proper outfit for lunch at CityZen?)


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inflation forecast


Gideon Gono, a time machine and the liquidity trap

Here is a quote from a random article from the financial media in 2008:

“Central banks around the world are rapidly depleting their ammunition as interest rates head to unparalleled lows”

It is quite common that it is claimed that central banks around the world are out of ammunition because interest rates are close to zero and that there therefore are no more options for monetary stimulus. Market Monetarist obviously disagrees strongly with that assessment, but we are up against a long running tradition.

Lets jump into a time machine and fastback to 1935. This is US congressman T. Alan Goldsborough supporting Federal Reserve chairman Marriner Eccles in Congressional hearings on the Banking Act of 1935:

Governor Eccles: Under present circumstances, there is very little, if any, that can be done.

Congressman Goldsborough: You mean you cannot push on a string.

Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the depths of a depression and… beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery

There is now doubt that even in 1935 the situation was quite desperate, but not as desperate as it was before the US went off gold in 1933.

So further back to 1932.

In 1932 the US economy is deep in depression, unemployment is massively high and deflation has never been stronger.

The situation is desperate for president Hoover. No matter what ideas he comes up with nothing works and he stands no chance of winning the upcoming presidential elections.

The chairman of the Federal Reserve Eugene Meyer is telling Hoover that he should use fiscal policy to boost the economy, but that monetary policy loosening is no option.

But then it all becomes very sci-fi – Meyer is beamed up by Scotty  (Sumner) and replaced by Zimbabwean central bank governor Gideon Gono.

We need a little be more sci-fi: Everybody in 1932 knows the reputation of Gideon Gono as a money printing psycho central banker.

So what happened when Gono is beamed back to 1932? Well, everybody knows that he doesn’t care about any strings on money policy – he just print money like a mad man and everybody knows that he created hyperinflation in his previous job. So what would you expect? They would of course expect inflation! And they would expect the US to give up the gold standard very fast – after all Gideon Gono is not exactly Bob Murphy. And he probably would so with in minutes of arriving back in 1932.

What happens now? Everybody realise that the value of cash will not continue to increase so there will be no reason to hoard cash. Rather suddenly the dollars are burning holes in people pockets. And the same goes for banks and corporations: We don’t want dollar anymore. This is the hot potato effect in monetary theory. Money demand collapse relative to the money supply. That is monetary loosening!

So monetary policy works with long and variable LEADS – in fact with time warping leads.

Fast forward to 2011. The global economy is on the verge of a new depression – the talk of a debt-deflation continues nearly four years into the Great Recession. An economics professor Scotty starts blogging about monetary policy. His big hero is Gideon Gono – the Fed chairman who in 1933 pulled out the US from the Great Depression and with it the rest of the world. Nobody would remember Hitler and we would still be talking about the “Great War” rather than World War 1.

And no Gideon Gono was never a good central bank and he would probably have stolen the US gold reserve once he landed back in 1932. This is not an endorsement of inflationist policies or insane central bankers, but an illustration of the importance of what expectations mean for monetary policy effectiveness.

PS after Gideon Gono became Fed chairman Hoover won the presidential campaign and became the longest serving US president ever and became a much loved president in the Republican party. They call him: “The president who understood monetary policy”. And the Republican party is forever grateful to Hoover for never having introduced Social Security. And most important Paul Krugman would look pretty stupid when he went on and on about the liquidity trap.

PPS luckily Gideon Gono was not beamed back to 1979.

PPPS If you want to read a truly insane book on monetary policy have a look at Gideon Gono’s “masterpiece”: Zimbabwe’s Casino Economy: Extraordinary Measures for Extraordinary Challenges.

And the Nobel Prize in economics goes to…

Press Release

10 October 2011

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to

Scott B. Sumner

Bentley University, Waltham, Massachusetts, USA

“for his work on economic history, monetary theory and market based monetary policy rules”

…ok that’s just a dream, but it would be pretty cool wouldn’t it? But since Scott likes prediction markets what do you think the odds are that this dream will come through within the next five years? And what are the reasons for these odds?

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