Category: Equitablog

…the Supreme Court voted in another case from Texas to permit the state’s voter ID law, the strictest in the country, to take effect… prevent as many as 600,000 Texans, 4.5 percent of all those registered, from voting next month. The impact, Judge Nelva Gonzales Ramos found, would fall disproportionately on black and Latino Texans. She ruled that the law violated Section 2 of the Voting Rights Act of 1965…. The six justices who let the stay remain in effect didn’t bother to explain themselves beyond the word ‘denied.’

That left it to Justice Ruth Bader Ginsburg and two others, Justices Sonia Sotomayor and Elena Kagan, to explain in dissent what was wrong with that outcome…. ‘The greatest threat to public confidence in elections in this case,’ Justice Ginsburg said, ‘is the prospect of enforcing a purposefully discriminatory law, one that likely imposes an unconstitutional poll tax and risks denying the right to vote to hundreds of thousands of eligible voters.’ A law, in other words, that in the full glare of publicity and on the verge of a highly polarized election, threatens destruction to the social fabric in the most dangerous way, by shutting thousands of citizens out of the democratic process of choosing their leaders.

‘There is no right more basic in our democracy than the right to participate in electing our political leaders,’ Chief Justice John G. Roberts Jr. wrote for the court in April of this year. His subject then was the right to spend money in politics, not the right to vote. If people conclude that the current Supreme Court majority cares more about the first than the second–surely a logical inference–the court will have entered a dangerous place. And so–as a conservative justice once realized in another context–will the country.

an object lesson on how not to run an advanced economy…. Western economists were scathing in their criticisms…. I was one of those critics; Ben Bernanke… was another. And these days, I often find myself thinking that we ought to apologize…. Our economic analysis… look[s] more relevant than ever now that much of the West has fallen into a prolonged slump very similar to Japan’s experience…. In the 1990s, we assumed that if the United States or Western Europe found themselves facing anything like Japan’s problems, we would respond much more effectively than the Japanese had. But we didn’t, even though we had Japan’s experience to guide us….

Start with government spending. Everyone knows that in the early 1990s Japan tried to boost its economy with a surge in public investment; it’s less well-known that public investment fell rapidly after 1996 even as the government raised taxes, undermining progress toward recovery. This was a big mistake, but it pales by comparison with Europe’s hugely destructive austerity policies, or the collapse in infrastructure spending in the United States after 2010…. Or consider monetary policy. The Bank of Japan, Japan’s equivalent of the Federal Reserve, has received a lot of criticism…. That criticism is fair, but Japan’s central bank never did anything as wrongheaded as the European Central Bank’s decision to raise rates in 2011…. And even that mistake is trivial compared with the awesomely wrongheaded behavior of the Riksbank….

As for why the West has done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In America, conservatives[‘]… general hostility to… a government that does anything to help Those People. In Europe… the German public is intensely hostile to anything that could be called a bailout of southern Europe…. Japan used to be a cautionary tale, but… [now] it almost looks like a role model…

…to end deflation was losing steam, Bank of Japan Gov. Haruhiko Kuroda Friday fired off a fresh round of ammunition from his famed money-spewing bazooka, shocking markets with a big increase in the central bank’s stimulus program. The impact was immediate, with the Nikkei Stock Average soaring more than 4% and the yen dropping sharply to a near-seven-year low against the dollar…. In sharp contrast to Mr. Kuroda’s first major easing announcement in April 2013, shortly after he took office, the central bank’s policy board was deeply split. Last year, he managed to get a 9-0 vote in favor of a policy that broke sharply with his more cautious predecessor. This time, the board voted 5 to 4…. Earlier in the day, the government had announced that the most closely watched gauge of inflation had fallen to 1% in September, having decelerated sharply from the 1.5% peak in April. That’s well below Mr. Kuroda’s 2% target, and showed the limited impact of the stimulus program to date….

Behind the surprise may also lie a broader strategy of economic policy coordination with the government. Before the BOJ announcement, Japanese stocks were up sharply in anticipation of an announcement planned for later in the day that the giant government pension fund would reallocate its portfolio…. And, looming for Mr. Abe is a decision on whether or not to go forward with a plan to raise the sales tax next year to 10% from the current 8%. It was the boost earlier this year… that slowed Japan’s economy and seemed to derail Mr. Kuroda’s earlier success in battling deflation. Mr. Kuroda has been a staunch and public advocate that Japan needs to go forward with the tax hike in order to curb its mammoth sovereign debt. Friday’s move, by providing at least a short-term dose of growth, will likely make it easier for Mr. Abe to take that step.

…pushing Wall Street to a record and Tokyo stocks to a seven-year peak, battering the yen while boosting the US dollar, and hammering gold to its cheapest in more than four years…. The yen is slumping 2.6 per cent versus the buck to Y112.04, its weakest since January 2008…. The Nikkei 225 jumped 4.8 per cent to its best level since early November 2007…. In New York, the S&P 500 is up 19 points to 2,013, leaving it on course to close a volatile month at a new record. The FTSE Eurofirst 300 is climbing 1.6 per cent after both Shanghai and Hong Kong added 1.2 per cent. ‘So much for the end of QE! The Bank of Japan’s announcement today that is stepping up its asset purchases is a timely reminder that not everyone has to follow the Fed’, said Julian Jessop, chief global economist at Capital Economics. The impact of the BoJ move is rippling through other asset classes. The most notable victim is gold… [which] does not like a strong buck… $1,163 an ounce, a four-year low.

…and the stock market has exploded to the upside. The one thing the policy bears may not have counted on was that someone else would cover the Fed’s back as it walked away. That someone else is the Bank of Japan, which shocked the markets this morning with an $80 trillion yen QE program that aims to triple the amount of Japanese equity ETFs and REITs it is buying on the open market. In addition, there is continued talk that the ECB will follow the Fed and the BoJ’s lead with a QE program of its own before too long.
I can’t tell you what these programs will do for the economies of these countries or for the wages and spending of their constituent workers. But it’s pretty clear what happens to their stock markets…. While QE is over for now in the US, it is just getting warmed up around the developing world in many respects…

…they often elicit the unsympathetic retort that they should shut up and praise the ghost of Jane Jacobs for the cultural vibrancy of their neighborhoods, the lucrative jobs, and the artisanal pizza: ‘Living in a great city is a consumption good, you whinging ninnies — you SHOULD have to pay for it! Why do you think you’re entitled to live wherever you want?’ Hey, fair enough. But there’s a difference between grumblings about $5 cinnamon macchiatos and the more useful outrage about meaningful troubles that can be solved — a difference between #firstworldproblems and the healthier expression of annoyed patriotism towards one’s habitat: ‘I like living here and want to keep living here, which is why the problems I complain about aren’t enough to push me out. I’d rather stick around and see the problems solved. But those problems suck, so let’s start doing something about them.’ To complain that rents, for instance, could and should be lower isn’t always a sign of yuppie entitlement. Nor is it mutually exclusive with appreciating the wonderful aspects of city life. Sometimes the gripe really is legitimate…

…key papers… maths and rational expectations… member of Sweden’s equivalent of the Monetary Policy Committee from 2007 to 2013…. Svensson… argued that there was still plenty of slack in the economy, and raising rates would be deflationary, so that inflation would fall well below the central bank’s target of 2%. By the end of 2012 inflation had indeed fallen to zero, and since then monthly inflation has more often been negative than positive. It was -0.4% in September. This week the Swedish central bank lowered their interest rate to zero…. Deviating from what mainstream macroeconomists in general advocate (and what one in particular recommended) has proved a costly mistake. (Svensson estimates it has cost 60,000 jobs.)… I am certainly not claiming that mainstream macroeconomics is without fault, as regular readers will know (e.g.) However it is important to recognise the achievements of macroeconomics as well as its faults. If we fail to do that, then central banks can start doing foolish things, with large costs in terms of the welfare of its country’s citizens…

I have trouble imagining a scenario in which the Fed is content to watch unemployment fall below 5.5% without at least beginning the rate hike cycle. Remember that they think that even as they increase rates, they believe that policy will continue to be accommodative. In other words, they do not fear raising rates as necessarily a tightening of policy. They will view it as a necessary adjustment in financial accommodation in response to a decline in labor market slack. Hence the line:

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run…

…after massive QE tends to suggest that QE just doesn’t work. In 2010 it was possible to argue that massive purchases of long term treasuries would have an effect similar to reductions in the Federal Funds rate. Now not so much.

I do object to your identifying the risk born by the Fed with ‘duration risk’. That is true only of the pointless QE based on purchasing long term treasuries. The Fed also bought agency issued mortgage backed bonds. That is a very different kind of QE (one which I thought would work so my predictions are–as usual–bad).

I don’t see why anyone would think that the Fed bearing duration risk would stimulate fixed capital investment. Long term bonds are risky, because short term rates might go up–either because of inflation and the Fisher effect or because of high demand and FOMC fear of over heating and inflation. Actual physical capital is a hedge against these risks. That is long term bonds are a good hedge against the risk of lower than expected inflation or aggregate demand.

Making a hedge against the risks of NIPA investment more expensive is a very odd way to encourage more NIPA investment.

Risk is not a scalar. Correlations matter and some of them are negative.