Latest Cato Research on Finance, Banking &amp; Monetary Policy https://www.cato.org/rss/research/finance%2C-banking-%26-monetary-policy en The 1948 German Currency and Economic Reform: Lessons for European Monetary Policy https://www.cato.org/cato-journal/fall-2019/1948-german-currency-economic-reform-lessons-european-monetary-policy?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Gunther Schnabl <div class="lead text-default"> <p>The European Monetary Union (EMU) is at a crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took unconventional measures to stabilize the common currency, cutting interest rates below zero and inflating its balance sheet via several asset purchase programs. While the ECB terminated these programs at the end of 2018, a new era of financial turmoil is on the horizon. Political instability and distrust are mounting in the face of economic unrest, and the proper policy regime for economic recovery remains murky.</p> </div> , <div class="text-default"> <p>This article explains the different views on European central bank policymaking from a historical perspective. It begins by describing the economic principles and monetary regime that constituted ordoliberalism, the political-economic theory credited for stabilizing postwar Germany and advancing European economic competition and integration. It then explains how the rise of the EMU and its recent crisis-era policies negated several of Germany’s primary economic principles and initiated a dramatic turnaround of the nation’s economic order. It concludes by offering a new set of economic policy recommendations for the EMU that will help reverse this new round of fiscal and political uncertainty.</p> </div> Tue, 01 Oct 2019 09:36:00 -0400 Gunther Schnabl https://www.cato.org/cato-journal/fall-2019/1948-german-currency-economic-reform-lessons-european-monetary-policy Will Paying Interest on Reserves Endanger the Fed’s Independence? https://www.cato.org/cato-journal/fall-2019/will-paying-interest-reserves-endanger-feds-independence?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss H. Robert Heller <div class="lead text-default"> <p>The U.S. Federal Reserve began a new policy of paying interest on excess bank reserves (IOER) during the Great Recession in 2008. In doing so, it set an effective floor to the federal funds rate, which allowed the Fed to all but dictate short-term open market interest rates. Both the Fed’s IOER policy and its subsequent rounds of large-scale asset purchases (also known as “quantitative easing,” or QE) have since become the primary monetary policy tools by which our central bank implements its policy decisions and in turn regulates the economy’s money supply.</p> </div> , <div class="text-default"> <p>Congress has subsequently used the Fed’s QE surplus to create and fund entire government programs and agencies. This has greatly increased the extent to which fiscal and monetary policy — and therefore congressional and central bank decisionmaking — rely on one another. The unprecedented interrelationship between monetary and fiscal policy holds alarming implications for the degree to which congressional whims can influence our central bank. As long as the Fed’s actions continue to affect important fiscal variables — such as the size of the federal deficit — the danger persists that politicians will attempt to dictate monetary policy, thereby endangering the Fed’s independence.</p> </div> Tue, 01 Oct 2019 09:31:00 -0400 H. Robert Heller https://www.cato.org/cato-journal/fall-2019/will-paying-interest-reserves-endanger-feds-independence Myopic Monetary Policy and Presidential Power: Why Rules Matter https://www.cato.org/cato-journal/fall-2019/myopic-monetary-policy-presidential-power-why-rules-matter?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss James A. Dorn <div class="lead text-default"> <p>This article examines the relationship between Fed policy and presidential power in a fiat money regime in which Congress has delegated significant power and discretion to the Fed. By making the Fed responsible, but not accountable, for achieving full employment and price stability, Congress can shift blame to the Fed when it fails to meet those objectives. As the Fed reviews its strategy and communications this year, it should not forget two important points: (1) independence is necessary for the Fed to do its stabilization job well, free of presidential meddling; and (2) specific monetary rules are an absolutely necessary condition to assure achievement of such independence. Ultimately, the Fed must be bound by a constitution that protects the value of money and safeguards individual freedom under a rule of law. The current monetary regime is far from that ideal.</p> </div> Tue, 01 Oct 2019 09:30:00 -0400 James A. Dorn https://www.cato.org/cato-journal/fall-2019/myopic-monetary-policy-presidential-power-why-rules-matter Modern Monetary Theory: A Critique https://www.cato.org/cato-journal/fall-2019/modern-monetary-theory-critique?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Warren Coats <div class="lead text-default"> <p>This article reviews Modern Monetary Theory’s approach to describing the process by which money is produced by banks (broad money) and by the central bank (base money). It analyses whether MMT’s characterization of the process reveals new, previously overlooked opportunities for the government to spend more without taxing more. It dissects MMT’s claim that because it can borrow in its own currency it can spend more — by printing more money — without crowding out private sector activity. MMT is an effort to justify more government spending with claims of fiscal space that can be liberated by printing money. Its arguments do not add up. Both the excitement and motivation for MMT seems to reflect the desire to promote a political agenda, without the hard analysis of its pros and cons — its costs and benefits.</p> </div> Tue, 01 Oct 2019 09:28:00 -0400 Warren Coats https://www.cato.org/cato-journal/fall-2019/modern-monetary-theory-critique Modern Monetary Theory: Cautionary Tales from Latin America https://www.cato.org/cato-journal/fall-2019/modern-monetary-theory-cautionary-tales-latin-america?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sebastian Edwards <div class="lead text-default"> <p>According to Modern Monetary Theory (MMT), it is possible to use expansive monetary policy — money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits that will ensure full employment and good jobs for everyone, through a “jobs guarantee” program. In this article, I analyze some of Latin America’s historical episodes with MMT-type policies (Chile, Peru, and Venezuela). The analysis uses the framework developed by Dornbusch and Edwards (1990) for studying macroeconomic populism. The three episodes studied in this article ended up badly, with runaway inflation, huge currency devaluations, and precipitous real wage declines. These experiences offer a cautionary tale for MMT enthusiasts.</p> </div> Tue, 01 Oct 2019 09:26:00 -0400 Sebastian Edwards https://www.cato.org/cato-journal/fall-2019/modern-monetary-theory-cautionary-tales-latin-america Macroprudential Policy, Leverage, and Bailouts https://www.cato.org/cato-journal/fall-2019/macroprudential-policy-leverage-bailouts?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Allan M. Malz <div class="lead text-default"> <p>Macroprudential policy refers to a wide range of policy measures intended to avoid crises. It is presented as a primary means of responding to concerns about financial stability and as an alternative to monetary policy. Its promise, however, is overstated. Banks are inadequately capitalized, and public sector guarantees generate moral hazard and shift risk to the public. Macroprudential tools cannot compensate for an existing regulatory system that increases risks to financial stability. Macroprudential policy may also raise the inefficiency and evasion costs of financial regulation and widen the use of discretion. There is an alternative path that uses higher regulatory capital standards as an interim step toward gradually eliminating guarantees without destabilizing the financial system. Relying on macroprudential tools may lead to deemphasizing monetary policy at critical junctures and shifting the risk assessment of policymakers toward ease.</p> </div> Tue, 01 Oct 2019 09:25:00 -0400 Allan M. Malz https://www.cato.org/cato-journal/fall-2019/macroprudential-policy-leverage-bailouts Consumer Protection and Financial Inclusion https://www.cato.org/cato-journal/fall-2019/consumer-protection-financial-inclusion?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Brian Johnson <div class="lead text-default"> <p>The fundamental question in thinking about consumer protection and financial inclusion is this: who do we want making financial decisions for ourselves and our children? Either we accept the responsibility for our own destiny, or, as President Reagan said in 1964, we “abandon the American Revolution and confess that an intellectual elite in a far-distant capitol can plan our lives for us better than we can plan them ourselves.”</p> </div> , <div class="text-default"> <p>Fifty-five years later, we still have to make this fundamental choice. We must be vigilant, guarding against every effort to subvert the idea of consumer protection by equating it with giving license to government actors to supplant consumer preferences with their own. And we must be mindful that the free market is the greatest engine for economic mobility and financial inclusion. Quite simply, the single best policy to protect American consumers and to foster financial inclusion is to ensure that consumers have the ability to make their own choices in free markets.</p> </div> Tue, 01 Oct 2019 09:23:00 -0400 Brian Johnson https://www.cato.org/cato-journal/fall-2019/consumer-protection-financial-inclusion Cashless Stores vs. Congressional Action https://www.cato.org/multimedia/cato-daily-podcast/cashless-stores-vs-congressional-action?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Diego Zuluaga, Caleb O. Brown <p>Congress is considering a ban on cashless stores. What does that mean for businesses that already don't take cash? Cato's Diego Zuluaga comments.</p> Fri, 20 Sep 2019 16:59:59 -0400 Diego Zuluaga, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/cashless-stores-vs-congressional-action Response to ANPR on Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z) https://www.cato.org/publications/public-comments/response-anpr-qualified-mortgage-definition-under-truth-lending-act?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Diego Zuluaga <div class="lead text-default"> <p>Dear Director Kraninger:</p> <p>I appreciate the opportunity to comment on the Consumer Financial Protection Bureau’s (CFPB) advanced notice of proposed rulemaking (ANPR) on the Qualified Mortgage Definition under the Truth in Lending Act (TILA) (Regulation Z).</p> </div> , <div class="text-default"> <p>The Cato Institute is a public policy research organization dedicated to the principles of individual liberty, limited government, free markets, and peace. Cato’s Center for Monetary and Financial Alternatives, at which I am a policy analyst, is dedicated to building a better tomorrow through monetary and financial alternatives &mdash; exploring policy reforms that capture the power of markets to provide for people’s welfare and developing ideas for a robust, resilient, innovative, and inclusive monetary and financial system worthy of a free and prosperous society.</p> <p>I thank you and the CFPB for your leadership in the discussion of how consumer protection rules can encourage an inclusive, competitive, innovative, and stable mortgage market.</p> </div> Mon, 16 Sep 2019 09:27:02 -0400 Diego Zuluaga https://www.cato.org/publications/public-comments/response-anpr-qualified-mortgage-definition-under-truth-lending-act Statewide California Rent Control: Shooting The Price Messenger https://www.cato.org/blog/statewide-california-rent-control-shooting-price-messenger?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Ryan Bourne <p>California has approved <a href="https://www.nytimes.com/2019/09/11/business/economy/california-rent-control.html?smtyp=cur&amp;smid=tw-nytimes">a statewide annual rent increase cap</a> of 5 percent plus inflation for rentable accommodation in buildings more than 15 years old. Though technically an “anti-gouging” measure (it expires after 10 years), most would recognize this price cap for what it is: rent control.</p> <p>Economists should be baffled about rent control’s recent revival. Controlling rental prices is one of those rare policies that practitioners of the dismal science <a href="http://www.igmchicago.org/surveys/rent-control">overwhelmingly oppose</a>. It’s even more troubling that it has been introduced in California. <a href="https://www.nber.org/papers/w24181">Recent academic evidence</a> suggests that a 1994 San Francisco ballot initiative to introduce rent control for small multifamily housing built before 1980 actually led to:</p> <ul> <li><span>rent-controlled buildings being almost 10% more likely to convert to a condo or a Tenancy in Common (TIC) than buildings in a control group. </span></li> <li><span>a 15% decline in the number of renters living in these buildings and a 25% reduction in the number of renters living in rent-controlled units, as landlords converted existing accommodation to other uses and demolished old buildings and replaced them with new units outside the controls </span></li> <li><span>a city-wide rent price increase of 5.1%.</span></li> </ul> <p><span>Rent control then had exactly the effects economists would predict. Capping a market price below its equilibrium creates shortages. Many landlords remove rentable accommodation from the market to more profitable uses, or else rebuild accommodation (that is often more expensive) to avoid the charges. The twin effects? Higher market rents and accelerated gentrification, to the detriment of poorer residents.</span></p> <p><span>Now, the urge for policymakers to “do something” on California’s housing problem is understandable. <a href="http://www.demographia.com/dhi.pdf">Demographia’s median multiple calculations</a> (median house price in a market, divided by median household income) shows that California contains 15 of the US’s 28 “severely unaffordable” housing markets – defined as those where the median multiple exceeds 5.1. In Los Angeles, San Jose and Santa Cruz that multiple actually exceeds 9! Homelessness is rife in some of California’s largest cities. The state has the <a href="https://www.census.gov/content/dam/Census/library/publications/2019/demo/p60-268.pdf">highest poverty rate</a> in the country. These problems are all exacerbated by high housing service costs.</span></p> <p><span>But rent control worsens, rather than dealing with, these problems. High and rising rental costs suggest that supply is relatively unresponsive to demand, often due to overly restrictive land use planning and zoning laws. High or rising prices and rents are therefore like a messenger, urging developers to build more houses or apartment buildings.</span></p> <p><span>What rent control amounts to is an attempt to muffle that message and pretend there is no problem. But in capping rents when markets are heating, you reduce the profitability for landlords to rent the accommodation in the first place, worsening the supply problem that’s pushed up rental costs to begin with.</span></p> <p><span>Indeed, as I said when <a href="https://www.cato.org/publications/commentary/statewide-rent-control-will-ultimately-please-nobody">Oregon introduced similar legislation</a>, this new California measure will ultimately please very few people. In areas where tenants face rent increases above earnings but below the cap, rent controls will have no effect. Increases will eat into families’ incomes further, and with affordability worsening, tenant groups are likely, in time, to demand tighter controls.</span></p> <p><span>Yet where market rents really are spiraling, capping them to prevent so-called “economic eviction” (as this measure does) dampens the incentive for developers to bring new supply to market - even more so if they see these measures as a precursor to even tighter controls. </span></p> <p><span>Some tenants, usually the less mobile and those opting not to move, will benefit from lower rents, of course. But the cost is a significantly worsened availability of rentable housing precisely where it is needed most.</span></p> <p><span>The California legislators think they get around this supply-reducing effect by only applying the controls to properties more than 15 years old. But as the San Francisco evidence shows, there’s nothing to stop landlords changing the use of existing properties, or else knocking down older buildings or houses, to then provide new exempted forms of accommodation.</span></p> <p><span>On housing there really is no substitute to liberalizing supply. California lawmakers should stop shooting the rent price messenger, and deliver the more difficult zoning and planning reforms to improve housing affordability more broadly.</span></p> Thu, 12 Sep 2019 14:30:00 -0400 Ryan Bourne https://www.cato.org/blog/statewide-california-rent-control-shooting-price-messenger George Selgin discusses a possible recession on SiriusXM's Press Pool https://www.cato.org/multimedia/media-highlights-radio/george-selgin-discusses-possible-recession-siriusxms-press-pool?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Thu, 12 Sep 2019 11:56:29 -0400 George Selgin https://www.cato.org/multimedia/media-highlights-radio/george-selgin-discusses-possible-recession-siriusxms-press-pool Inside America's Worst Financial Crisis: Gold, the Real Bills Doctrine, and the Fed https://www.cato.org/blog/inside-americas-worst-financial-crisis-gold-real-bills-doctrine-fed?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Amanda Griffiths <p>The Cato Institute's newest book, <a href="https://www.amazon.com/Gold-Real-Bills-Doctrine-Fed/dp/1948647559" rel="noopener noreferrer" target="_blank"><em>Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922–1938</em></a> is out now — and it's already getting rave reviews for challenging conventional wisdom on the Great Depression.</p> <p>In<em>Gold, the Real Bills Doctrine, and the Fed,</em>preeminent monetary historians Thomas M. Humphrey and <a href="https://www.cato.org/people/richard-timberlake" rel="noopener noreferrer" target="_blank"><strong>Richard H. Timberlake</strong></a> deliver a compelling critique of the U.S. central bank’s once-central theory on monetary policy: the Real Bills Doctrine. Theirs is the first full-length treatise on the doctrine and its formative role in the Great Depression and other monetary disorders of the early 20<sup>th</sup>century.</p> <p>Even today, the gold standard remains one of the most popular scapegoats for "the Great Contraction" — the unprecedented collapse of the U.S. money supply, which began after the 1929 stock market crash and led to the Great Depression. Skeptical of this hypothesis,<em>Gold, the Real Bills Doctrine, and the Fed</em>traces the Contraction and the Depression — along with similar monetary crises like the German hyperinflation — to their true source: the Real Bills Doctrine. By drawing a false dichotomy between “productive activity” and “speculative activity,” Humphrey and Timberlake argue, the Doctrine wrongfully impugned speculation as the source of asset price bubbles and financial panic. Such flawed premises made the Fed unduly reluctant to make full use of the United States' ample gold reserves.</p> <p><em>Gold, the Real Bills Doctrine, and the Fed</em>refutes these erroneous beliefs and vindicates the true gold standard. It also provides a stirring defense for what was once the United States’ decentralized network of competing monetary regimes.</p> <p>Among the book’s many compelling contributions are:</p> <ul type="disc"> <li>Its thesis that a centrally-managed “gold standard” is a contradiction in terms: a true gold standard requires no discretionary management whatsoever.</li> <li>Its discussion of the difference between a money stock based on real production — which can be price-stabilizing — and a money stock based only on the nominal dollar value of real production, which can never stabilize prices. Humphrey and Timberlake illustrate this distinction by comparing the New York Federal Reserve Bank’s monetary regime, which stabilized prices by adhering to the “quantity theory” of money, with the dysfunctional Real Bills-driven monetary regime that the Washington Fed Board imposed, and struggled under, at the same time.</li> <li>The authors’ revolutionary new economic model<strong>,</strong>which presents the Real Bills Doctrine as a “metastatic equilibrium concept”: one whose ability to support a stable economy is exogenous to the Doctrine itself. On its own, the authors’ formal model shows, the Real Bills Doctrine can neither stabilize nor destabilize the economy. It can only reflect the preexisting level of political or economic stability within the price level and money supply.</li> <li>A chapter on the history of the quantity theory of money, explaining its relative success compared to the Real Bills Doctrine.</li> <li>The authors’ full-fledged refutation of the Real Bills Doctrine’s erroneous beliefs about production and speculation: Humphrey and Timberlake show that all productive activity is driven by expectations of future outcomes, and is therefore partly speculative. Likewise, all speculative activity is capable of producing real value, and can therefore be productive.</li> </ul> <p>Former president and CEO of the Federal Reserve Bank of Richmond Jeffrey Lacker writes that the book "persuasively document[s] the baneful effects of a well-intentioned but hopelessly flawed economic idea — the Real Bills Doctrine." And long before the book's publication, 1976 Nobel Prize recipient Milton Friedman praised Humphrey and Timberlake's scholarship on the Real Bills Doctrine, writing:</p> <blockquote><p>It certainly was not adherence to any kind of gold standard that caused the [Great Depression]. If anything, it was the lack of adherence that did. Had either we or France adhered to the gold standard, the money supply in the United States, France, and other countries on the gold standard would have increased substantially… . [Tom Humphrey and Dick Timberlake’s] emphasis of the Real Bills Doctrine complements in an important way Anna [Schwartz] and my analysis of why Fed policy was so "inept." We stressed and discussed at great length the shift of power in the System. We did not emphasize, as in hindsight … we should have, the widespread belief in the Real Bills Doctrine on the part of those to whom the power shifted.”</p></blockquote> <p>Finally, Phil Gramm, economist and former chairman of the Senate Banking Committee, calls this</p> <blockquote><p>the most important book written on the Great Depression since Friedman and Schwartz published their<em>Monetary History of the United States</em>. In originality and significance, I know of no other book that comes close in … explaining why U.S. monetary policy during the Depression allowed a financial panic, not significantly different from the Panic of 1907, to cripple the banking system, destroy a third of the money supply, and cause the most traumatic economic downturn in our history. . . .I strongly recommend this book to anyone who seeks to understand the economic history of America.</p></blockquote> <p><em>Gold, the Real Bills Doctrine, and the Fed</em> is the only book in the economic literature devoted to the Real Bills Doctrine, its logic, history, strengths, weaknesses, and role in policy debates. It is also the first and only book to suggest that the Real Bills Doctrine was a key causal factor of the Great Depression and other monetary disorders of the 20<sup>th</sup>century. Anyone interested in understanding the causes of Great Depression, the role that prevailing economic theories played in it, and its implications for monetary policy and alternative currencies today, should regard <em>Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922­–1938</em> as an absolutely essential work. You can order it <a href="https://www.amazon.com/Gold-Real-Bills-Doctrine-Fed/dp/1948647559" rel="noopener noreferrer" target="_blank">here</a> today!</p> <p>[<a href="https://www.alt-m.org/2019/09/10/inside-americas-worst-financial-crisis-gold-the-real-bills-doctrine-and-the-fed/">Cross-posted from Alt-M.org</a>]</p> Tue, 10 Sep 2019 11:19:49 -0400 Amanda Griffiths https://www.cato.org/blog/inside-americas-worst-financial-crisis-gold-real-bills-doctrine-fed Worried About A Recession? Relax. https://www.cato.org/publications/commentary/dont-worry-about-recession?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Steve H. Hanke <div class="lead text-default"> <p>Everyone seems to be wringing their hands about what they fear is an oncoming recession. Indeed, as a sign of the level of the public&rsquo;s angst, <a href="https://www.economist.com/finance-and-economics/2019/08/22/the-onset-of-a-downturn-is-as-much-a-matter-of-mood-as-of-money" target="_blank"><em>The Economist </em>magazine reports</a> that Google searches related to the word &ldquo;recession&rdquo; have surged.</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>While the daily drumbeat of negative news&mdash;particularly that which is related to President Trump's counter-productive and futile trade war with China&mdash;is worth paying attention to, it is somewhat of a sideshow.</p> </div> </div> </aside> , <div class="text-default"> <p>If that wasn&rsquo;t enough evidence of the hand wringing, the Chairman of President Trump&rsquo;s Council of Economic Advisers, the respected Tomas Philipson, recently indicated that he was worried about the steady negative drumbeat in the press: that a recession might be just around the corner. Philipson put his finger on the problem when he said, &ldquo;The way the media reports the weather won&rsquo;t impact whether the sun shines tomorrow. But the way the media reports on our economy weighs on consumer sentiment, which feeds into consumer purchases and investments.&rdquo;</p> <p>Philipson understands very well that negative news can become part of a negative feedback loop that can result in a plunge in the public's state of confidence and a recession. He also knows how to follow metrics that gauge the public's expectations and confidence in the economy, like the University of Michigan's Consumer Sentiment index. The chart below shows the course of that index. The last reading on the chart is for August. It is notable that Consumer Sentiment took a dive, falling from 98.4 in July to 89.8 in August. That's the lowest reading since October 2016. It's clear that the President's Council of Economic Advisers took note, causing Chairman Philipson to spring into action.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="304" alt="hanke-market-1-img" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-1-img.jpg?itok=PKxHtLxV 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-market-1-img.jpg?itok=6j4zUM-s 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-1-img.jpg?itok=PKxHtLxV" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>The state of confidence argument which sometimes flies under the &ldquo;animal spirits&rdquo; rubric goes back to earlier ideas about the business cycle; ideas that stress the importance of changes in business sentiment. For example, members of the Cambridge School of Economics, which was founded by Alfred Marshall (1842-1924), all concluded that fluctuations in business confidence are the essence of the business cycle. As John Maynard Keynes argued in the <em>General Theory</em>:</p> </div> , <blockquote class="blockquote"> <div> <p>&ldquo;The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analyzed it carefully and have been content, as a rule, to discuss it in general terms.&rdquo;</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>Frederick Lavington (1881-1927), a Fellow of Emmanuel College and the most orthodox of the Cambridge economists, went even further than Keynes. In his 1922 book, <em>The Trade Cycle</em>. Lavington concluded that, without a &ldquo;tendency for confidence to pass into errors of optimism or pessimism,&rdquo; there would not be a business cycle.</p> <p>But, this animal spirits approach to the business cycle, while it contains a grain of salt, fails to offer much of a theory of national income determination, as Keynes himself concluded. The monetary approach fills that void.</p> <p>The monetary approach posits that changes in the money supply, broadly determined, cause changes in nominal national income and the price level. Sure enough, the growth in the supply of broad money and nominal GDP are closely linked.</p> <p>So, just where do things stand in the U.S.? As shown in the chart below, the growth rate of the money supply, broadly measured by Divisia M4, is growing at 5.04%/yr. That puts it above the trend rate since 2003 of 3.81%/yr. And what&rsquo;s more, the broad money growth rate is right in line with the &ldquo;golden growth&rdquo; rate. That&rsquo;s the rate of growth in the money supply that would allow the Fed to hit its inflation target of 2%/yr. The money supply, broadly measured, is in the sweet spot: not too hot, not too cold. Also, private credit is growing at 5.57%/yr, which is very close to its trend rate since 2003 of 5.63%/yr.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="506" alt="hanke-market-2-2-img" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-2-2-img.jpg?itok=3636dpD0 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-market-2-2-img.jpg?itok=gwhKY46I 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-2-2-img.jpg?itok=3636dpD0" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>While the daily drumbeat of negative news—particularly that which is related to President Trump&rsquo;s counter-productive and futile trade war with China—is worth paying attention to, it is somewhat of a sideshow. The main event is money. Money dominates, and at present, it&rsquo;s not too hot, not too cold—about right. Perhaps that&rsquo;s why Fed Chairman Jerome Powell, while in Zurich yesterday, confidently said, &ldquo;Our main expectation is not at all that there will be a recession.&rdquo; Powell could have added the word: &ldquo;Relax.&rdquo;</p> </div> Sat, 07 Sep 2019 10:14:46 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/dont-worry-about-recession Pedro Schwartz gives a lecture on “History of Monetary Thought through the eyes of the Classics” at the Institute of International Monetary Research https://www.cato.org/multimedia/media-highlights-tv/pedro-schwartz-gives-lecture-history-monetary-thought-through-eyes-classics-institute-international-monetary-research?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Thu, 05 Sep 2019 15:44:46 -0400 Pedro Schwartz https://www.cato.org/multimedia/media-highlights-tv/pedro-schwartz-gives-lecture-history-monetary-thought-through-eyes-classics-institute-international-monetary-research Why the Fed Needs a Monetary Rule to Protect Its Independence https://www.cato.org/blog/why-fed-needs-monetary-rule-protect-its-independence?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss James A. Dorn <p>As the 2020 presidential election season heats up, Federal Reserve Chairman Jerome Powell is being pushed from all sides. <a href="https://www.msn.com/en-us/news/politics/trump-slams-fed-chief-who-is-our-biggest-enemy-jay-powell-or-chairman-xi/ar-AAGejHt" rel="noopener noreferrer" target="_blank">President Trump</a> has castigated him for overly tight monetary policy and has implied that Powell is a “bigger enemy” than Xi Jinping.  Meanwhile, <a href="https://www.bloomberg.com/opinion/articles/2019-08-27/the-fed-shouldn-t-enable-donald-trump" rel="noopener noreferrer" target="_blank">William Dudley</a>, who recently headed the Federal Reserve Bank of New York, the most important reserve bank in the system, boldly called for Powell to enter the political fray against Trump and use a tighter monetary policy to help defeat him in 2020.&#13;<br /> &#13;<br /> We’ve seen this pattern before—only this time, it’s more extreme. President Trump, like many executives before him, wants the Fed to sacrifice its independence in favor of more accommodative monetary policies, while Dudley, on the other hand, is willing to sacrifice the Fed’s independence in the short run.&#13;<br /> &#13;<br /> The real problem is that, in our purely discretionary fiat money system, there is no rule to provide long-run guidance to monetary policymakers. This allows Congress to delegate too much power to the Fed and expect too much from it in return.  In conducting monetary policy, the Fed needs to be accountable to political institutions, yet independent of political pressures to finance budget deficits or use the printing press to satisfy special interests (whether those interests take the form of a border wall or a “Green New Deal”).&#13;<br /> &#13;<br /> Only a rule—about how to track economic stability and how and when to respond to changes in that stability—can provide that independence.<a name="_ednref1" href="https://www.cato.org/#_edn1" id="_ednref1">[1]</a>&#13;<br /> &#13;</p> <p>In a recent <em><a href="https://www.wsj.com/articles/america-needs-an-independent-fed-11565045308" rel="noopener noreferrer" target="_blank">Wall Street Journal article</a></em>, Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen called for “nonpolitical” monetary policy “based on analysis of the longer-run economic interests of U.S. citizens rather than being motivated by short-run political advantage.”  They also called for “a robust public debate” to help “make monetary policy better.”&#13;<br /> &#13;<br /> That debate is indeed necessary. And a significant part of it should focus on the relationship between Fed independence and a monetary rule—that is, whether the depoliticization of the Fed is more likely to occur under a regime of pure discretion or a rules-based regime. The answer seems clear. As <a href="https://www.wsj.com/articles/central-bankers-in-glass-houses-11565910399" rel="noopener noreferrer" target="_blank">Charles Calomiris</a>, a member of the Shadow Open Market Committee, notes: “There are many levers that politicians can, and do, employ to influence monetary policy. True independence comes from making it harder for politicians to pull those levers.”&#13;<br /> &#13;<br /> But the Fed has never managed yet to achieve genuine independence from politics.<a name="_ednref2" href="#_edn2" id="_ednref2">[2]</a> When Alan Greenspan followed an implicit Taylor Rule (adjusting the fed funds, or interbank lending, rate in order to achieve steady nominal GDP growth), the economy flourished under a period now known as “the Great Moderation.” Politicization of the Fed was low and Fed independence was high. But when the Greenspan Fed departed from that rule in mid-2003, it erred by keeping interest rates too low for too long. Those low rates helped fuel the housing bubble and the growing subprime mortgage crisis.<a name="_ednref3" href="#_edn3" id="_ednref3">[3]</a>&#13;<br /> &#13;<br /> More recently, the Fed may have catered to pressures to favor housing finance by accumulating massive amounts of mortgage-backed securities. This meant the Fed began playing a major part in the allocation of credit as opposed to using pure monetary policy to achieve its inflation and employment goals.&#13;<br /> &#13;<br /> Its continued reliance on unconventional monetary policy to offset the 2008 financial crisis finally resulted in a new operating framework in which the Fed sets its policy interest rate administratively and uses forward guidance to signal where the Fed thinks rates should go. But that guidance has been—and, in a free market, will always be—erratic as the Fed attempts to measure and respond to day-to-day changes in economic data and to financial markets.&#13;<br /> &#13;<br /> Powell’s “pivot” after last December’s rate hike is a case in point.  The markets tanked and Powell immediately called for <a href="https://www.cnbc.com/2019/01/30/fed-leaves-rates-unchanged.html" rel="noopener noreferrer" target="_blank">“patience,”</a> followed by the first rate decrease since 2008. There is likely to be another rate cut this month, but not enough to satisfy President Trump, so the political pressure for easy money will continue.  Moreover, with growing budget deficits, the Fed will be expected to maintain a low interest rate policy.&#13;<br /> &#13;<br /> The Fed’s so-called independence has always been tested by political pressures (see <a href="https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2013/9/cjv33n3-9.pdf" rel="noopener noreferrer" target="_blank">Cargill and O’Driscoll</a> 2013), but those pressures became super-charged with the 2008 financial crisis, and have gained steam with President Trump’s tweeting storm and Dudley’s call for politicization. As the Fed reviews its strategy and communications this year, it should not forget two important points: (1) independence is necessary for the Fed to do its stabilization job well, free of presidential meddling; and (2) specific monetary rules may be the only sure means by which it can achieve such independence.&#13;<br /> &#13;<br /> Just what sort of rule might protect the Fed’s independence while also being consistent with its mandate is of course another question that must also be addressed. Any rule can be shown to be inferior to some ideal of discretionary central banking. But it hardly follows that all monetary rules are inferior to discretion as actually practiced by the Fed, let alone as it might be practiced by central bankers who favor the use of discretion for avowedly political ends.&#13;<br /> &#13;<br /> The problem is how to induce the Fed to trade off its discretionary powers and adopt a monetary rule that will decrease the uncertainty that now plagues the present system.  Congress has the authority to make the Fed accountable for following a rule, but thus far has not been able to even commence a national monetary commission to evaluate the Fed’s performance and recommend reforms.&#13;<br /> &#13;<br /> This is a critical first step. Until then, it is imperative that we continue to examine alternative monetary rules so that, when the time is ripe, an effective rule-based monetary regime can be adopted to limit the power of the central bank, insulate it against political opportunism, and safeguard citizens’ right to sound money.&#13;<br /> &#13;<br /> _____________________________________________________________________&#13;<br /> &#13;<br /><a name="_edn1" href="#_ednref1" id="_edn1">[1]</a> See J. A. Dorn, “Myopic Monetary Policy and Presidential Power: Why Rules Matter.” <em>Cato Journal</em> 39 (3), forthcoming Fall 2019.&#13;<br /> &#13;<br /><a name="_edn2" href="#_ednref2" id="_edn2">[2]</a> See S. Binder and M. Spindel, <em>The Myth of Independence: How Congress Governs the Federal Reserve</em>.  Princeton, N.J.: Princeton University Press.&#13;<br /> &#13;<br /><a name="_edn3" href="#_ednref3" id="_edn3">[3]</a> See John B. Taylor, <em>Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis</em>.  Stanford, Calif.: Hoover Institution Press.&#13;<br /> &#13;<br /> [<a href="https://www.alt-m.org/2019/09/04/why-the-fed-needs-a-monetary-rule-to-protect-its-independence/">Cross-posted from Alt-M.org</a>]</p> Wed, 04 Sep 2019 09:20:00 -0400 James A. Dorn https://www.cato.org/blog/why-fed-needs-monetary-rule-protect-its-independence Steve H. Hanke discusses the Argentine peso on The Gold Newsletter podcast https://www.cato.org/multimedia/media-highlights-radio/steve-h-hanke-discusses-argentine-peso-gold-newsletter-podcast?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 03 Sep 2019 11:02:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-radio/steve-h-hanke-discusses-argentine-peso-gold-newsletter-podcast Grace Blakeley’s Stolen Is a Tired Invective against Market Capitalism https://www.cato.org/publications/commentary/grace-blakeleys-stolen-tired-invective-against-market-capitalism?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Diego Zuluaga <div class="lead text-default"> <p>It is safe to assume that most books bearing the term “financialisation” in the title are not mainly about finance. Grace Blakeley’s <em><a href="https://www.amazon.co.uk/Stolen-How-Save-World-Financialisation/dp/1912248379">Stolen: How to Save the World from Financialisation</a></em> is no exception.</p> </div> , <div class="text-default"> <p>Blakeley’s book, her first, is a sweeping polemic against the market economy. A researcher at the UK’s Institute for Public Policy Research (IPPR), she has recently emerged as a forceful advocate for the “democratic socialism” associated with  both Jeremy Corbyn and Bernie Sanders in the US. Unlike these white-haired icons of the post-Soviet Left, however, Blakeley is a millennial, which furnishes her advocacy with a sense of the zeitgeist that they lack.</p> <p>But <em>Stolen</em> is not a good book. Its invective against capitalism cherry-picks the evidence and disregards the <a href="https://ourworldindata.org/economic-growth#gdp-growth-since-1950" rel="noopener" target="_blank">dramatic economic growth</a> of non-Western countries, home to 80% of the world’s population, since 1980. Furthermore, the book’s case for a state takeover of most capital allocation in the economy takes no account of the <a href="http://conversableeconomist.blogspot.com/2012/07/russian-economic-inefficiency.html" rel="noopener" target="_blank">gross mismanagement</a>, <a href="https://thediplomat.com/2014/10/how-the-soviet-union-created-central-asias-worst-environmental-disaster/" rel="noopener" target="_blank">environmental degradation</a>, and <a href="https://www.wsj.com/articles/100-years-of-communismand-100-million-dead-1510011810" rel="noopener" target="_blank">human suffering</a> associated with twentieth-century experiments with socialism, to which contemporary Venezuela is a particularly tragic sequel.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>A star of the millennial left has some thoughts on capitalism — prepare to be unconvinced.</p> </div> </div> </aside> , <div class="text-default"> <p>Like other critics of the free market, Blakeley opposes “neoliberalism.” Unlike many of those critics, she offers a definition of sorts: neoliberalism is the process of globalisation that has accelerated since the collapse in 1971 of the Bretton Woods system of global monetary and financial regulations. Blakeley’s target is economic freedom in general, and capital mobility in particular. Why? Because “capital mobility ... gives those who own it veto power”.</p> <p>Capital mobility means savers can shield some of their assets from policies they believe would harm them. Blakeley resents this material counterpart of people’s ability to vote with their feet, which the French — for example — exercised when newly-elected President Mitterrand launched a <a href="https://www.nytimes.com/1982/02/15/world/france-begins-8-billion-takeover-of-private-industry-and-banking.html">major expansion</a> of the government’s role in the economy in the early 1980s. Blakeley blames “bond vigilantes” for the ensuing mass exodus out of French assets and Mitterrand’s eventual U-turn. But the sorry experience of similar programs of nationalisation and controls elsewhere, including across the English Channel, offers grounds for doubt that Mitterrand’s original plan could have succeeded. Investors certainly thought so.</p> <p><em>Stolen</em> is not the place to look for novel arguments against the free market. Instead, the reader will encounter familiar allegations such as the market’s promotion of income and wealth inequality, the short-term orientation of corporate shareholders, and their supposed inability to allocate funds for productive investment. Those unpersuaded by <a href="https://iea.org.uk/wp-content/uploads/2018/02/Socially-Useless-f1-web.pdf" rel="noopener" target="_blank">evidence</a> to the <a href="https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7484" rel="noopener" target="_blank">contrary</a> will find their views confirmed. For the rest, <em>Stolen</em> will likely not prompt a Damascene conversion.</p> <p>The book abounds in assertions that will surprise the reader trained in economics. Blakeley tells us that “it is a fairly respected law of investing that the more capital you have ... the higher your returns,” when every standard model of production assumes that marginal returns <a href="https://democracyjournal.org/magazine/33/the-inequality-puzzle/" rel="noopener" target="_blank">decline</a> as one adds capital. Some hedge funds that cater to the rich may post higher returns than retail asset managers, but their superior performance, which is <a href="https://www.theatlas.com/charts/ByYxH-w8f" rel="noopener" target="_blank">rarely consistent</a> and <a href="https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp" rel="noopener" target="_blank">never certain</a>, comes at <a href="https://www.institutionalinvestor.com/article/b1g6gx17wdmbs3/Hedge-Funds-Still-Winning-the-Fee-Battle-With-Investors" rel="noopener" target="_blank">much higher fees</a> and usually at greater risk. Even Warren Buffett, a six-decade stock-picking outlier, has <a href="https://www.investopedia.com/articles/stocks/08/buffet-investing.asp" rel="noopener" target="_blank">found it harder</a> to outperform the market as his pool of capital has grown.</p> <p>Blakeley denigrates the “big tech monopolies,” which allegedly do not invest but rather grow “by merging or acquiring other firms.” Yet, in the first six months of 2019, Google’s parent company Alphabet <a href="https://abc.xyz/investor/static/pdf/20190725_alphabet_10Q.pdf?cache=6a9f26d">spent $12.2 billion</a> on research and development – 16 percent of gross revenue for the period. Even if Blakeley’s statement were true, are mergers and acquisitions not a form of investment? Am I not investing when I acquire shares in a public firm?</p> <p><em>Stolen</em> displays numerous instances of such incomplete reasoning. Share buybacks are “money that [isn’t] going to workers or being invested in future production.” So, where does the money go? Not to spending, it seems: Blakeley writes of a structural “demand deficit”, yet the proceeds from investment can either be spent or re-invested, within the same firm or in another venture. They cannot just vanish.</p> <p>The book gives a quaint interpretation of the financial crisis. While much of the world emerged sluggishly from the 2008 meltdown, “it was China that saved the day” with a stimulus program that has “supported high growth rates in China and its major trading partners ever since”, This contradicts the <a href="https://www.ft.com/content/0c7ecae2-8cfb-11e8-bb8f-a6a2f7bca546" rel="noopener" target="_blank">consensus</a> among China-watchers, who view the post-2008 growth spurt as short-lived and driven by <a href="https://www.ft.com/content/002a1978-7629-11e4-9761-00144feabdc0" rel="noopener" target="_blank">inefficient investments</a>. Perhaps more tellingly, the 40-year process of liberalisation that has <a href="https://qz.com/1498654/the-astonishing-impact-of-chinas-1978-reforms-in-charts/" rel="noopener" target="_blank">transformed</a> the Chinese economy, arguably the most notable example of “neoliberalism” at work, has no place in <em>Stolen</em>. The critical reader will leave the book with the impression that its goal is not to inform but to propagandise.</p> <p>There are also glaring contradictions. The owners of financial capital form “a parasitic rentier class”, but investment markets are inevitably unpredictable because of uncertain expectations. Perhaps, then, returns on invested capital do not simply amount to “financial extractivism” but are rather the reward for exposing oneself to an uncertain future? Blakeley has no time for that possibility.</p> <p>Indeed, both Blakeley and Shadow Chancellor John McDonnell overlook uncertainty when they advocate more stock-based compensation for workers: The typical worker is risk-averse and always prefers cash to stocks, because cash compensation is immediate and can buy anything (including stocks), whereas stock-based compensation is subject to deferral and potentially large changes in value.</p> <p><em>Stolen</em>’s policy recommendations, which include massive consumer debt forgiveness, a public option for retail banking that would invest in “socially desirable” projects, mandatory collective bargaining, and a state-owned investment bank that would pay for the UK’s version of the Green New Deal, are radical but standard fare for a “democratic socialist” pamphlet. It is worth noting, however, that her exposition of each in the last chapter is entirely devoid of cost estimates.</p> <p>More original is Blakeley’s call for an asset price inflation target for the Bank of England. But the reason no-one else has proposed such a target before is probably that it would be difficult to implement and could undermine macroeconomic stability. If the policy target were house prices, as Blakeley has <a href="https://www.ippr.org/research/publications/on-borrowed-time" rel="noopener" target="_blank">previously advocated</a>, how could the Bank effectively respond to non-financial variables such as population growth and land-use restrictions? Were all assets to form the target, how could Bank policy be predictable if expected to counteract the fundamentally unpredictable short-term fluctuations of stock and bond prices?</p> <p>In <em>Stolen</em>, Blakeley sets out to expose the supposed failure of “finance-led growth,” the system of largely free trade and open capital markets that emerged from the mid-1970s. But her critique rests on evidence-free straw man arguments that will not persuade the educated layman, let alone any experts. This book may galvanise the vociferous minority of socialists in Britain and abroad — but it is unlikely to convert anyone else.</p> </div> Mon, 02 Sep 2019 11:26:00 -0400 Diego Zuluaga https://www.cato.org/publications/commentary/grace-blakeleys-stolen-tired-invective-against-market-capitalism Hayek on Argentina’s Capital Controls https://www.cato.org/publications/commentary/hayek-argentinas-capital-controls?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Steve H. Hanke <div class="text-default"> <p>Yesterday, President Mauricio Macri chose to impose capital controls on Argentina. Since being elected, Macri has been reluctant to reform — a gradualist, “do-nothing” president. But, when backed into a corner of his own making, he acts as if he is bent on committing political suicide. First, he called in the firemen from the International Monetary Fund — a rightfully despised organization in Argentina. And now, he has pulled the trigger on capital controls.</p> <p>What would Nobelist Friedrich Hayek say about the imposition of capital controls and restrictions on the convertibility of Argentina’s junk currency—the peso?</p> <p>Currency convertibility is a simple concept. It means residents and nonresidents are free to exchange domestic currency for foreign currency. However, there are many degrees of convertibility, with each denoting the extent to which governments impose controls on the exchange and use of currency.</p> <p>The pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.</p> <p>So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new. Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce, in 1905-06, a limited form of exchange control to discourage speculative purchases of foreign exchange. The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy imported goods.</p> <p>Otherwise, foreign exchange was limited to 50,000 German marks per person. The Tsar’s rationale for exchange controls was that of limiting hot money flows, so that foreign reserves and the exchange rate could be maintained. The more things change, the more they remain the same.</p> <p>Before more politicians come under the spell of exchange controls, they should reflect on the following passage from Hayek’s 1944 classic,<a href="https://mises.org/library/road-serfdom-0" target="_blank"><em>The Road to Serfdom</em></a>:</p> </div> , <blockquote class="blockquote"> <div> <p>"The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape-not merely for the rich but for everybody."</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>Hayek’s message about convertibility has regrettably been overlooked by Argentina’s economists, who have a fatal attraction to nutty ideas. Exchange controls are nothing more than a ring fence within which governments can expropriate their subjects’ property. Open exchange and capital markets, in fact, protect the individual from exactions, because governments must reckon with the possibility of capital flight.</p> <p>From this it follows that the imposition of exchange controls leads to an instantaneous reduction in the wealth of the country, because all assets decline in value. To see why, it is important to understand how assets are priced. The value of any asset is the sum of the expected future installments of income it generates discounted to the present value. For example, the price of a stock represents the value to the investor now of his share of the company’s future cash flows, whether issued as dividends or reinvested. The present value of future income is calculated using an appropriate interest rate that is adjusted for the various risks that the income may not materialize.</p> <p>When convertibility is restricted, risk increases, because property is held hostage and is subject to a potential ransom through expropriation. As a result, the risk-adjusted interest rate employed to value assets is higher than it would be with full convertibility. Investors are willing to pay less for each dollar of prospective income, and the value of property is less than it would be with full convertibility.</p> <p>This result, incidentally, is the case even when convertibility is allowed for profit remittances. With less than full convertibility, there is still a danger the government will confiscate property without compensation. That explains why foreign investors are less willing to invest new money in a country with such controls, even with guarantees on profit remittances.</p> <p>Investors become justifiably nervous when they expect that a government may impose exchange controls. Settled money becomes “hot” and capital flight occurs. Asset owners liquidate their property and get out while the getting is good. Contrary to popular wisdom, restrictions on convertibility do not retard capital flight, they promote it. Macri’s capital controls have destroyed vast amounts of Argentina’s wealth and further damaged the country’s dead-beat reputation.</p> </div> Mon, 02 Sep 2019 10:27:56 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/hayek-argentinas-capital-controls Puerto Rico Financial Oversight Board Was Unconstitutionally Appointed https://www.cato.org/blog/puerto-rico-financial-oversight-board-was-unconstitutionally-appointed?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Ilya Shapiro, Sam Spiegelman <p>By 2016, Puerto Rico’s government was in dire financial straits. To avoid bankruptcy, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), creating a board responsible for restructuring the island territory’s substantial public debts. But there are serious questions regarding the constitutionality of this Financial Oversight and Management Board for Puerto Rico (the “Board”).&#13;<br /> &#13;<br /> Under PROMESA, the president chooses six of the seven members of the Board from “secret lists submitted to [him] by the House and Senate leaders.” But in view of the Board members’ selection process and responsibilities, the U.S. Court of Appeals for the First Circuit held that they are “principal federal officers” who must be nominated by the president and confirmed by the Senate, rather than “inferior officers” whose appointment does not go through the same constitutional rigmarole.&#13;<br /> &#13;<br /> Under the Constitution’s Appointments Clause, the president “shall nominate” principal federal officers, “and by and with the Advice and Consent of the Senate, shall appoint” them. But that is not what happened here. PROMESA’s appointment scheme raises serious separation-of-powers concerns because it positions the legislative branch to assume a role the Constitution exclusively reserves to the executive.&#13;<br /> &#13;<br /> The First Circuit did not see it this way. Although it deemed the Board members “principal federal officers,” it applied an archaic doctrine to uphold their appointments. Under the “<em>de facto</em> officer” doctrine, acts performed by an officer that has assumed official duties without having been properly appointed to an office are valid even though it is later discovered that the officer’s appointment is legally deficient.&#13;<br /> &#13;<br /> But this ancient doctrine is inapplicable to this case. Here, it is not the appointment of individual Board members against a valid appointment process that is in question. By all accounts, the appointment of each Board member did not violate any of PROMESA’s express prescriptions. Instead, it is PROMESA’s appointment process <em>itself</em> that is constitutionally suspect. In such case, the “<em>de facto</em> officer” doctrine has no real bearing, because no officer can be validly appointed in the first place.&#13;<br /> &#13;<br /> Supreme Court precedent confirms, again and again, that the Board members are indeed “principal federal officers” who must be nominated by the president, and only then Senate-confirmed for appointment. That’s because they (1) occupy a “continuing” position established by federal law, and (2) “exercise significant authority pursuant to the laws of the United States.” While (1) is obvious, perhaps (2) is less so. And so it bears emphasizing that the Board, under PROMESA, has ultimate authority over the fiscal future of a U.S. territory of more than three million inhabitants. If that authority is not “significant,” we don’t know what is.&#13;<br /> &#13;<br /> Cato has thus filed an <a href="https://object.cato.org/sites/cato.org/files/wp-content/uploads/aurelius_brief_final.pdf">amicus brief</a> supporting several of Puerto Rico’s creditors before the Supreme Court, in their argument to overturn the decisions of the Board and invalidate its statutory authority. If PROMESA is allowed to stand, and the Board’s decisions are upheld, this will signal to the executive and legislative branches—both complicit in this perilous scheme—that anything goes, that they are free to strike at the heart of our constitutional structure without any pushback from the one branch left to preserve the ever-fragile separation of powers.&#13;<br /> &#13;<br /> The Supreme Court will hear argument in <em>Financial Oversight &amp; Management Board for Puerto Rico v. Aurelius Investment, LLC</em> on October 15.</p> Thu, 29 Aug 2019 12:00:00 -0400 Ilya Shapiro, Sam Spiegelman https://www.cato.org/blog/puerto-rico-financial-oversight-board-was-unconstitutionally-appointed The Galling Push for a Student Debt Bailout https://www.cato.org/multimedia/cato-daily-podcast/galling-push-student-debt-bailout?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Christian Barnard, Caleb O. Brown <p>Leading Democratic presidential contenders want the feds to bail out students with school debt. What about the young people who made more modest choices? Christian Barnard of the Reason Foundation comments.<br />  </p> Thu, 29 Aug 2019 11:06:00 -0400 Christian Barnard, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/galling-push-student-debt-bailout On Targeting the Price of Gold https://www.cato.org/blog/targeting-price-gold?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss George Selgin <p>Thanks to President's Trump's picks for prospective Fed Board nominees, the subject of gold price targeting (or a gold "price rule") is getting attention once again.&#13;<br /> &#13;<br /> The idea, which got a lot of attention back in the 1980s, <a href="https://object.cato.org/sites/cato.org/files/pubs/pdf/pa016.pdf" rel="noopener noreferrer" target="_blank">after Arthur Laffer</a>  and other supply-siders, including <a href="https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1983/5/cj3n1-13.pdf" rel="noopener noreferrer" target="_blank">Alan Reynolds</a>, first began promoting it, is that the Fed could mimic a gold standard, keeping inflation in check and otherwise making the dollar "sound," by employing open-market operations to stabilize the price of gold. The topic has come up again because three of Trump's prospective nominees have at one time or another suggested that the U.S. should revive the gold standard, and two of them, Herman Cain and Stephen Moore, <a href="https://spectator.org/stephen-moore-and-herman-cain-are-just-what-the-fed-needs/" rel="noopener noreferrer" target="_blank">are full-fledged supply-siders</a>. Although Cain and Moore are no longer in the running, Judy Shelton, the third gold standard fan, is still in the race (along with <a href="https://www.bloomberg.com/news/articles/2019-07-03/st-louis-fed-s-waller-joins-bullard-in-a-dovish-duo-at-the-fed" rel="noopener noreferrer" target="_blank">Chris Waller of the St. Louis Fed</a>), and she also has strong supply-side leanings.&#13;<br /> &#13;<br /> These facts <a href="https://www.youtube.com/watch?v=2tnvNfCWGsw" rel="noopener noreferrer" target="_blank">prompted Representative Jennifer Wexton (D-Va.) to ask Jerome  Powell, following his July 10th testimony, whether the U.S. should "go back to the gold standard.</a>" In response Powell, whether because he had a Laffer-style gold price-rule in mind or for some other reason, interpreted the question as one asking whether the Fed should "stabilize the dollar price of gold." That, he said, wouldn't be a good idea:&#13;<br /> &#13;</p> <blockquote><p>There have been plenty of times in fairly recent history where the price of gold has sent signals that would be quite negative for either [maximum employment or stable prices]. …If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldn’t care. We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.</p> </blockquote> <p>Powell's statement raises three questions. One is whether it's proper to equate reviving the gold standard with having the Fed target the price of gold, as Powell did. The second is whether Judy Shelton has herself endorsed a gold price rule. The third is whether such a rule would be as disastrous as Powell claims.&#13;<br /> &#13;<br /> This post is devoted to answering, or trying to answer, these questions.&#13;<br /> &#13;</p> <h4>A Gold Target Isn't a Gold Standard</h4> <p>Answering the first question is relatively easy. Despite what Jay Powell suggested, reviving the gold standard and having the Fed target the price of gold aren't the same thing. So far as most fans of the gold standard are concerned, in a genuine gold standard paper money consists of readily redeemable claims to gold; and <a href="https://www.alt-m.org/2019/04/18/a-gold-standard-does-not-require-interest-rate-targeting/" rel="noopener noreferrer" target="_blank">it's that redeemability—and not any central bank "targeting"—that keeps that paper on a par with the gold it represents</a>.&#13;<br /> &#13;<br /> At a still more fundamental level, a true gold standard is one in which paper money consists of legally-binding IOUs, exchangeable for definite amounts of gold, <a href="https://www.cato.org/cato-journal/springsummer-2015/law-legislation-gold-standard" rel="noopener noreferrer" target="_blank">not as a matter of policy, but as a matter of contract</a>. Making the equivalence of paper money and gold a matter of binding contracts, enforceable in ordinary law courts, rather than one of pledges made as a matter of public policy, <a href="https://link.springer.com/article/10.1007/s10602-005-5853-z">makes that equivalence especially credible</a>. The sovereign immunity enjoyed by most modern central banks, in contrast, renders them unfit to operate genuine gold standards even when their notes are officially redeemable in gold, because they can always change their policy, dishonoring a prior redemption pledge, with impunity. (Every older central bank has, in fact, <a href="https://www.jstor.org/stable/135820" rel="noopener noreferrer" target="_blank">done just that at some point in its history</a>.)&#13;<br /> &#13;<br /> So although a central bank may target the price of gold, or adhere to a gold "price rule," by doing so, <a href="https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1983/5/cj3n1-14.pdf" rel="noopener noreferrer" target="_blank">it creates a "pseudo" rather than a "real" gold standard</a>. Having a real gold standard, in contrast, <a href="https://www.alt-m.org/2019/07/09/is-there-such-a-thing-as-a-free-market-gold-standard/" rel="noopener noreferrer" target="_blank">doesn't call for having a central bank at all</a>, as many past examples make clear.  Indeed, so far as many fans of the classical gold standard (<a href="https://www.independent.org/pdf/tir/tir_14_04_01_selgin.pdf" rel="noopener noreferrer" target="_blank">including this one</a>) are concerned, central banks have mainly served to muck things up.&#13;<br /> &#13;<br /> Finally, it's by no means clear that the macroeconomic consequences of a gold price rule would be the same as those of a genuine gold standard, in part precisely because such a rule can be more easily set aside, and therefore would lack the credibility, of a genuine gold standard. I'll return to this point later in this essay.&#13;<br /> &#13;</p> <h4>Some Gold Standard Proponents Still Favor a Gold Price Rule…</h4> <p>Despite its possible shortcomings, gold price targeting has continued to have advocates since the 1980s. Jack Kemp pleaded its case again in a 2001 <a href="https://www.wsj.com/articles/SB99368350745974449" rel="noopener noreferrer" target="_blank">Wall Street Journal op-ed</a>; and Steve Forbes has been carrying the gold price rule torch ever since. Referring to the <a href="https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_Act" rel="noopener noreferrer" target="_blank">Federal Reserve Transparency Act</a>, <a href="https://www.forbes.com/sites/steveforbes/2013/05/08/heres-what-a-new-gold-standard-could-look-like/#444ab4373a3d" rel="noopener noreferrer" target="_blank">he wrote</a>,&#13;<br /> &#13;</p> <blockquote><p>Unlike in days of old we don't need piles of the yellow metal for a new [gold] standard to operate. Under Poe's plan—an approach I have long favored—the dollar would be fixed to gold at a specific price. For argument's sake let's say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would "print" new money by buying bonds, thereby injecting cash into the banking system.</p> </blockquote> <p>Nathan Lewis is another gold standard fan who considers a stable gold value for the dollar the essence of a gold standard, <a href="https://www.forbes.com/sites/nathanlewis/2018/04/02/did-we-just-enjoy-the-yellen-gold-standard/#459af09923fa" rel="noopener noreferrer" target="_blank">no matter how that stability is achieved</a>.&#13;<br /> &#13;<br /> Former prospective Fed nominees Herman Cain and Stephen Moore both spoke and wrote of the benefits of having the Fed target the price of gold. Although he was better known for his notorious 9-9-9 plan, Cain also had a plan for establishing a "21st Century Gold Standard." According to <a href="https://www.forbes.com/sites/charleskadlec/2012/05/21/herman-cains-path-to-a-21st-century-gold-standard/#29c57ef57504" rel="noopener noreferrer" target="_blank">Charles Kadlec</a>, that plan would have assigned the Fed&#13;<br /> &#13;</p> <blockquote><p>a single target—the value of the dollar in terms of gold—and the tools to achieve that target. Open market operations would be used for the sole purpose of increasing or decreasing the supply of dollars in order to maintain the dollar/gold exchange rate. Other than setting the Discount Rate to fulfill its role as lender of last resort, targeting or manipulating interest rates would be prohibited.</p> </blockquote> <p>Although Steve Moore would rather have had the Fed target a broad index of commodity prices, according to a report in <a href="https://www.nytimes.com/2019/03/22/us/politics/stephen-moore-federal-reserve.html" rel="noopener noreferrer" target="_blank"><em>The New York Times</em></a>, he agrees with Steve Forbes that having the Fed target the price of gold would be “a lot better than what we have now.”&#13;<br /> &#13;</p> <h4>… but Judy Shelton Isn't One of Them</h4> <p>Powell was very careful, in answering representative Wexton's question, to make clear that his remarks shouldn't be taken as referring to the views of Judy Shelton or any other prospective Fed board nominee. That's just as well, because although she certainly favors a gold standard of some sort, so far as I can determine Shelton has never spoken or written in favor of gold price targeting.&#13;<br /> &#13;<br /> It's true that in her 1994 book, <em><a href="https://www.amazon.com/dp/0684863944/ref=rdr_ext_tmb" rel="noopener noreferrer" target="_blank">Money Meltdown</a></em> (pp. 298-301), Shelton discusses the idea of having the Fed target gold's price (which many thought it was then doing under Greenspan's leadership), showing much sympathy for it. But she ultimately concludes, for several reasons, that the policy would be a poor alternative to a gold standard founded upon actual convertibility of paper dollars into gold.&#13;<br /> &#13;<br /> Taking the same subject up again more recently, in her pamphlet <a name="_ftnref1" href="https://www.cato.org/blog/gold-standard-does-not-require-interest-rate-targeting#_ftn1" id="_ftnref1"></a><a href="https://www.amazon.com/Fixing-Dollar-Now-Integrity-Restore-ebook/dp/B0067OHBSW/ref=redir_mobile_desktop?_encoding=UTF8&amp;qid=1556881918&amp;ref_=tmm_kin_title_0&amp;sr=8-1" rel="noopener noreferrer" target="_blank"><em>Fixing the Dollar</em></a><em>, </em>Shelton comes to the same conclusion, to wit: that despite the greater challenges involved, "the advantages of forging an inviolable link between the value of US money and gold through fixed convertibility seem to make it well worth tackling the difficulties."&#13;<br /> &#13;<br /> Finally, as if to settle any doubts,  <a href="https://markets.businessinsider.com/news/stocks/trump-fed-nominee-judy-shelton-interview-transcript-2019-6-1028265265" rel="noopener noreferrer" target="_blank">in an interview this June Shelton</a> declared,&#13;<br /> &#13;</p> <blockquote><p>I'm sure I've never said that the Fed should have a price rule to ratchet up or down interest rates in accordance with the daily price of gold. But I'm sure that if anything I would have said a price rule I don't think is a good idea. I've never suggested that. I'm not badmouthing the gold standard. I'm saying look to see what you like about prior systems that have worked and see if we could develop a future system that would incorporate the virtues of things that worked in the past.</p> </blockquote> <p>Consequently the drawbacks of gold price targeting, whatever they may be, can't fairly be laid at Judy Shelton's door, whether by implication or <a href="https://www.moneyandbanking.com/commentary/2019/7/6/protecting-the-federal-reserve" rel="noopener noreferrer" target="_blank">explicitly</a>. For while a gold price targeting regime may resemble a convertibility-based gold standard in one respect, it also differs greatly from it in others. Its flaws aren't the flaws of the Bretton Woods system, just as the flaws of the Bretton Woods system aren't those of the classical gold standard. Perhaps they are all faulty. Still, each deserves a separate hearing.&#13;<br /> &#13;</p> <h4>Is Powell Right? Some Econometric Results</h4> <p>So we come to the third question. It calls for giving proposals for targeting the price of gold a  proper hearing.  Although such proposals can be assessed in all sorts of ways, one popular approach involves asking what would have happened had the Fed actually targeted the price of gold in the past.&#13;<br /> &#13;<br /> Economists usually use statistical techniques to try to answer this sort of question. So naturally I turned to my former UGA colleague <a href="https://www.terry.uga.edu/directory/economics/william-d-lastrapes" rel="noopener noreferrer" target="_blank">Bill Lastrapes</a>, the Gordo Cooper of econometricians (that is, <a href="https://www.youtube.com/watch?v=edEVmGOR03E" rel="noopener noreferrer" target="_blank">the best econometrician I ever saw</a>), who worked on a similar project with me years ago. That project investigated claims to the effect that Greenspan's Fed had actually been practicing gold price targeting. Although <a href="https://pdfs.semanticscholar.org/c5d5/77dd46e898781bfeff704436a483b6ac72db.pdf" rel="noopener noreferrer" target="_blank">we concluded that those claims contained rather more than a kernel of truth</a>, we made no attempt to say whether the policy was or wasn't a good idea.&#13;<br /> &#13;<br /> Now, there are all sorts of ways to go about such a counterfactual exercise, each with its drawbacks. One way is to rely on a simple reduced-form regression of the price of gold on the fed funds rate— the Fed's immediate target—and then infer from it, first, where the fed funds target would have had to be set at any given time to maintain a fixed value of gold and, second, how inflation and output would have responded to that rate setting. Using this approach (or the first part of it) to assess Herman Cain's gold price rule proposal, <a href="http://econbrowser.com/archives/2019/04/what-would-it-take-to-implement-cains-gold-standard-interest-rate-wise" rel="noopener noreferrer" target="_blank">Menzie Chinn</a> concluded that, had that policy been put into effect in January 2000, between then and March 2019 the Fed would have had to increase its fed funds target by 14.89 percentage points, whereas in fact it reduced it by 3.04 percentage points, to a level that President Trump, and many others besides, still consider too high.&#13;<br /> &#13;<br /> While Chinn's approach is certainly suggestive, it suffers in treating the fed funds rate itself as an "exogenous" variable, and thereby failing to allow for the simultaneous determination of gold price and interest rates. More generally, Chinn ignores general equilibrium effects. To take those effects into account, Bill and I (OK, Bill) used a simple, structural "VAR" (for Vector Auto-Regression) model. The model has four equations for as many variable: real GDP, the inflation rate, the fed funds rate, and the price of gold. In the "factual" regression we take to the data, we assume that the Fed sets the funds rate in response to changes in both GDP and P, but not in response to changes in the price of gold. In contrast, in the "counterfactual" regression, we let the Fed adjust the funds rate so as to either rigidly fix the nominal price of gold or stabilize it around a constant mean. In both cases we rely on various other identifying restrictions to distinguish the Fed's rule from the effect of non-Fed instigated interest rate changes on gold prices.&#13;<br /> &#13;<br /> All that still leaves open plenty of options, so we considered several, based on data starting either in 1973 or in 1979. The results in every case, like those from Chinn's simple regression, support Powell's position. Indeed, they suggest that a gold price rule would be an even worse idea than Chinn's findings suggest.&#13;<br /> &#13;<br /> To drive that point home, I'll report here results from only one of the many regressions Bill and I considered: the one that yielded results <em>most favorable</em> to a gold price rule. (The complete study isn't yet ready for distribution.) That regression refers to the post-1979 sample period only. Going back to 1973 makes gold price targeting look worse. It also assumes, again in gold price targeting's favor, that instead of trying to the price of gold absolutely constant, the Fed allows it to vary somewhat above and below its targeted value.&#13;<br /> &#13;<br /> Looking first at the findings for the price of gold itself, the figure below compares gold's actual price during the sample period to its counterfactual price, where the last reflects our assumption that a gold-targeting Fed tolerates some fluctuations in that price.&#13;<br /> &#13;<br /><a href="https://www.alt-m.org/?attachment_id=203000" rel="attachment wp-att-203000"></a></p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="ac7d940f-ae83-4246-a3e7-dbb9d24da5a6" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetGoldPrice.jpg?itok=dw7OuP0U 1x, /sites/cato.org/files/styles/pubs_2x/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetGoldPrice.jpg?itok=DjIn8gZI 1.5x" width="700" height="350" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetGoldPrice.jpg?itok=dw7OuP0U" alt="Media Name: GoldTargetGoldPrice.jpg" typeof="Image" class="component-image" /></p></div> <p>&#13;<br /> &#13;<br /> Evidently, even keeping gold's price within these broadened limits requires substantial changes in the Fed's monetary policy settings. Just how substantial can be seen in the next chart, showing actual and counterfactual values for the federal funds rate, where the counterfactual values are those needed to generate the relatively stable price of gold shown in the previous image. For the period since 2005, which includes the financial crisis and recession, the average counterfactual funds rate exceeds 10%; and on some occasions that rate exceeds 20%.&#13;<br /> &#13;<br /> These numbers are roughly in agreement with Chinn's findings. But we can also see some consequences of gold price targeting not evident from Chinn's simple regression, including the fact that it would make the fed funds rate highly volatile. During the year 2000, for example, the rate would have had to vary by about 12 percentage points. Other years would have seen still larger movements. Had the Fed instead tried to keep the price of gold absolutely constant, the fed funds rate would have bounced around even more. The greater volatility makes intuitive sense, because under a gold price target, the Fed must respond to fluctuations not only in the absolute but in the relative price of gold. (John Cochrane made a similar point in his <a href="https://protect-us.mimecast.com/s/G82XCDkWNQH53YXZsWQch3?domain=wsj.com" rel="noopener noreferrer" target="_blank">WSJ editorial</a> a few weeks ago, which he has <a href="https://johnhcochrane.blogspot.com/2019/08/gold-oped.html" rel="noopener noreferrer" target="_blank">since republished on his blog</a>.)&#13;<br /> &#13;<br /><a href="https://www.alt-m.org/?attachment_id=203002" rel="attachment wp-att-203002"></a></p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="569668eb-90d3-487e-b1a1-36eac82825ce" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetFedFunds.jpg?itok=qx4OarSB 1x, /sites/cato.org/files/styles/pubs_2x/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetFedFunds.jpg?itok=uV_arhvJ 1.5x" width="700" height="351" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetFedFunds.jpg?itok=qx4OarSB" alt="Media Name: GoldTargetFedFunds.jpg" typeof="Image" class="component-image" /></p></div> <p>&#13;<br /> &#13;<br /> Moving next to inflation, although gold price targeting would have meant more rapid disinflation at the start of the Volcker era, for most of the Great Moderation it would have made relatively little difference, resulting in slightly less inflation in some periods, and slightly more in others. Only starting in the mid-2000s does the policy begin to matter again, by yielding (until 2015 or so) persistently lower inflation. But that lower inflation includes severe deflation during much of 2009, which hardly makes the counterfactual inviting, especially when one takes account of corresponding effects on output.&#13;<br /> &#13;<br /><a href="https://www.alt-m.org/?attachment_id=203001" rel="attachment wp-att-203001"></a></p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="41afc786-0c18-4370-b1c8-341ba20b6f66" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetingInflation.jpg?itok=e6NVi-br 1x, /sites/cato.org/files/styles/pubs_2x/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetingInflation.jpg?itok=vsx7Nh1Z 1.5x" width="700" height="344" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldTargetingInflation.jpg?itok=e6NVi-br" alt="Media Name: GoldTargetingInflation.jpg" typeof="Image" class="component-image" /></p></div> <p>&#13;<br /> &#13;<br /> The final image shows those effects, and more. Counterfactual real GDP runs persistently below actual real GDP from 2000 onward, with a particularly severe dip—that is, relative to the already severe actual dip—during 2008-9, and a substantially lower level from late 2009 onward. Under gold price targeting, in short, the Great Recession would have been more like a second Great Depression. Indeed, since the original Great Depression actually consisted of two separate downturns, it might have qualified as America's Greatest Depression yet!&#13;<br /> &#13;</p> <h4><a href="https://www.alt-m.org/?attachment_id=203003" rel="attachment wp-att-203003"> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="44abfe76-ea6d-43cb-8b03-6fe845c000c6" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldtargetLogGDP.jpg?itok=t4iZ8khA 1x, /sites/cato.org/files/styles/pubs_2x/public/download-remote-images/cdn.alt-m.org/225108895873/GoldtargetLogGDP.jpg?itok=_J5IzxSW 1.5x" width="700" height="349" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/GoldtargetLogGDP.jpg?itok=t4iZ8khA" alt="Media Name: GoldtargetLogGDP.jpg" typeof="Image" class="component-image" /></p></div> <p></p></a></h4> <h4>… and Some Caveats</h4> <p>While econometric findings similar to those I've reported no doubt informed Powell's answer to Representative Wexler, such findings need to be taken with a grain of salt. For while they yield more information than Chinn's simple regression, they may still be unreliable. In particular, they may still run afoul of the famous <a href="https://en.wikipedia.org/wiki/Lucas_critique" rel="noopener noreferrer" target="_blank">"Lucas Critique."</a>&#13;<br /> &#13;<br /> That critique, as originally summed up <a href="https://www.sciencedirect.com/science/article/pii/S0167223176800036" rel="noopener noreferrer" target="_blank">by Robert Lucas himself</a>, holds that, because "the structure of an econometric model consists of optimal decision rules of economic agents, and … optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker … any change in policy will systematically alter the structure of econometric models." As<a href="https://www.minneapolisfed.org/research/qr/qr333.pdf" rel="noopener noreferrer" target="_blank"> Thomas Sargent later explained</a>, this means, among other things, that the uses to which VARs can safely be put "is more limited than the range of uses that would be possessed by a truly structural simultaneous equations model." Such VARs, Sargent continues, are particularly ill-suited for evaluating "the effect of … changes in the feedback rule governing a monetary or fiscal policy variable [because] when one equation […] describing a policy authority’s feedback rule changes, in general, all of the remaining equations will also change."&#13;<br /> &#13;<br /> Of particular concern to both Lucas and Sargent are instances in which <a href="https://www.frbsf.org/economic-research/files/wp02-02bk.pdf" rel="noopener noreferrer" target="_blank">agents’ expectations of the policy process are likely to change when policymakers change their own behavior.</a>  As Christopher Sims <a href="https://www.bostonfed.org/-/media/Documents/conference/42/con42_07.pdf" rel="noopener noreferrer" target="_blank">puts it</a>, "evaluating changes in policy rule as if they could be made permanently, while leaving expectations formation dynamics unchanged, is a mistake."&#13;<br /> &#13;<br /> That concern is clearly relevant in the present instance. Consider our VAR model's gold price equation, the coefficients of which are functions of the supply of and demand for gold. Our counterfactual assumes that those coefficients stay the same whether or not the Fed targets the price of gold. But that assumption is suspect. Gold is, after all, demanded in part <a href="https://www.emerald.com/insight/content/doi/10.1108/eb043380/full/html" rel="noopener noreferrer" target="_blank">as an inflation hedge</a>. Consequently, by credibly switching to a gold price rule, the Fed might reduce that demand by dampening fears of inflation. Put another way, the shocks in our gold price equation could be smoothed under gold price targeting. Because it doesn't allow for this, our counterfactual exercise may overstate the shortcomings of a gold price rule, especially by exaggerating the fed funds rate changes needed to implement it.*&#13;<br /> &#13;<br /> Were our sample period one during which changing fears of inflation were not an important source of innovations to the demand for gold, our counterfactual estimates would be less vulnerable to the Lucas Critique. With this understanding in mind, Bill repeated our counterfactual analysis for the "Great Moderation" (1984-2008) sub-period, during which inflation fears are generally understood to have been quieted. Although the counterfactual fed funds rate for this period, shown below, is somewhat less volatile, it still swings dramatically, while the other counterfactual series show results similar to those from the longer sample period.&#13;<br /> &#13;<br /><a href="https://www.alt-m.org/?attachment_id=203161" rel="attachment wp-att-203161"></a></p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="0f2d8cc6-d010-48e4-beed-9cca109ae8bf" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/New-Counter.jpg?itok=L-ul_lcv 1x, /sites/cato.org/files/styles/pubs_2x/public/download-remote-images/cdn.alt-m.org/225108895873/New-Counter.jpg?itok=Rhva3YAp 1.5x" width="700" height="303" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/download-remote-images/cdn.alt-m.org/225108895873/New-Counter.jpg?itok=L-ul_lcv" alt="Media Name: New-Counter.jpg" typeof="Image" class="component-image" /></p></div> <p>&#13;<br /> &#13;<br /> These findings suggest that, though our results are subject to the Lucas Critique, they may not be all that misleading. Thus we might echo Sims' claim, made with regard to <a href="https://www.bostonfed.org/-/media/Documents/conference/42/con42_07.pdf">counterfactual work of his own</a>, that the possibilities raised by Lucas are "reasons to be somewhat cautious about these results, not a reason for ignoring them."&#13;<br /> &#13;<br /> But Sims' thinking mustn't be stretched too far. However useful our counterfactual exercise may be for assessing the likely consequences of gold price targeting, it's far less capable of telling us what consequences might result from a return to a more genuine gold standard, including a Bretton-Woods type arrangement <a href="https://www.cato.org/cato-journal/springsummer-2018/case-new-international-monetary-system" rel="noopener noreferrer" target="_blank">of the sort Judy Shelton has sometimes recommended</a>. For that more radical regime change would almost certainly involve still more far-reaching changes in the coefficients of our models' equations, making any results it might yield especially dubious. That doesn't mean, of course, that <a href="https://www.wsj.com/articles/benn-steil-the-myth-of-bretton-woods-1406590558" rel="noopener noreferrer" target="_blank">reviving Bretton Wood</a>s, or establishing any other sort of "genuine" gold standard, would be a good idea. It's just that whether it is or isn't isn't something one can hope to decide, even very tentatively, just by running a few regressions.&#13;<br /> &#13;<br /> __________________&#13;<br /> &#13;<br /> *If, on the other hand, the Fed's gold price rule is less than fully credible, our findings might still be misleading, because that less-than-credible rule could itself give rise to a speculative demand for gold based on fears that the rule with change. In that case, the Fed's (unconvincing) switch to a gold price rule could end up making the fed funds rate <em>more</em> rather than less volatile than if it didn't pretend to target gold at all.&#13;<br /> &#13;<br /> [<a href="https://www.alt-m.org/2019/08/29/on-targeting-the-price-of-gold/">Cross-posted from Alt-M.org</a>]</p> Thu, 29 Aug 2019 10:06:00 -0400 George Selgin https://www.cato.org/blog/targeting-price-gold What Could Cause the Next Housing Crash? https://www.cato.org/multimedia/cato-daily-podcast/what-could-cause-next-housing-crash?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Diego Zuluaga, Caleb O. Brown <p>Are rules governing housing finance setting the stage for the next crash? If so, what ought to change? Diego Zuluaga comments.</p> Tue, 27 Aug 2019 11:31:00 -0400 Diego Zuluaga, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/what-could-cause-next-housing-crash Trump and the Business Roundtable Create Unwanted Regime Uncertainty https://www.cato.org/publications/commentary/trump-business-roundtable-create-unwanted-regime-uncertainty?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Steve H. Hanke <div class="text-default"> <p>Last week, the Business Roundtable joined the ever-present Donald J. Trump in creating unwanted regime uncertainty. President Trump displayed his mercantilist machismo by threatening to go to the mat with China and America’s businesses. He promised more tariffs on China if Beijing did not comply with his demands. Then, the President turned his fury on America’s businesses; he ordered them to stop doing business with the Chinese. But, that wasn’t all. Trump also lashed out at the Chairman of the U.S. Federal Reserve Jerome Powell, labeling him an “enemy” and comparing him to Trump’s trade nemesis President Xi Jinping of China. Not surprisingly, the markets plunged.</p> <p>If that wasn’t enough, the Business Roundtable launched a major attack on property rights, the bedrock of the capitalist system. In a stunning new mission statement, the Roundtable, which represents almost 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five stakeholders, alongside customers, workers, suppliers, and communities that will call the tune for corporations.</p> <p>Just what do President Trump and members of the Business Roundtable have in common? Well, they are all businessmen. And, when it comes to economics and economic policy, businessmen are notorious for talking nonsense. While businessmen readily accept the expertise of lawyers, engineers, and those from other professions, they often reject professional opinion offered by professional economists. And why not? After all, as they say, every man is an economist. So, when it comes to economics, businessmen have and express their own ideas and theories—often fallacious ideas and theories. That’s why solid training in economics is not simply to acquire a set of readymade answers to economic questions, but to learn how to avoid being deceived and bamboozled by businessmen.</p> <p>When it comes to the Business Roundtable’s most recent manifesto, it appears that the authors simply suffer from a case of economic illiteracy, which is not uncommon in the business world. Indeed, the great Austrian economist Joseph Schumpeter concluded in his 1942 classic<em><a href="https://www.amazon.com/Capitalism-Socialism-Democracy-Perennial-Thought/dp/0061561614" target="_blank">Capitalism, Socialism, and Democracy</a></em>that businessmen would “never put up a fight under the flag of their own ideals and interest.” Schumpeter saw clearly that businessmen would not be the ones to defend capitalism. Indeed, he concluded that they, through their ignorance and cowardice, would assist those who wished to destroy capitalism. In 1947, when Schumpeter’s<em><a href="https://www.amazon.com/Capitalism-Survive-Joseph-Alois-Schumpeter/dp/1891396765" target="_blank">Can Capitalism Survive?</a></em>was published, he took businessmen to the cleaners once again. He also continued to harbor gloomy prospects for capitalism’s survival.</p> <p>And as for President Trump—as well as many businessmen, from Secretary of Commerce Wilbur Ross to those who man main street America—he has a view about international trade, particularly the U.S. trade balance. Their wrongheaded view of international trade and the trade balance has its roots in how individual businesses operate. A healthy business generates positive free cash flows—revenues exceed outlays. If a business cannot generate positive free cash flows on a sustained basis and cannot take on more debt or issue more equity to finance itself, then it will eventually be forced to declare bankruptcy.</p> <p>Businessmen naturally employ this general free cash-flow template when they think about the economy and its external balance. For them, a negative trade balance for the nation is equivalent to a negative cash flow. In both cases, more cash is going out than is coming in.</p> <p>But, this line of thinking is fallacious. Indeed, it represents a classic fallacy of composition. This fallacy is the belief that what is true of a part (a business) is true for the whole (the economy). Alas, economics is littered with fallacies. These cause businessmen to confuse their own arguments about international trade and trade balances, as well as other people’s minds, almost beyond reason.</p> <p>In reality, the negative trade balance in the United States is not a “problem” caused by nefarious activities by foreigners. No. The U.S. negative trade balance, which the U.S. has recorded every year since 1975, is not a problem. Moreover, it is made in the U.S.A., caused by a savings deficiency (read: the U.S. fiscal deficit).</p> <p>So, where did the Trump trade tirades and the Business Roundtable’s new anti-capitalist mission statement leave us? Well, it left us with plenty of unwanted regime uncertainty. Just what is regime uncertainty? Robert Higgs in<a href="https://www.independent.org/store/book.asp?id=115" target="_blank"><em>Taking a Stand: Reflections on Life, Liberty, and the Economy</em></a>(2015) answers this question. In 1997, Higgs first introduced the concept of “regime uncertainty” to explain the extraordinary duration of the Great Depression. Higgs’ regime uncertainty is, in short, uncertainty about the course of economic policy — the rules of the game concerning taxes and regulations, for example. These rules of the game affect the net benefits and free cash flows investors derive from their property; the rules affect the security of their property rights. So, when the degree of regime uncertainty increases, investors’ risk-adjusted discount rates increase, and their appetites for making investments diminish.</p> <p>As it turns out, Scott R. Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven J. Davis of the University of Chicago have developed a measure that serves as a proxy for regime uncertainty: the “Global Economic Policy Uncertainty Index.” The chart below shows the course of this index.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="356" alt="Hanke Forbes Image August 26 2019 1" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-1.png?itok=p9L7Hivo 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-forbes-8-26-19-1.png?itok=vZ7u4G9Q 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-1.png?itok=p9L7Hivo" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>It’s clear that the Global Economic Policy Uncertainty Index is elevated. While the gold bugs love it, most others do not.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="339" alt="Hanke Forbes August 26 2019 Image 2" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-2.png?itok=TMu6N9_W 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-forbes-8-26-19-2.png?itok=_t9FJAjj 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-2.png?itok=TMu6N9_W" typeof="Image" /> </div> </figure> Mon, 26 Aug 2019 10:43:37 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/trump-business-roundtable-create-unwanted-regime-uncertainty Really, It's True: Creditors, Predators Not Same Thing https://www.cato.org/blog/creditors-predators-not-same-thing?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Walter Olson <p>Between the print version of Rebecca Traister's August 5 New York magazine profile of Elizabeth Warren, and the version now online, there can be spotted an amusing correction. Print version:&#13;<br /> &#13;</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="d2384516-bce8-496e-824e-82bb1f6f309d" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/wp-content/uploads/warrentypo2.jpg?itok=5Gz75nkq 1x, /sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/warrentypo2.jpg?itok=cbYcwWIL 1.5x" width="700" height="933" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/wp-content/uploads/warrentypo2.jpg?itok=5Gz75nkq" alt="Clip of 8/4/19 NY mag &quot;predators&quot;" typeof="Image" class="component-image" /></p></div> <p><a href="https://www.thecut.com/2019/08/elizabeth-warren-teacher-presidential-candidate.html">Online version</a>: &#13;<br /> &#13;</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="c63ebe01-5836-46a6-acdf-4deda9734959" data-langcode="und" class="embedded-entity"> <p><img srcset="/sites/cato.org/files/styles/pubs/public/wp-content/uploads/warrentypo2.png?itok=DuqkHjdQ 1x, /sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/warrentypo2.png?itok=tFp5fc3x 1.5x" width="625" height="363" src="https://www.cato.org/sites/cato.org/files/styles/pubs/public/wp-content/uploads/warrentypo2.png?itok=DuqkHjdQ" alt="Clip, NY mag 8/4/19 online, &quot;creditors&quot;" typeof="Image" class="component-image" /></p></div> <p>Let's hope editors in the nation's leading financial center continue to keep in mind that lending money to someone doesn't necessarily make you a predator. </p> Thu, 22 Aug 2019 11:55:08 -0400 Walter Olson https://www.cato.org/blog/creditors-predators-not-same-thing Steve H. Hanke discusses the Fed on Yahoo! Finance https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-fed-yahoo-finance?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Thu, 22 Aug 2019 11:24:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-fed-yahoo-finance