Chuck Norris is back in the running

I seldom agree with Joseph Stiglitz on anything, but I agree with him that it would be a bad idea to name Larrry Summers new Fed chairman. So both Stiglitz and I should be happy today as Summers has redrawn his candidacy for new Fed chairman.

This is Summers’ letter to president Obama:

Dear Mr. President,

I am writing to withdraw my name for consideration to be Chairman of the Federal Reserve.

It has been a privilege to work with you since the beginning of your Administration as you led the nation
through a severe recession into a sustained economic recovery built on policies to promote employment
and strengthen the middle class.

This is a complex moment in our national life. I have reluctantly concluded that any possible
confirmation process for me would be acrimonious and would not serve the interests of the Federal
Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery.

I look forward to continuing to support your efforts to strengthen our national economy by creating a
broad based prosperity and to reform our financial system so that no President ever again faces what you
and your economic team faced upon taking office in 2009.

Sincerely yours,

Lawrence Summers

And the market reaction? Well, the US stock market is up, the dollar weaker and yields are lower. Said in another way US monetary conditions are easier today than on Friday.

So by redrawning from the Fed race Summers has done more for a “sustaine economic recovery”  and more “to promote employment” than by staying in the race.  That is not my verdict, but the verdict of the markets.

Don’t ever mess with Chuck Norris!

My CNBC interview on why Chuck Norris should be the next Fed chairman

This is me on CNBC being interviewed by Kelly Evans about why I think Chuck Norris should be the next Fed chairman. Enjoy.

The interview was inspired by this blog post of mine on the same topic.

Forget about Yellen or Summers – it should be Chuck Norris or Bob Hetzel

I think Janet Yellen would be a pretty bad choice for new Fed chairman, but she is much preferable to Larry Summers. 

So among the bookmakers’ favourites I prefer Yellen to Summers. That is easy.   

However, I have another candidate. Chuck Norris! Or rather I strongly believe that monetary policy needs to be strictly rule based and if you have a rule based monetary policy who is fed chairman isn’t really important.

Under a strict monetary policy rule monetary policy will be fully “automatic” espcieally if you introduce “A Market-Driven Nominal GDP Targeting Regime”. This is of course what we call the Chuck Norris Effect – that the markets are implementing monetary policy. Or said in another way lets call the computer Milton Friedman wanted to run the fed Chuck Norris.

But there is of course no chance that we will get this kind of strict rule based monetary policy in the US. Therefore, if I was President Obama I would give Richmond fed economist Robert Hetzel a call. 

Why pick Hetzel? Well because he is the best qualified for the job. It is that easy. Anybody who reads my blog should understand why I think so.

Add to that nearly 40 years expirience within the fed system and Hetzel has probably participated in more FOMC meetings as an advisor to different Richmond fed persidents over the years than any other living economist in the world (I am guessing here, but if you know anybody else with this kind of expirience please let me.)

I am of course dreaming, but I won’t pick Yellen just because I think Summers would be a bad choice.

PS Happy 101st birthday Milton Friedman. See my personal tribute to ‘Uncle Milt’ from last here.

How much QE is needed with a NGDP target?

Today I got an interesting question: “does NGDP targeting equate to more quantitative easing (QE) of monetary policy?”.

The simple answer is that it all depends on Chuck Norris, or rather on the Chuck Norris effect. I have earlier defined the Chuck Norris effect in the following way:

“You don’t have to print more money to ease monetary policy if you are a credible central bank with a credible target.”

Let’s say we have a central bank – for example the Federal Reserve that tomorrow announces a target for the level of nominal GDP (NGDP) 15% higher than the present level and that it will hit that target within 24 months.

The “clever” reader would of course ask how you can achieve that target with interest rates at near zero. Well, through quantitative easing, of course – by printing money. Or rather by increasing the supply of money more than the demand for money.

So the relevant measure is not the supply of money, but rather the supply of money relative to demand for the dollar. The demand for money of course is extremely dependent on the expectation of the future value of money.

So let’s assume that the announcement of the +15% NGDP level target is credible – what would happen? This announcement would effectively mean that the central bank would try to reduce the purchasing power of the money it issues, which effectively of course would equate to “burning” households and companies cash holdings. If we know that the value of cash we have today will be worth less tomorrow we would course do everything to get rid of that cash – that goes for households, banks, companies and institutions.

This is key for how the transmission mechanism works under credible NGDP level targeting. The expectation of a 15% increase in NGDP would cause de-hoarding of cash, which is the same as to say that private consumption and investments would increase, banks would increase lending (ease credit conditions) and the currency would weaken, which would spur exports. This would automatically lead to an increase in NGDP.

Hence, if the Chuck Norris effect is strong enough then the central bank could achieve its NGDP target without undertaking any QE at all.

In the “real world” it is unlikely that any central bank will be able to raise NGDP by 15% without actually increasing money supply. After all, the problem in the present crisis is exactly that the major central banks of the world are lacking credibility about their targets – otherwise for example market expectations in the eurozone would not be below 2%. Therefore, to get the needed credibility the central bank would probably need to announce clearly that it would undertake unlimited amounts of QE if needed to achieve its +15% NGDP target level and probably also define through which channel the increase in the money supply would occur – for example, through the buying of foreign currency (which in our view would probably be the most effective as you would circumvent the crisis-hit banking sector), or through buying or government or corporate bonds, etc.

However, if this were done it is likely that the goal of lifting NGDP by 15% could be achieved by printing significantly less “extra” money than if it simply implemented QE without a clear target of what it wants to achieve. So once again, the central banks need to call in Chuck Norris. It’s all about the anchoring of expectations and you will only achieve this by announcing a credit NGDP and credible strategy of how to achieve it.

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.

Chuck Norris on monetary policy #3

Yet another other great “fact” from www.chucknorrisfacts.com

“TARP didn’t have to be passed to kickstart the economy. All that the President needed to do was to ask Chuck Norris to roundhouse kick it”

Well, it is entirely correct – TARP really didn’t do anything to “kickstart” the US economy. Just look at the US stock markets – the ultimate forecasting tool for NGDP expectations. It kept dropping until the Federal Reserve called in Chuck Norris in March 2009 and initiated quantitative easing of monetary policy – the monetary version of a roundhouse kick.

Chuck Norris on monetary policy #2

I am continuing my tribute to the great Chuck Norris.

Here this it truth from http://www.chucknorrisfacts.com

“If Chuck Norris goes to the bank to get money, all banks go on a world crisis. It happened on 2008”

Well, you are quite right it was not the collapse of Lehman Brothers, which triggered the kind of mess we are in now. Rather it was Chuck Norris who increased his demand for dollars. Or maybe it was not Chuck, but somebody else, but nonetheless the increase in demand for dollars both in the US and from Europe lead to an “passive” tightening of US monetary policy, which the Federal Reserve failed to respond forcefully enough to.

PS both Nick Rowe and David Beckworth are now picking up the Chuck theme…

Nick, Chuck and the central banks

Here is Nick Rowe on central banks and Chuck Norris. If you don’t understand Chuck you don’t understand central banks.

 

 

Chuck Norris on monetary policy #1

In the coming time I will pay tribute to the great Chuck Norris by analyzing the monetary policy implications of some well-known facts and quotes from the great hero. These “facts” all come from www.chucknorrisfacts.com

“Chuck Norris does not earn money,he prints it”

Well Chuck, so does central banks and that is why we can always avoid deflation, increase inflation and get whatever growth rate of nominal GDP we would like. But not even Chuck can increase real GDP growth in the long run by printing money. Not even Chuck can defeat the long run vertical Phillips curve.

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