Englund

  The obvious-seeming narratives of what’s happening in the U.S. economy keep falling short Government spending matters, monetary policy matters and there is a natural link between growth, unemployment and inflation.  None of the three proved reliable in the past four years, yet each seems self-evidently true, baked into the very structure of the economy.  It is, in a word, confusing. Spending big when the economy is already running hot will create inflation. Simple. Yet, the government kept on spending into a hot economy.  Over the past two years—well after the pandemic stimulus—the federal deficit has been larger as a share of the economy than any time since World War II, aside from the deep recession after Lehman Brothers collapsed in 2008 and the pandemic itself. Blanchard says the stimulus ended up having less impact than he anticipated because much of it was saved, smoothing out the effect over time. Monetary policy hasn’t been particularly useful for forecasti...

Gone are the days when the political right and left could be distinguished by competing theories: free market, monetarist, or Keynesian.  Today, economic policy is mostly a grab bag from which policy interventions are found to address specific economic grievances. No overarching economic theory guides either party’s approach to policymaking. By the end of the 1990s all the talk was of the “Washington consensus,” an approach that argued prosperity and stability could be achieved via orthodox monetary and fiscal policies, alongside vigorous engagement in international trade. The Washington consensus, however, was never quite as widely fancied within the economics profession as it was amongst politicians.  It is not that economists disagreed with the merits of independent central banks tasked with keeping inflation low, deregulation, or increased globalization.  Rather, the economics profession noted that those pillars, while necessary for growth, shared prosperity, and stab...

We were surprised when inflation rose. We were surprised when inflation fell. And we were surprised again when inflation stopped falling. The message of all these surprises is that we — including professional economists — really don’t have a strong grasp on why prices go up and down. Aside from those practical considerations: If we don’t understand inflation, then we also don’t truly understand anything else about the business cycle (if there even is one), because growth and inflation are intertwined. https://www.nytimes.com/2024/04/11/business/economy/business-cycle.html?te=1&nl=peter-coy&emc=edit_pc_20240413 J erome Powell likes to say that the Fed rate-setters are navigating by the stars under cloudy skies. Jeremy Rudd “A Practical Guide to Macroeconomics,”  It’s common sense that inflation tends to go up when the economy is running hot because of the laws of supply and demand Rudd writes that the Phillips curve hasn’t been emitting useful signals. “Although the Phillips...

The Errors Tour: How the Pros Bungled the End of Zero Interest Rates A look at the ways forecasters, traders and executives missed the mark over the past two years. And at the lessons learned. We were supposed to be in a recession by now, at least if you listened to mainstream economists.  The exact opposite happened: Unemployment is down near a half-century low, consumers keep spending, and residential real estate demand remains insatiable. Bloomberg News 14 februari 2024 https://www.bloomberg.com/news/features/2024-02-14/the-errors-tour-how-finance-pros-bungled-the-end-of-zero-interest-rates Economics is the most mathematical of the social sciences.  That’s not because economists are smarter than, say, sociologists or political scientists; trust me, it’s quite possible to say stupid things with equations  In particular, the Fed would very much like to know how high it needs to keep the interest rate — or more precisely, the interest rate minus expected inflation — to av...

Economics is the most mathematical of the social sciences. That’s not because economists are smarter  than, say, sociologists or political scientists; trust me, it’s quite possible to say stupid things with equations  In particular, the Fed would very much like to know how high it needs to keep the interest rate — or more precisely, the interest rate minus expected inflation — to avoid overheating the economy and reigniting inflation. This “natural rate of interest,” a term invented in 1898 by the Swedish economist Knut Wicksell, is often referred to as r* or r-star. Back in 1968, Milton Friedman, in a deliberate echo of Wicksell, argued that there is also a “natural” rate of unemployment consistent with stable inflation. Since referring to any level of unemployment as natural raises some people’s hackles, this is often referred to as the NAIRU, for non-accelerating inflation rate of unemployment — and often denoted as, you guessed it, u*. But even if the stars exist, can we l...

 “A dominant theme in my investing life has been, whenever you think something is priced in, it’s not priced in,” Greenhaus said.  Dan Greenhaus at Solus Alternative Asset Management Longer-term concerns become a “blah, blah, blah” in traders ears’ — forgotten right up until something cracks, and then markets wake up and say, in essence, of course we saw that coming. https://www.bloomberg.com/news/newsletters/2023-08-15/stock-traders-in-us-hear-only-white-noise-until-something-breaks “I’m not surprised we have a market pausing after such a strong run,” said Marci McGregor, head of CIO portfolio strategy for Merrill and Bank of America Private Bank. https://www.wsj.com/articles/global-stocks-markets-dow-news-08-03-2023-daea6ee3 NOBODY KNOWS ANYTHING They don’t want to be what investor Mark Kritzman calls “wrong and alone.”  https://englundmacro.blogspot.com/2022/07/60-per-cent-of-actively-managed-equity.html

After adjusting for expected inflation,  real interest rates  were negative and projected to stay that way. The Fed recently raised its policy rate to 5.25%. In the US and many other countries, real interest rates have also moved into positive territory.  Short-term nominal interest rates are now  above 5% , and real interest rates have returned to  positive territory .  And now that the US appears to have avoided a recession after all, rates will likely stay well above zero for a while. In Europe and Japan, nominal interest rates did fall slightly below zero, as low as -0.5% and -0.75%. This was the effective lower bound.  If the equilibrium real interest rate was neagtive and the effective lower bound on nominal rates was close to zero or even -0.50%, the global economy would be in serious trouble.  The responsibility for maintaining full employment would thus have to revert to fiscal policy, which is often politically fraught. This scenario is ...

 Many major developments over the past year have departed from the consensus forecast, exposing the limitations of our understanding. Suddenly, financial markets are entertaining the idea that policymakers can indeed achieve a soft landing: inflation returns toward its target level (around 2%) without the need for a recession and a sharp increase in unemployment. For the past two decades, it has been fashionable among academic economists to assume that excess global savings have resulted in a lower natural rate of interest....  The long-term “new normal” would be much more normal indeed. Interest rates, finally, would remain above the actual or desired level of inflation. Jim O’Neill Project Syndicate 21 July 2023 https://www.project-syndicate.org/commentary/economic-forecasting-misses-inflation-recession-china-by-jim-o-neill-2023-07

George DeMartino’s recent book, “The Tragic Science: How Economists Cause Harm (Even as They Aspire to Do Good)”,  economists aren’t just ineffective at solving social problems; they often end up creating new ones. "Does Economics Do More Harm than Good?" | naked capitalism - Economics may be dismal, but it is not a science A-Z topics financial crisis and euro EMU at Rolf Englund IntCom (internetional.se)

 In 2008, University of Chicago economist (and future Nobel laureate) Richard Thaler and Harvard law professor Cass Sunstein published their book Nudge, which popularized the idea that subtle design changes in the architecture of choice (“nudges”) can influence our behavior.  The book became a global phenomenon and marked an intellectual watershed. But 15 years after its publication, the question remains: Has behavioral economics lived up to the hype? Thaler and Sunstein based their thesis on the research and insights of psychologists Daniel Kahneman and Amos Tversky, which they had previously applied to the field of law and economics  Acclaimed author Michael Lewis fueled further interest in behavioral science with his books Moneyball and The Big Short Macroeconomists, who study the aggregate functioning of economies and explore the impact of factors such as output, inflation, exchange rates, and monetary and fiscal policy, have, in particular, largely ignored the behavi...

 The discipline, willingly or not, has inhaled his influence When he presented an early version, a young economist despaired: “You just explained why everything I’ve done in the last few years is worthless.”  Economists, he believed, “are basically storytellers, creators of make-believe economic systems”. So he and his colleagues built a fantastical new world for wonks to explore. Lucas adopted the “rational expectations hypothesis”. He assumed the actors in his models would expect what the model itself predicted. If an economist can foresee that extra tokens will raise ride prices, then operators should expect the same. With the assumption of rational expectations, Lucas felt he had “eliminated the main intellectual basis” for fiscal and monetary fine-tuning of demand. After all, cashiers could not systematically fool ride operators. “Keynesian economics is dead,” he reported in 1979.  That report proved exaggerated.  The Economist 18 May 2023 https://www.economist....

 As Tyler Cowen of George Mason University puts it: “In the last 30 years the reliability of empirical work and estimations has risen dramatically. Which is good. But few new important ideas have really been generated.” Big advances are easier to spot in hindsight. It may even turn out that there were some hidden among the presentations at the annual meeting of the American Economic Association in New Orleans. The most compelling evidence on the impact of monetary policy on inflation came from Christina Romer of the University of California, Berkeley, who dusted off an old-fashioned method.  In her talk, she argued that monetary-policy changes have bigger effects on unemployment than inflation, and that it sometimes takes a few years for their main impact to be felt.  The method used by Ms Romer and her husband and co-author, David Romer, was not a new statistical technique or even timelier data, but a “narrative approach”.  The Romers combed through transcripts and ...

 till exempel ”varför det är så viktigt att undvika att banker kollapsar”. (Var inte du redan tidigare ganska övertygad om att man bör avhålla sig från att kollapsa banker?)  Låt mig ge ett exempel ur en förklarande text från Kungl. Vetenskapsakademin:  För att samhällsekonomin ska fungera behöver sparande kanaliseras till investeringar. Men här finns en motsättning. Sparare vill ha tillgång till sina pengar snabbt när oväntade utgifter dyker upp medan företagare och bostadsköpare behöver veta att de inte tvingas betala tillbaka sina lån i förtid… Men analysen visade också att kombinationen av dessa två åtaganden gör banker sårbara för rykten om deras nära förestående kollaps. Om ett stort antal sparare skyndar till banken samtidigt för att ta ut sina pengar kan ryktet bli en självuppfyllande profetia – en bankrusning uppstår och banken kollapsar. Knappast epokgörande ny kunskap, eller hur?  Patrik Engellau 12 eller 11 oktober 2022 https://detgodasamhallet.com/2022/1...

Accusations that economic orthodoxy is driven by a cosy cabal of the Davos-attending global elite It is not the slave of some defunct economist, but a constantly evolving body of thinking and experimenting in the real world.  Far from every element of the “Washington consensus” — the economic orthodoxy of the 1990s — survived the Asian financial crisis in the latter part of that decade. The lesson from 2010 to 2015, now accepted by the IMF, OECD and European Commission, is that there was a little too much focus on deficit reduction and austerity in the post-global financial crisis years.  Chris Giles FT 29 September 2022 https://www.ft.com/content/f1f27816-b0ca-4b66-a8fe-cce74c3b0af2 Her Majesty’s question ("If these things were so large, how come everyone missed them?") Chris Giles, FT, November 25 2008  https://englundmacro.blogspot.com/2022/01/why-did-almost-nobody-see-inflation.html What is the “Washington Consensus? Did it fail? https://englundmacro.blogspot.com/2021...

To be fair, high energy prices, linked in part to Russia’s invasion of Ukraine, have been a significant factor in inflation’s rise.   If central banks don’t deserve the blame for the recent inflation jump, maybe they don’t deserve the credit for the past three decades of subdued price rises. Entry of China into the global economy...  Perhaps central banks weren’t really brilliant economic managers — perhaps they were just lucky. Philip Coggan FT 9 July 2022 https://www.ft.com/content/bf31d005-10b3-481f-bd37-50402897cc21 Government bond yields, after declining for 40 years, might be trending upwards again Philip Coggan FT 5 January 2022 https://englundmacro.blogspot.com/2022/02/government-bond-yields-after-declining.html

 ... and alternatives have yet to emerge Economists have struggled to explain how inflation suddenly shot from around 2% before the pandemic to 8.6% in May. Outside of a handful of individuals, economists have thus far devoted remarkably little attention to how their theories and models got inflation so wrong.  This would be understandable if economists had only missed by a bit.  They didn’t.  Inflation at the end of last year was more than double the median projection among economists surveyed eight months earlier and well above the highest forecast. Greg Ip WSJ 15 June 2022  https://www.wsj.com/articles/on-inflation-economics-has-some-explaining-to-do-11655294432

Mest känd är han för det anförande han höll i augusti 2005 på det årliga mötet för världens riksbankselit i Jackson Hole i Wyoming. Han varnade då för att världen var på väg mot en stor finansiell kris Rajans tal är väl värt att läsa idag. I Jackson Hole 2005 väckte det däremot nästan ingen uppmärksamhet. De flesta deltagare menade att Rajan inte förstod sig på den nya tidens ekonomi. Janerik Larsson SvD 12 juni 2022 https://www.svd.se/a/RrgyKr/raghuram-g-rajan-varnar-for-gratis-lunch-ekonomin The Greenspan Era: Lessons for the Future,  Speech by Raghuram G. Rajan, Economic Counsellor and Director of the IMF's Research Department August 27, 2005 https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp082705 År 2013 varnade Rajan i en intervju för följderna av den expansiva politik som riksbanker och regeringar bedrev sedan den stora krisen 2008 hade hanterats. https://qz.com/126875/the-economist-who-predicted-the-financial-crisis-just-sounded-another-alarm-it-would-be-wise-to-liste...

Economists polled by The Wall Street Journal had forecast a 0.7% advance. The increase in inflation over the past year moved up to 8.6% from 8.3%, a new cycle high.  The last time inflation rose as rapidly was in 1981. MarketWatch 10 June 2022 https://www.marketwatch.com/story/coming-up-consumer-price-index-for-may-11654862886

 For me, his real gem is “Life among the Econ”, a comic essay written with wry affection, but serious intent, 50 years ago. https://www.ufjf.br/econs/files/2010/05/life-econ-crop.pdf As I noted in a column last year, Leijonhufvud wrote it soon after joining UCLA https://www.ft.com/content/ecf08d1b-88e3-4c0e-ae3d-8242f52db278 The essential message of “Life among the Econ”, that economists can sometimes be prone to tunnel vision and abstraction, is still relevant.  These failings were one reason why so few foresaw that 2008 crisis. In the years leading up to it, most economists had little contact with either the weeds of the financial system (where credit bubbles were developing) or subprime mortgage borrowers (where consumers were not behaving as economists’ models predicted). Gillian Tett 11 May 2022 https://www.ft.com/content/b409c254-79e6-41f4-91ce-dbeaebda016e Five years before the financial meltdown of 2008, Robert Lucas famously declared that “the central problem of depre...

”Ekonomer och prognosmakare är notoriskt dåliga på att lägga in recessioner i prognoserna. Det händer i princip aldrig.” Viktor Munkhammar DI 5 maj 2022 https://www.di.se/nyheter/experterna-tio-rantehojningar-tar-oss-mot-90-talskrisen/ They don’t want to be what investor Mark Kritzman calls “wrong and alone.”  A manager with one-third of assets in Chinese stocks won’t get fired if that market falls, since almost every other firm has similar exposure.  Being wrong together gives every manager plausible deniability. Englund: NOBODY KNOWS ANYTHING (englundmacro.blogspot.com) The consensus view is for S&P to rise by 10.1% this year and 9.5% in 2023.  Those figures have given comfort to people betting equities can hold firm. The issue for investors is that there’s little precedent of such estimates changing in the runup to periods of market stress.  The most famous example is the eve of the 2008 financial crisis, when Wall Street prognosticators pegged the increase i...