Sunday, February 21, 2016

A couple bits of Sunday news

Here's a few things for reading purposes:

New Deal Demoncrat - weekly indicators. Real M1 dropped severely this week. Then again, I guess that's what we're supposed to expect when a central bank starts a tightening cycle, right? And M1 did go down constantly from 1994 to 2001. I guess the question is whether credit growth stays positive enough to keep M2 growth at 5%/y with a decreasing M1.

Tangentially, I guess the proper questions to ask Yellen, by the way, are whether she feels the money multiplying machinery of the economy has what it takes to accommodate M1 contraction, because after all it's only going to cause economic contraction if the banks are unable to keep multiplying off a smaller base, and they can't if there's insufficient aggregate demand to take up new loans, and does she really think GDP trend is so much lower now than it was a couple decades ago that it's suddenly become okay to tighten at 2-3% growth. Then again, I suspect that she did study macroeconomics at university.

Macro Musings - the Fed didn't make a mistake in December, it made a mistake all last year. The argument is that they spent so long generating expectations of a rate hike. As he says:
The Fed did not make a mistake in December. It made a mistake all last year by talking up interest rate hikes and signalling a tightening of future monetary policy. Since markets are forward looking, this expectation got priced into the market and affected decision making. The Fed did this even though the economy was not back at full employment. The December rate hike was just a confirmation of these expectations.

The Fed, in other words, got ahead of the recovery well before December. Damage was already being inflicted on the economy by the time the actual rate hike occurred[....]
And then he presents a whack of charts to illustrate all the damage that was being done all through 2015.

Basically, generating expectations is a big part of monetary action, and the Fed did far too much generating of expectations of a rate hike.

I guess they're damned if they do and damned if they don't.

New Deal Demoncrat - retail sales and real compensation. Retail sales still going up, production/nonsupervisory wages still going up, production/nonsupervisory real aggregate income still going up. And with consumption as a large percentage of GDP, that means no recession.

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