The Bond Markets Have Priced in the “Economists”

I’ve frequently argued that the Great Recession was caused by macroeconomists, not bankers.  Ryan Avent found a gem that perfectly illustrates my hypothesis:

A remarkable piece in the  [2006] New York Times commented:

Economists applauded the Bank of Japan’s interest rate increase, the first in six years, as a long-awaited signal that Japan’s $4.6 trillion economy is finally getting back on track. 

They said that by moving pre-emptively on Friday, long before a return of inflation is likely to became a threat, the central bank was also hoping to demonstrate that it was watching prices carefully, and was therefore up to the task of stewarding Japan’s economy, the world’s second largest after the United States.”

I wish they would have named the “economists” who were applauding.  I’d guess they were the same ones who applauded when the Fed raised rates in 1937, only to drop them to zero again in 1938.  And when the BOJ raised rates in 2000, before cutting them back to zero in 2001.  And when the ECB raised rates last spring, before cutting them again a few months later.  And they’ll be applauding when the Fed raises rates prematurely.

All one needed to do was look at the Japanese bond market to know that inflation was not just around the corner.

The US bond markets have also priced in the pernicious influence of these unnamed economists.  Ten year bonds yield about 1.5% and the 30 year bond yields about 2.6%.  That can only mean one thing; the bond market expects low NGDP growth for as far as the eye can see.  They understand that any pickup in NGDP growth would lead the Fed to tighten, and we’ll drop right back into the slow growth track.

Woodford showed that current AD is determined by future expected monetary policy.  Because the median economist in America, Japan and Europe has a flawed model of the economy, they will continue to enact bad policies.  The expectation of those future bad policies causes AD to be low right now.

You’d think that there would be soul-searching among the “economists” who applauded the BOJ awful 2006 decision.  But don’t count on it.  Their view of reality is flawed.  Indeed I’d wager that the mistake that seems obvious to Ryan and I, doesn’t even register in their consciousness.  I’m sure they sleep comfortably at night, while I toss and turn thinking about where we are headed.

Update:  Commenter Johnleemk sent me this list, which is just a tiny percentage of the economists who either think money is too easy, or about right.  It’s from 2010, so we already know they were completely wrong.  Perhaps someone could check to see how many have admitted to being wrong in 2010.

To: Chairman Ben Bernanke Federal Reserve Washington, DC

Dear Mr. Chairman:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.


Cliff Asness AQR Capital

Michael J. Boskin Hoover Institution, Stanford University Former Chairman, President’s Council of Economic Advisors

Richard X. Bove Rochdale Securities

Charles W. Calomiris Columbia University Graduate School of Business

Jim Chanos Kynikos Associates

John F. Cogan Hoover Institution, Stanford University Former Associate Director, U.S. Office of Management and Budget

Niall Ferguson Harvard University Author, The Ascent of Money: A Financial History of the World

Nicole Gelinas Manhattan Institute & e21 Author, After the Fall: Saving Capitalism from Wall Street—and Washington

James Grant Grant’s Interest Rate Observer

Kevin A. Hassett American Enterprise Institute Former Senior Economist, Board of Governors of the Federal Reserve

Roger Hertog Hertog Foundation

Gregory Hess Claremont McKenna College

Douglas Holtz-Eakin Former Director, Congressional Budget Office

Seth Klarman Baupost Group

William Kristol Editor, The Weekly Standard

David Malpass GrowPac, Encima Global Former Deputy Assistant Treasury Secretary

Ronald I. McKinnon Stanford University

Joshua Rosner Graham Fisher & Co., Inc.

Dan Senor Council on Foreign Relations Co-Author, Start-Up Nation: The Story of Israel’s Economic Miracle

Amity Shlaes Council on Foreign Relations Author, The Forgotten Man: A New History of the Great Depression

Paul E. Singer Elliott Management Corporation

John B. Taylor Hoover Institution, Stanford University Former Undersecretary of Treasury for International Affairs

Peter J. Wallison American Enterprise Institute Former Treasury and White House Counsel

Geoffrey Wood Cass Business School at City University London

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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