Thursday, November 05, 2009
So I find myself wondering -- if America used the million, milliard, billion, billiard long form, would we view the current amount of spending in government with more trepidation or less?
Origins from Wiki.
Monday, September 14, 2009
Bank Rossii cut the refinancing rate to 10.5% from 10.75% (note, double digit) and lowered the repurchase rate charged on central bank loans to 9.5% from 9.75%, effective September 15. Russia's benchmark refinancing rate is the second highest in Europe, after Serbia's and Iceland's who pay 12%.
Russian output shrank a record 10.9% last quarter after a decline in global trade undermined demand for Russia's commodity-reliant exports of raw materials from steel to oil....Consumer prices rose an annual 11.6% in August.
If we continue on the Democrats' desire for centralized control, we will have far more to worry about than just the debt we're leaving our kids and grandkids.
Monday, July 20, 2009
But Henderson appears to have had a change of heart, calling the Fed "illegitimate," even while maintaining it is more transparent than most government agencies. Meanwhile, Arnold Kling and Alex Tabarrok argue that the Federal Reserve suffers from a kind of regulatory capture by commercial banks. Here's Kling:
I perceive signs of what Danny Kaufmann calls "cognitive capture" of the Fed by the banks that it regulates. That is, the Fed sees the world through the eyes of the executives at large banks.And Tabarrok, at greater length:
But neither point out that the Federal Reserve is in fact owned by commercial banks, specifically for that reason. The problem with a dependent central bank is a time-consistency problem. (Not long ago we thought enough of it to award a Nobel to its discoverers.) Central banks can promise price stability but, when they are subject to an electoral check, they can't deliver on the promise because of the possibility of temporarily raising output in advance of an election and having inflation come later (the "political business cycle", a topic I first wrote about in graduate school.) Central banks cannot make credible commitments to price stability without overcoming the problem.
The primary reason that independent central banks are better at controlling inflation is that absent direct political control the default selection mechanism favors bankers, i.e. lenders, people whose interests make them more favorable towards lower inflation.
Thus, independence is a political decision that favors lenders in the decisions of monetary policy. Now, depending on the alternatives, there may be good reasons for making this choice but we should not fool ourselves into thinking that we have depoliticized money. We should not be surprised, for example, that "independent" central banks tend to make lender of last resort decisions that protect banks and bankers.
It's true that a central bank could find another mechanism to overcome the problem, such as the Reserve Bank of New Zealand's contract that fires a central bank governor if he allows inflation to rise above a certain rate. Tabarrok notes this example as a case where the central bank does NOT have independence. But independence means two different things: It can mean independence of choosing its goals, or it could mean independence in choosing the instruments by which it meets those goals. You can tell me to keep inflation below 2% or I'm fired, but you permit me to use whatever means I wish to meet that target. Tabarrok misfires in calling the New Zealand central bank dependent. See Carlstrom and Fuerst .
In the absence of a contract, one can choose instead to delegate monetary policy to someone who can overcome the time inconsistency problem. The old story we use in classrooms is to think about a father taking his two sons to a baseball game; the family goes once a year; the stadium is a three-hour drive from home. Brothers often fight in back seats, so the father turns around and tells them "stop or we won't go to the game." Of course the sons don't believe Dad, because Dad loves baseball, they know he does, and turning the car around is too painful for Dad. Delegation means giving the tickets to Mom, who let's say doesn't like baseball. "If you don't behave, Mom will not give us the tickets to go to the game." (I can't take credit for this metaphor -- it was in an intermediate macro text I read and used, but I can't find where I got it on my bookshelf. Apologies to the originator of that story.)
A government official cannot make a credible commitment to price stability, because if some price shock happens the cost of keeping the commitment is high unemployment which is painful to the government official. So he delegates monetary policy to someone who cares less about unemployment than he does, and cares perhaps more about price stability. That is in fact exactly what a commercial banker prefers.
Federal Reserve governors are chosen by the president subject to confirmation by the Senate. But Federal Reserve bank presidents (of the twelve branches) are chosen by the members of the Fed, the commercial banks. They are typically more inflation averse than the governors (see Havrilesky and Gildea , for example.) In some cases the central bank's board is entirely chosen by bankers (see Swiss National Bank for example.)
The reasons for central bank independence at this particular time in history are, I believe, profound. James Hamilton writes:
The reason I find that loss of Fed independence to be a source of alarm is the observation that every hyperinflation in history has had two ingredients. The first is a fiscal debt for which there was no politically feasible ability to pay with tax increases or spending cuts. The second is a central bank that was drawn into the task of creating money as the only way to meet the obligations that the fiscal authority could not. Every historical hyperinflation has ended when the fiscal problems got resolved and independence of the central bank was restored.I return to the question I asked before: if you abolish the Fed, what do you replace it with? Tabarrok's complaint that even delegating to commercial bankers makes it political would seem to lead to a complaint about governments maintaining a monopoly over money. Would only competitive money satisfy the objections? I suspect it would prevent hyperinflation, but multiple monies are also likely to sacrifice many scale economies that allow our current level of financial sophistication.
Wednesday, February 11, 2009
We have discontinued the liquidity-adjusted TIPS expected inflation estimates for the time being. The adjustment was designed for more normal liquidity premiums. We believe that the extreme rush to liquidity is affecting the accuracy of the estimates.Interestingly, yesterday the New York Fed held a conference inflation-indexed securities and risk management. Fleming and Krishnan presented an interesting paper on the TIPS security. They explain that the spread between same-maturity Treasuries and TIPS actually contain two premia, one for liquidity and one for inflation. They normally work in opposite directions. But look here, at the last 12 months for the 10-year bonds indexed (blue) and unindexed (green).
Now the inflation risk would seem to be higher; if you are in a world where some people shout "hyperinflation!" and others shout "deflation!", you can be pretty sure inflation uncertainty went up. That would push down the yield on the inflation-protected security, because the buyer is transferring that risk onto government. But if the TIPS market is less liquid -- even more so with the flight to safety underway -- we have a big counterweight. After seemingly inflation risk was increasing in December and early January, we're seeing some closing of the gap as real yields appear to be increasing -- or the liquidity premium rose -- or the deflationary threat is perceived more real -- or...
And if the FED is doing the Twist around the 10-year note, I have no idea what the spread means. But one thing is clear -- a gauge of expected inflation has been disrupted in the market.
Tuesday, February 03, 2009
In an attempt to try to tame hyperinflation and avert total economic collapse Zimbabwe's central bank revalued its dollar again on Monday, lopping another 12 zeros off its battered currency.Steve Hanke estimated last last year that the annual inflation rate had reached 6.5x10108 percent through November last year. The government has given up trying to force shopkeepers to keep the Zim$ as the sole medium of exchange. According to CNN, more than Zim$300 trillion is needed to buy one U.S. dollar.
Reserve Bank of Zimbabwe Governor Gideon Gono announced the new currency moves on Monday, adding that some foreign exchange controls will be relaxed and gold producers now can sell bullion directly and not to the central bank as in the past.
This is the third renomination of the Zim$; ten zeroes were stripped off the currency last August. Will their inflation reach the Hunagarian pengo for the record?
Tuesday, November 18, 2008
In Zimbabwe, where it will be a race to see if collapse or the record for hyperinflation comes first.
The latest figures put the country's annual rate at 516 quintillion per cent � 516 followed by 18 zeros � overtaking Yugoslavia in 1994 and putting it behind only Hungary in 1946.
With goods unavailable and official statistics widely distrusted, the Cato Institute in Washington calculated the figures based on exchange rate movements and market data.
In post Second World War Hungary monthly inflation reached 12,950,000,000,000,000 per cent, with prices doubling every 15.6 hours � Zimbabwean prices are currently doubling every 1.3 days.
Stores are only accepting dollars and SA rands now, so if you don't have foreign currency you are probably doing business only by barter. (One ISP is selling connectivity for gas.) And collapse has lead to an outbreak of cholera, and gold production has fallen flat.
The end game may be afoot, if this rumor in a South African paper about Gideon Gono, the Reserve Bank of Zimbabwe governor, is true:
When learned that Mugabe had reluctantly handed over the finance ministry to Morgan Tsvangirai, of the Movement for Democratic Change (MDC), he marched straight to the US Embassy, where he told officials he would give them details of the looting of the country by Mugabe via share transfers and foreign exchange deals. In exchange, Gono requested 5-million and residence permits in a western country for himself, his wife and his mistress.Will Mugabe's bag man turn his boss in to the US?
Monday, August 18, 2008
It's worth remembering that this currency shortage doesn't mean that there's not enough currency. Rather, there is so much money that nobody wants to use it. (cf. Hans Sennholz.)
Bidders (at a car auction) must put down a deposit of 1,000 liters (220 gallons) of gas coupons, worth about $1,500 at the current gas price in Zimbabwe, and pay the rest in coupons when they pick up their purchases.
Zimbabweans face acute shortages of local currency. Already gas coupons can be used to pay some household accounts. Many businesses also pay workers part of their earnings in scarce foodstuffs, or demand dollars for purchases, which is illegal.
From the same story, the removal of zeroes from the currency had as expected no effect, but
There is thus not only uncertainty about which currency gets used as the medium of exchange, but also what numeraire to use. At these levels, the output costs of hyperinflation must be huge.
Obsolete coins also have been revalued, sending Zimbabweans hunting for coins they squirreled away in recent years.
Shops battled to count heaps of coins, causing long lines at checkout counters. One enterprising Harare business on Tuesday advertised coin weighing machines that even banks had discarded after coins went out of circulation in 2002.
Shopping and visits to cafes and restaurants became further confused this week by a range of different exchange rates used against the U.S. dollar.
On Wednesday, banks quoted the official exchange rate at about 10 new Zimbabwe dollars (1 billion old Zimbabwe dollars) to a single U.S. dollar. Businesses quoted an exchange rate in new dollars of between 25-1 and 100-1.
Wednesday, March 26, 2008
So the question was, what causes an increase in the supply of money? Not too long ago reaction functions were all the rage, replaced by Taylor and McCallum rules, but basically making the money supply or a policy interest rate a function of observed economic phenomena. What's in those functions? "Policy choices", you say, and I say "sure, but why did you make those choices?" We argued that the institutions of a country mattered for that; so too do the preferences of the polity. Germany has a greater aversion to inflation than Italy; it chose institutions that expressed that preference. Thus the things that initiated monetary accommodation -- that led to the monetary expansion that sustained the inflation -- could be different things in different places. My co-author and I share an aversion to one-size-fits-all explanations of inflation.
But I never found this a terribly satisfying explanation. Why do Germans hate inflation more than Italians? Sure, the Germans had hyperinflation, but the Hungarians had worse -- are they somehow more foolish than Germans? Made no sense to me. And so when the paper drew rejection letters from several fine journals, we got the message: Bad idea, go back and try again. We went back, came up with different stuff, moved on.
I write all this as prologue to reading John Palmer's explanation of the current macroeconomic situation.
Every time I look at the data, it seems pretty clear to me that if aggregate demand is pushed upward, then in the short run the economy will experience reduced unemployment rates and (often with a lag) higher rates of inflation. During such a period, the unemployment rate drops below the natural unemployment rate (or the NAIRU), and that seems pretty much like what the North American economies were experiencing during the past few years.And I keep reading that, and I ask: what initiated that increase in aggregate demand? He's suggesting that the inflation is, in the old language of my grad school days, demand-pull. But what was the first thing that pulled demand? War spending? Investment? Housing boom? Or perhaps the first shock came by a slowdown in productivity, which led to a cost-push inflation. Which is it?
Commenting on that post, Mike Moffatt says that "treating the current situation as a demand-side problem is terribly misguided." But even a supply shock is often accommodated by easy money because that's what the system prefers; the economy's closeness to a national election affects that choice. So too does the possible rapid loss of liquidity in the system, which is what I think Arnold Kling means when he says "The central bank matters more as a lender of last resort than as a monetary authority." If the central bank faces a suddenly illiquid financial system, it may accommodate inflation in order to provide liquidity. Some might see that as seat of the pants monetary policy, but it feels vaguely familiar.
John's story, as I read it, seems to assume a constant level of full-employment GDP. I mentioned the productivity slowdown before -- but even there, it's growing more than it did in the 1970s. knzn suggests it's actually better than you think.
Thursday, January 17, 2008
President Robert Mugabe's government, stricken by chronic hyperinflation, announced Thursday it was to introduce a 10 million Zimbabwe dollar note. Economists said they believed it was the highest denomination of any currency in the world.I am going to guess, following Larry White's suggestion, that price increases in Zimbabwe are exceeding the rate at which the central bank could print currency. I have a hard time finding money supply data for Zimbabwe post 2004 so it's hard for me to show this, but it appears money supply growth was under inflation in 2005 and 2006 from what data I can find. Therefore real money supply is falling. Using more zeroes will help monetary growth to catch up.
Central bank governor Gideon Gono was quoted on state radio as saying that the bank would begin releasing a set of three new notes - 1 million, 5 million and 10 million - on Friday.
The issue of new notes follows nearly three months of banking chaos as cash dried up and queues, sometimes hundreds of metres long, became a permanent feature outside commercial banks.
Of course, Zimbabwe has four zeroes to go to catch up with the Yugoslav dinar. But with inflation worth less than 0.05% of what it was 1 year ago, it might set the record yet.
Friday, October 26, 2007
Seeking to tame galloping food prices ahead of parliamentary elections in early December, the Russian government on Wednesday signed an agreement with major food producers instituting temporary price controls on basic products.
A tersely worded statement posted on the Web site of the Agriculture Ministry said the producers had signed the agreement �at their own initiative.�
�Producers and retail organizations, understanding the social responsibility of business in the balanced and stable development of the consumer market in Russia, will take necessary measures over the course of the agreement to ensure that the most vulnerable strata of the population can purchase products at acceptably stable prices,� the statement read.
Prices for products like cheese and vegetable oil have jumped and even doubled in some regions in the past two months.
Here's the Nixon period from Commanding Heights. Arthur Burns at the Fed raised the money supply 13% in that period in advance of Nixon's re-election. M2 in Russia at this time is up almost 28%.
A deep recession followed the relaxation of price controls in the US in 1974-75. Those investing in Russia are hereby warned.
(h/t: Greg Mankiw.)
Monday, June 25, 2007
I said at the beginning that some legislators want to have their cake and eat it too.So why, do you think, doesn't the DFL do this?
What did I mean? Simply this: If big-spending legislators want to have inflation included in current forecasts, all they need do is pass laws mandating that all programs get automatic inflationary increases.
Personally, I think this would be a terrible idea. Yet even big-spending legislators are unwilling to propose this, in part because they might have to make unpopular spending cuts the following year if there was not enough tax revenue.And to those who think having inflation would the budgeting easier, Knoblach also has some tough words:
It is far easier to advocate for a forecast that assumes everyone gets an inflationary increase, than to have to make the tough choices that might come if you pass laws that actually give one.
Most recipients of state tax dollars assumed they would get an inflationary increase, and then added their wish list on top of that assumption when presenting their budget request.Having no inflation in the expenditure forecast, except for those spending items indexed by law, provides more rather than less clarity.
In addition, determining the actual budget base for an agency was confusing. Legislators weren�t always sure if the base budget numbers they received were the amount an agency was legally authorized to spend, or authorized spending plus inflation.
Monday, June 11, 2007
Minnesota has performed very well over the years because we lived by a guiding principle regardless of which party was in control. That principle was that we allowed fiscal experts to create a budget forecast that gave a straightforward, honest picture of our state finances. This gave us as a baseline snapshot of where we were headed if nothing changed.This gives the impression that Governor Pawlenty's was the first administration to remove inflation from budgeting. That is in fact wrong. The law that required inflation of expenditures was only passed in 1994 (Chapter 587, Article 7, Section 2, Subd. 1). When the law was changed in 2002 (Chapter 220, Article 13, Secs. 1 and 2), the House Fiscal Analysis unit created a document that discusses the use of "planning inflation". I highly recommend people to read it. Two sentences jump off their pages:
Even though the inflation adjustment is applied to most appropriations, the Department of Finance has always argued that inflation should not be seen as a commitment to adding funding to any particular program to offset the impact of inflation in the next biennium. (page 4)If there is no commitment, and no building into current law or base budgets, how exactly can Auditor Otto claim that a budget with inflation " gave us as a baseline snapshot of where we were headed if nothing changed"? That would be at least a mischaracterization of the history of inflation increases.
[T]he inflation increases are all increases that have not been built into current law
formulas or base budgets. (p. 5)
The beauty of this system was that it allowed the fiscal experts to give Minnesotans, lawmakers and the media an honest assessment of our financial picture.As the quotes above would show, this is not true. The experts did not want to have that data included. And according to those I talk to, they still don't.
Politicians did not intrude in their work...And yet they passed laws first requiring them to inflate expenditures, then to require them not to. Pre-1991, Finance sometimes included some estimates and sometimes did not. They applied it to some expenditures at first, and then to all of them. As the House Fiscal document explains, they even ended up giving two inflation adjustments to local government aid, since there were inflation adjustments in the LGA formula, which were applied after the general inflation adjustment was made. (No wonder the LGA crack addicts have been jonesing for a new fix.)
Today, and throughout the time of the current administration, we have allowed politics to enter into the forecasting process. We no longer get a straightforward assessment of our financial baseline.No, politics has always been there, as House Fiscal explains.
Planning estimate inflation has also been a tool to provide more flexibility for a Governor and Legislature in assembling a new budget. The inflation creates a cushion of several hundred million dollars that is already counted as spending in the budget forecast. For example, in the November 1998 forecast for fiscal years 2000-01, almost $800 million was set aside as planning estimate inflation. That amount allowed the Governor to make budget recommendations for $800 million of spending above the base level budget that did not count as new spending relativeIn other words, Governor Ventura could hide new spending without being accountable for it.
to the budget forecast.
As I noted the other day, the budget does include an inflation measurement, it just puts it below the line rather than above the line in terms of stating the current surplus or deficit. An accurate baseline is being provided. What they want is the cover for spending increases under the rules that Carlson and Ventura (and no previous governors) have had. Had you taken the opportunity to read the history, Ms. Otto, rather than hang around DFL fundraisers, maybe you'd know that.
Monday, June 04, 2007
One type of forecasting is forecasting of an event. The revenues generated by the tax code are the result of an event -- what happens in the economy -- multiplied by a vector of tax rates that collect revenue based on a matrix of flows of income and stocks of wealth or assets in the hands of economic agents. The tax rates are constant; the movement in tax bases comes from the Global Insights forecast (as I mentioned earlier). Insert the numbers from that economic forecast in the matrix, plug and chug, and there you are, a revenue forecast.
What I said on the air was that you can't forecast decisions. That's not right exactly; there's a very good example of decision-forecasting in the Taylor Rule, which is a forecast of the Federal Funds rate target set by the Federal Reserve as the basis of its monetary policy. It is a description of how monetary policy was being set under the leadership of Chairman Greenspan. (Does it describe Chairman Bernanke? Look at the graph and decide for yourself. The Taylor Rule, properly understood, is not a mechanism that predicts an economic event but a heuristic used to try to understand how the FOMC is deciding policy at that point in time. The rule is not independent of the committee whose behavior it is forecasting.
Legislatures and executives do not automatically adjust spending to inflation. The budget forecast provided, as noted by the House Fiscal Analysis Department, is the budget's structural balance, i.e., "how much more is being collected than spent before any tax or spending decisions are made." (Emphasis added.) They may do so as an element of policy; the budget forecast provides information on what additional spending would occur if all non-indexed items were to be raised by inflation as measured by CPI. But is it appropriate for an arm of the executive branch to forecast a policy decision of the legislative branch? I think it is not.
There is, by the way, a very simple solution. The Federal government has both an Office of Management and Budget (reporting to the executive branch) and a Congressional Budget Office. If the DFL wants a forecasting arm that reports budget figures the way they would like to read them, have the Senate and House Fiscal Analysis Department provide you that information. What the DFL is doing instead is censoring the information the Finance Department can provide, but not allowing it to report spending without inflation. This is a bad policy.
($ in millions)
|Estimated Inflation (CPI)||$320||$700||$1,060||$1,430|
The impact of inflation is not reflected in expenditure projections. Inflation for FY 2008 and FY 2009, based on the consumer price index, is expected to be 2.0 and 2.2 percent.Inflation then was going to be about 4.25% for the first biennium. The argument isn't that they are hiding the information. The issue is that the DFL leadership wants the inflation number cooked in above the line, so that the budget would look like this:
For FY 2010 and FY 2011 CPI growth rates of 2.0 and 1.9 percent are projected. The inflation forecast is down slightly for FY 2008, but about 0.2 percent for FY 2009-11.
Using current law projections, if spending increases at the rate of inflation, revenues and spending will remain in balance through FY 2011. Historically increases in spending have been greater than those attributable to inflation alone.
So what's the big deal? Pretty clear: Changing the way in which it was reported would have change the tenor of the debate. Rather than having almost no "new money" to finance its new priorities, the revised reporting would have allowed more campaigning, more editorials from compliant (and under-educated) columnists that taxes needed to be raised. Had the same inflation factor been applied to education, they would have screamed that K-12 had been cut (I know, they will anyway.)
Here for example is a paragraph from the faculty union's lobbyist's email to us about the higher ed bill; I've highlighted the inflation parts.
The Governor started off the session proposing $123 million in new funding for the MnSCU system�and $55 million of that was one-time funding that did not continue into the next biennium. He proposed no money for inflation, and $25 million of his proposal was for a one-time �performance bonus.� The legislature listened to the systems, students and faculty, and focused their funding on maintaining and improving the core infrastructure of MnSCU. The House passed a bill providing $168 million in new funding for MnSCU. The Senate passed two bills that together would have provided $187 million for MnSCU. They compromised in conference committee at $150.7 million.Budgeting into a base appropriation is an attempt to set the bar higher each period. The budget proposals from the governor's office used a $1 billion budget surplus from the current biennium, thus those were one-time monies which Pawlenty offered to use in the appropriate way: as one-time expenditures. By budgeting then as not one-time money, the "tail" of the bill is higher, meaning the anticipated surplus in FY 2010-11 is less than it would have otherwise been, making the probability of a tax increase in that period higher than it otherwise would be.
The Governor vetoed the first higher education bill in its entirety, forcing the DFL higher education chairs to make some tough compromises on both policy matters (the Dream Act, ACHIEVE, and performance funding) and funding to get the Governor to support a second bill (there weren�t enough DFLer�s in either the House or Senate to vote to over-ride the veto). However, through patience and persistence, the higher education chairs were able to put together a bill that the Governor ultimately signed. The appropriation for the MnSCU system in the final bill was not only $28 million above what the Governor originally proposed�almost none of the money is �one time� funding.
Putting up each number by an inflation factor, contrary to Larry Pogemiller's assertion, is in fact hiding additional costs of government. And what that's about, as much as anything, is a lack of growth in government employment. An inflation factor in the budget puts a base under wages for those employees.
Thursday, May 24, 2007
Seriously, in one veto you stop this inflation nonsense and the corporate welfare to Thomson West and MoA? And frankly, Scarlett, I don't give a damn about guaranteeing costs for the RNC. Why does a government have to do that?
The tax bill contains many items Pawlenty supports, including tax breaks for expansions of the Mall of America in Bloomington and Thomson West Publishing in Eagan, a $39 million state guarantee for costs of the 2008 Republican National Convention in St. Paul and tighter tax rules for firms with foreign operations.
But Pawlenty opposes a section that returns projected inflation to the state's official budget forecasts. To eliminate it, he would have to veto the entire bill, because line-item vetoes are allowed only for spending provisions, not policy. He warned legislators before the bill was approved that the inflation provision could bring down the whole measure.
Of course, the corporate types will also be pushing for the foreign operations tax veto as well; I think this is as good as dead. $39 mil for the RNC guarantee (which, to be clear, doesn't cost us anything except in very dire circumstances) isn't enough sugar to swallow this lemon.