tag:blogger.com,1999:blog-1110014885778996459.post3446203247077097597..comments2024-03-28T04:16:11.729-07:00Comments on Idiosyncratic Whisk: Upside-down CAPM, Part 2: The magical elasticity of investment demandKevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-1110014885778996459.post-86127705324793879322017-12-03T15:47:25.940-07:002017-12-03T15:47:25.940-07:00- To get increased credit (=leverage) demand one n...- To get increased credit (=leverage) demand one needs rising prices.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-23362767026663847682017-12-03T15:44:31.385-07:002017-12-03T15:44:31.385-07:00- The FED FOLLOWS the 3-month T-bill rate. NOT the...- The FED FOLLOWS the 3-month T-bill rate. NOT the other way around.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-90928465343871638312017-11-12T06:15:01.066-07:002017-11-12T06:15:01.066-07:00On Saudi land---
"The monopolization of this...On Saudi land---<br /><br />"The monopolization of this resource limited the amount of urban land available to the masses, pushing up land and home prices, which contributed to massive land and home shortages. Remedying this situation will reduce the cost of home ownership, thereby alleviating a major source of grievance among middle- and lower-class Saudis."<br /><br />Oh gee, sounds like America. Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-42050197773079971992017-11-10T15:58:58.892-07:002017-11-10T15:58:58.892-07:00Thanks for the thoughtful input:
1) I'm not su...Thanks for the thoughtful input:<br />1) I'm not sure that long term rates are that anchored to short term rates. Part of the problem in 2004-2006 was that the Fed thought they should be correlated, and was confused by long term rates that remained low when short term rates were hiked.<br /><br />2) This is one of many factors that I would put in the category of plausible, even true, but not definitive. This is something that certainly is part of the mix of what is going on, but I don't think it bears out in the data as "the thing that drives the business cycle". This is similar to credit explanations for the housing bubble. Sure, there was credit flowing. Sure, people are drawn to hot markets. Etc. It's a plausible explanation for rising home prices, but plausible isn't enough. It wasn't the cause of market prices for homes that are double or triple their replacement value, and in fact, it is implausible that it could be. But, the seeming plausibility of the story, conceptually, led to its acceptance as the cause of the bubble. Then, work from researchers like Mian and Sufi seemed to provide quantitative cover for that plausibility, even though their work controls away the true causes.<br /><br />3) NGDP only correlates with inflation because monetary policy is pro-cyclical.<br /><br />4) True. It is also true that if Congress made international trade illegal, it would create a devastating recession, but I don't think we should pre-emptively make trade illegal in order to avoid that. It should be self-evident that we should govern ourselves in the best way possible, even though subsequently governing ourselves less well would be catastrophic.<br /><br />5)Even if that was the case, it would be better.<br /><br />6) I agree. But, the lowest hanging fruit is self-imposed nominal instability. It is the broken window fallacy applied to macroeconomics.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-1170998783453764442017-11-10T15:38:19.217-07:002017-11-10T15:38:19.217-07:00Good point. Although, it might even be questionab...Good point. Although, it might even be questionable that public borrowing leads to higher rates. It's certainly not been the experience of the past 20 years in the US.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-47179471507295638902017-11-10T15:36:27.194-07:002017-11-10T15:36:27.194-07:00Well, high yields are usually associated with grow...Well, high yields are usually associated with growing economies. But, also we currently have a problem with pensions that are missing their long-term nominal growth targets, the zero lower bound during recessions, etc.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-54722640777116426722017-11-10T09:19:14.525-07:002017-11-10T09:19:14.525-07:00A few thoughts:
1) Why are you so focused on bond...A few thoughts:<br /><br />1) Why are you so focused on bond buying vs setting of the discount rate? Longer-rates are anchored to short-rates within some range so the ability to set the short rate has a powerful impact on other rates. I think that is more meaningful than QE.<br /><br />2) I see the business cycle as reflexive. For many (most?) borrowers, credit-worthiness is a function of ability to refinance. When the credit cycle is strong, borrowers are in fact more credit-worthy. This is a self-reinforcing cycle both up and down, leading to booms/busts. It is rational to lend more during periods of low credit spreads...until it isn't.<br /><br />3) I'm not sure what NGDP targeting offers over inflation targeting. In theory we'd be targeting future forecasts of NGDP. As best i can tell, those forecasts are highly correlated to future inflation forecasts...so you are in practice targeting the same thing.<br /><br />4) My fear on NGDP targeting is largely a political fear. NGDP targeting would require high inflation during periods of low real growth. I see this as politically unsustainable...we are always one election away from a new Fed mandate. If you've structured an entire system around nominal stability (including potentially massive amounts of leverage, as you suggested) you are exposed to massive risks in the event of such a political change. This is the opposite of "antifragile" thinking.<br /><br />5) I don't believe nominal stability would change the business cycle. You would just move from nominal cycles to real cycles. This could lead to equally drastic swings in corporate profits as well. Periods of low/negative real growth and high inflation have the potential to be disastrous for corporate profits (or very good). Point being, you'd still have cycles...possibly cycles just as large. My intution is that you'd have lower cyclical volatility but with a higher skew (fewer, deeper recessions): which seems to be what we've experienced since Greenspan (who adopted what i consider to be NGDP-targeting "light").<br /><br />6) All this obsession with nominal stability is driven by two simple beliefs: wages are sticky and debt contracts are nominal. Why don't we spend our energy attacking the root problems. It seems to me that wages have become less sticky over time so that problem may solve itself. Why don't we push for reform that would favor equity financing over debt financing? This is so far from current thinking that I see low-hanging fruit everywhere.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-88257636205120705562017-11-10T04:44:30.898-07:002017-11-10T04:44:30.898-07:00The idea that nominal stability leads to complacen...The idea that nominal stability leads to complacency strikes me as odd. If stability of one important sort is generally expected is it not rational to think risk is lower than otherwise?<br /><br />Thinking in terms of interest rates as the sole indicator/instrument of monetary policy is needlessly confusing.<br /><br />Oddly enough the only explanation of the "fiscal transmission mechanism" (rather than the monetary one) that makes sense to me is due to interest rates is that increased government borrowing leads to higher interest rates which reduces the demand for money and is therefore expansionary. Iskandernoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-71518852407604807662017-11-09T20:58:48.527-07:002017-11-09T20:58:48.527-07:00I cannot enlighten you. I don't know either.
...I cannot enlighten you. I don't know either. <br /><br />There is much in orthodox macroeconomics (particularly on monetary side) that does not stand up to scrutiny, although much of the discipline makes sense (EMH, for example). <br /><br />My guess is that the Austrians and Minskyites have to toss EMH out of the window to get their platforms to work. People become irrational in common, and assets or business opportunities become "overpriced." <br /><br />But if one makes common widespread irrationality by captains of industry and finance a foundation for macroeconomic policy…well, let's go to central planning.<br /><br />I still do not know why the hysteria about moderate rates of inflation. You can read treatises from the St. Louis Fed on inflation that hardly come up with any costs, and even those costs are debatable. "The cost of capital is higher," is one. <br /><br />But would not borrowers take on debt knowing they can pay back with cheaper dollars--especially if they can just "hang on" long enough if circumstance go south? So the cost of capital would not deter, in moderate inflation. <br /><br />I would be more comfortable borrowing in a 4% inflation zone than in a zero or deflation zone. If I was bank, I might even be more comfortable lending, since loans are repaid in nominal dollars. <br /><br />-----<br /><br />"In fact, I think one of the many benefits of NGDP targeting would be that fixed income yields would be high, which is exactly what the global economy could use right now."--KE<br /><br />Not sure about this. Why are high fixed-income yields good?<br /><br />I happen to be a market monetarist, though I would err on the side of growth as a rule. That is a 5%-6% NGDPLT.<br /><br />But the global supply of capital is enormous. Maybe interest rates "should" be low. The passive investor does not have anything valuable to offer, since capital is abundant, and I suspect, always will be as the globe develops. More savings in higher-income nations. <br /><br /><br /><br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.com