Dumb statement of the week

Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” (Jim) Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday

From here.

Look, the guy can disagree with Federal Reserve policy – it would be nice if he actually explained why – but even if he doesn’t he can.  But saying that one of the worlds top economists doesn’t understand economics really just shows that he doesn’t understand the discipline of economics.

Hey, he can disagree with the discipline of economics – but without understanding it how can he say that someone else doesn’t?

And when he says “debasing your currency” he shows his true colours – he doesn’t understand monetary policy or inflation targeting.  There is no “magic” value for money, it isn’t some god given level of what it should be.  The whole point of “printing money” at the moment is because inflation is below their target, their mandate is to hit a certain level of inflation, and by default they need to increase how stimulatory policy is to do that – if QE2 appears to be the wrong way of doing this, or will lead to unintended consequences, then criticise it on those grounds FFS.

As an investor I’m sure he understands investing – but this sort of attack on Bernanke indicates that he might not have the same level of mastery in economics.  Ben Bernanke might not be as good at investing – but he is one guy I’d sure listen to when it comes to economics.

November 10 Fed meeting

The November 10 Fed meeting is more important for New Zealand then I think we currently recognise.  The decisions they make over the next two days are going to have a profound impact on the general monetary policy environment around the world – and New Zealand will not be immune.

Once they finally announce what they are doing I’ll be sure to stab down some thoughts.

Rate cuts: Not out of the realm of possibility

I see that there is an article saying that another rate hike is unlikely in the near future – this is true.  If anything, uncertainty – both about the probability of a movement AND the direction of a movement is elevated.  I would not be putting a zero, or even a particularly small probability on a rate cut within the next two meetings.  Note:  I don’t expect one, I expect a lift by around March – and I think the Bank will probably have to move pretty quickly when they do.  But this point is still useful.

Why do I say a cut is possible?  Well it has less to do with the domestic economic situation, and more to do with this stemming from this.  If the Fed does start price level targeting, they will essentially be aiming for a pretty high near term value for inflation – which in turn will see their dollar tank.  If we take this as a broader part of a “currency war” our Reserve Bank would be acting well within their mandate, and likely in an optimal sense, by lowering the cash rate.  A higher dollar tightens monetary conditions (other things equal) and they will want to counter that.

Until we have some idea regarding what the hell the Fed is going to do there will be a huge amount of uncertainty regarding changes in the OCR.  And it isn’t the RBNZ’s fault, they will just be doing what they can given the situation thrust upon them from overseas.

Scott Sumner wins

That is my impression of what is going on here (see Fed minutes too):

The Fed also said for the first time that it was considering targeting a path for the level of nominal gross domestic product as a way to increase price expectations.

And in case you aren’t sure who I’m talking about – Scott Sumner is the author of this excellent blog here, and has been pushing the NGDP target line for the entire crisis.  See the start of the blog in February 2009 – in the depths of the crisis.

While such a target doesn’t help in the face of a “supply side” shock, it does deal with “demand side” issues eg here.

Update:  His semi ‘celebration’ here.

Absolutes

From Policy Progress:

The giveaway words are ‘believe’ and ‘completely’. Very absolute words, those. Generally to be avoided unless you have solid evidence.

Very true, it reminds me of an old quote:

Only a Sith deals in absolutes

Of course, this quote makes sense, given my view that economists share similarities with the Jedi in terms of:

  • our inconsistency,
  • our inability to agree,
  • our unwillingness to commit to a firm opinion,
  • (and yet) our absolutism when we are forced to make an opinion,
  • our deep sense of thinking we are saving the world by describing trade-offs,
  • our (debatable) sense of moral/general superiority over other social sciences,
  • and our cool lightsabers.

Now this is not to say that anyone is the Sith [as I’ve said before I like Bernard Hickey, I can’t imagine him getting red eyes and running round with a lightsaber hunting down economists] – as after all, if there is anything Star Wars teaches us it is that no matter the moral standpoint, a desire to provide absolute answers and view things in black and white terms is what drives people to evil.  Not the tag they live under.

So if this post had to have a conclusion [it was obviously just a reason for me to compare economists to Jedis again], it would be to not get annoyed at the “two-handed” economist – as their response is more honest, and fundamentally probably more useful in the long-term, then the response of someone who is willing to be “one-handed”.  The world is uncertain, and the economic method is just trying to shine a light on this uncertainty – not make your choices for you.

Nobel 2010

Congratulations to Peter Diamond, Dale Mortensen, and Christopher Pissarides on being joint winners of the 2010 Nobel Prize in Economics.

I am stoked that Peter Diamond won this year – I was quietly rooting for him, especially after all this rubbish argument about whether he could be a Fed governor (of course he could be).  I avoided making him my pick for fear of jinxing him – so I happy 🙂 .  Although I have heard of Mortensen, I’ve never heard of Pissarides before – which is weird because it sounds like their best work was together!  I will make sure I educate myself this weekend.

Economist’s View (*), Paul Krugman, and Econlog have posts up.  Marginal Revolution’s coverage is excellent, with Tyler writing profiles on each of this year’s winners (Diamond, Mortenson, and Pissarides).

This year’s prize is very much a labour market prize – which is definitely topical given the seemingly unending elevated level of unemployment in the United States.  These authors have all done work describing why unemployment may not move back to its “natural rate” following a large shock – implying that we can’t necessarily expect a self-correcting process in the labour market EVEN IF we had fully flexible wages/prices.  It is an important lesson in the current environment – both in terms of trying to understand why unemployment can stay elevated, and IF there are any policies that can help the labour market in such a situation.

If the problem isn’t sticky wages, smashing unions (or even printing money) isn’t going to help us move out of a “bad” equilibrium in the labour market.  And even if you don’t care about the labour market – remember what the flip side is to higher equilibrium unemployment (in this type of situation), lower equilibrium output/income.

I imagine labour economists will be happy with this prize – I expect them to have a drink tonight to celebrate 😉