August 15, 2011
Governor Perry on Monetary Policy
From the Washington Post:
..."If this guy [Fed Chairman Bernanke] prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”
Perry continued by saying that printing more money would be "devaluing the dollar in your pocket, and we cannot afford that. ..."
The Philadelphia Fed's August Survey of Professional Forecasters was released on Friday. Ten year CPI inflation expectations are presented below.
Update: 9:12AM Pacific 8/16: Some readers have questioned the reliance on survey based expectations (these are probably the same readers who take at face value surveys of purchasing managers, etc.). In any case, here are some market based indicators:
Figure 2 from Christensen and Gillan (June 2011).
Figure from Lucca and Schaumberg (August 2011).
Update 2: 11AM Pacific: Commentary by [RA/Free Exchange] and [Economists View], [Grunwald/Time], [Sargent/Plum Line]. In my view, heated rhetoric of this nature regarding monetary policy is not constructive. 
Posted by Menzie Chinn at August 15, 2011 10:23 PMdigg this | reddit
Well, he does have protect his monetary policy flank from competitor Ron Paul.
Posted by: Phil Rothman at August 15, 2011 10:44 PM
What is it with the GOP? They don't want fiscal stimulus (rightly so in my mind), but they don't want monetary stimulus either. Are they all Austrian now? I don't buy GOP = anti-intellectualism, but this is really really getting my goat. Can't wait to read what Sumner has to say about this. I'm sure it will be suitably vicious.
Posted by: Manny C at August 16, 2011 01:08 AM
Money printing is treacherous in a sense that it spells the beginning of the end of the dominance of America in the world.
Posted by: Aus at August 16, 2011 01:23 AM
You seem to be trying to refute Perry's claim by referring to current inflation levels.
There is little doubt that inflation would be lower, or that there would be deflation without QE. After all one of the Fed's stated reasons for QE is prevention of deflation.
Therefore Perry is correct to say that QE devalues the dollar in your pocket, relative to its likely value in the absence of QE.
Posted by: Paul Andrews at August 16, 2011 01:43 AM
Maybe he was talking about printing Confederate script.
You've got to marvel at the chutzpah of someone who would accuse the Fed chair of treason when only a few months ago he was not only openly talking about secession, but actively pumping secessionist rallies in Austin...all in the name of winning a Republican primary.
Posted by: 2slugbaits at August 16, 2011 02:04 AM
FWIW, when is Bernanke going to print money? Unlike what Perry thinks, not a ounce has been printed to this date. Why, how dare I say that. We must force a overvalued currency at all costs........to the day the overvaluement causes it to collapse. Then Perry will go to Morgan and ask for a bailout like his Democratic cross town rival and spiritual soulmate, Grover Cleveland.
Posted by: The Rage at August 16, 2011 02:11 AM
I am so conflicted!
I had just written a post trashing Perry. The man is clearly a RINO, a crony capitalist, and not too bright.
But then he threatens to go medieval on Zimbabwe Ben! What am I to do?
Posted by: W.C. Varones at August 16, 2011 03:28 AM
the joke is, of course, that the professional forecasters are about 200 basis points above the fixed income markets... just look at the yield on the 2 year
Posted by: john haskell at August 16, 2011 03:32 AM
The tough-guy facade works. I suppose if you are angling for the votes of an angry mod, an even tougher facade works even better. Sad, though, that he has decided (following the example of his predecessor in the governor's office, perhaps) to sound like a tough-guy idiot.
One other thought that occurs to me is that he is doing exactly what he is accusing the Fed of doing. By making violent noises, he is trying to sway monetary policy for political ends. Just like Republicans in Congress, Perry thinks a bad economy is good for his prospects. How else is Bernanke "printing more money to play politics"? Perry is tacitly acknowledging that monetary stimulus might work, and so doesn't want monetary stimulus.
He's just the kind of traitor this country needs in the White House.
Posted by: kharris at August 16, 2011 04:41 AM
The great thing about economic forecasts is that they are always so accurate, especially the ones that cover the distant future.
Luckily our wise economic professoriate don't do anything so tricky and so vulgar. Predictions based on models are so much more elegant and useful.
Posted by: C Thomson at August 16, 2011 04:45 AM
But look at the price of gold! Given the reference to the election and playing politics, it's pretty clear that what he's saying is that he doesn't want Obama rescued by an upturn in aggregate demand. Mind you, Obama doesn't seem to want that either, judging by his reluctance to make an issue of it.
Does Perry see Bernanke as Atticus Finch, thwarting the will of the people?
Posted by: Kevin Donoghue at August 16, 2011 05:22 AM
Few figures and charts may help as guidance for judgement.
Even though below figures are up and running they provide for the time of the foot print.The incumbent Fed chairman had no time to print so much money.
FEDERAL RESERVE statistical release
Flow of Funds Summary Statistics First Quarter 2011
At the end of the first quarter of 2011, the level of domestic non financial debt outstanding was $36.3 trillion; household debt was $13.3 trillion,non financial business debt was just under $11 trillion, and total government debt was $12 trillion.
If and when tempted to make a comparative analysis,the ECB is providing for the figures at comparative GDP.
ECB Statistical Data Warehouse
If and when tempted to make a weighing:
BIS Detailed tables on preliminary locational and consolidated banking statistics at end-March 2011
Table 2A: External positions of banks in all currencies vis-à-vis all sectors In individual reporting countries (in billions of usd)
Reporting countries Dec 2010 Mar 2011
United Kingdom 5,510.3 5,771.4
United States 3,582.1 3,690.7
At time of the official recognition of the financial crisis, a Pareto distribution as applied to incriminated assets was a guidance for the magnitude of the non performing loans.
Around one trillion usd for the mortgage loans in USA and more to assess on the other sub categories (MA,consumers loans and credit)The US CB is meeting with its obligation of lender of last resort to banks and treasury.One may wonder why banks are paying dividends,when they are not profitable.
Aware of the potential chisme and with all due respect to Professor Hamilton and Professor Chinn.
M3 as recorded by J Williams
M3 as recorde by the ECB
It may be opportune to leave the conclusion to more knowledgeable people, when it comes to the causes of this financial crisis.
"Alan, thank you for raising the respect which others give to our discipline of economics and our profession of central banking"
M.King Bank of England governor Jackson hole 2005.
Posted by: ppcm at August 16, 2011 05:36 AM
RIP independent central bank.
Posted by: Patrick at August 16, 2011 05:37 AM
The money printing has devalued the dollar..one need only look at the numbers. There are far too many on Wall Street and in economics who believe expansionary monetary policy solves all problems or even makes current problems bearable (with no consequences and in fact make matters worse). Some just like money illusion to hide the facts from the public.
Posted by: Hondo at August 16, 2011 05:52 AM
Ever consider that the price changes easing is causing and spending decisions it allows create uncertainty and increase deflationary pressure as the broader population's discretionry income and ability to save and invest erode?
Posted by: aaron at August 16, 2011 05:52 AM
And pay debts.
Posted by: aaron at August 16, 2011 05:53 AM
Um.....does he know the difference between "treacherous" and "treasonous"?
Posted by: SvN at August 16, 2011 05:53 AM
Right now, the Fed is flirting with 0 for 2 in forecasting if the economy goes back into recession.
Posted by: Steven Kopits at August 16, 2011 06:05 AM
Are you saying that you believe these 10-year inflation predictions are accurate?
I suspect that one of the reasons that CPI forecast accuracy falls during periods of high inflation is that predictions of future inflation lag actual inflation growth. If so, then we should expect these predictions to remain low until actual inflation rises and forces the forecasters to adjust their estimates....
Posted by: CarlC at August 16, 2011 06:10 AM
A dead simple chart; an logical point than cannot be refuted. However, most people have no clue what the chart says or what you mean to point out. Sometimes you also have to print the message in small, direct words, too.
Posted by: wallyfurthermore at August 16, 2011 06:11 AM
In Harrisburg, Pa today. The contrast with Houston couldn't be greater. The cars in the parking lot, the age and condition of the hotels and offices, the availability of a decent cup of coffee. Only the engineers look the same.
Texas has it's problems and limitations, but today, the up-and-coming city in the country today has to be Houston.
Posted by: Steven Kopits at August 16, 2011 06:12 AM
Any effort to help the economy is "playing politics."
Devaluing the dollar boosts oil prices which helps Texas economy. In 2008, the boost 130 oil gave Texas is very apparent. It softened the downturn in Texas. On this blog, I read $1 fall in dollar causes oil to rise $1.3. Think it was Prof Hamilton's calculation but I'm not sure.
Fips Area IndCode Industry 2008 06 California 101 All industry total 1,911,741 06 California 107 Oil and gas extraction 17,644 48 Texas 101 All industry total 1,202,104 48 Texas 107 Oil and gas extraction 113,611
Fips Area IndCode Industry 2007
06 California 101 All industry total 1,874,783
06 California 107 Oil and gas extraction 14,011
48 Texas 101 All industry total 1,147,970
48 Texas 107 Oil and gas extraction 86,643
Posted by: joe at August 16, 2011 06:19 AM
Only between now and the election. After the election and he wins, he will want him to do a lot. That won't be political, just patriotic.
Posted by: Lord at August 16, 2011 06:22 AM
Another candidate offers a much different assessment of the economy and solutions:
Posted by: Bruce Hall at August 16, 2011 06:28 AM
If you will vote for Obama, you want Perry or Bachmann as the candidate. Perry is on record opposing Social Security; it's in his book. He cannot be elected with that kind of thing. He's said that nearly everything Congress does is unconstitutional, again in writing in his own book. He says lots of things in public.
As for Bachmann, she'll motivate huge numbers to turn out against her and her beliefs.
Most Americans by far don't want a religious zealot as President.
Posted by: Jonathan at August 16, 2011 06:35 AM
So Perry is technically correct in arguing that Fed money creation is lowering the value of the dollar in your pocket, relative to what it would have been in the absence of QE2. Okay, stipulated.
And on the larger political question of calling that "treason"? - As opposed to promoting deflation in a moribund, heavily-indebted economy?
Really, why make excuses for these guys? The best you can say (and it's apparently apt in Perry's case) is that they're morons, not scoundrels.
Posted by: Dave L at August 16, 2011 06:41 AM
Having lived in Texas for almost a decade, I can tell you that Perry is "all hat, no cattle" as we say. He likes to talk a lot, but there's really nothing spectacular about him. He very much believes in cronyism and the good old boys' network. I sincerely hope he does not get the Republican nomination; Obama would probably get reelected if he does.
Posted by: Brian at August 16, 2011 06:41 AM
CarlC: If you prefer, you can look to market based indicators, such as the TIPS breakeven rates and the inflation swaps. They both tell you the same thing about inflation expectations. See this Liberty Street Economics post.
Posted by: Menzie Chinn at August 16, 2011 07:01 AM
"So Perry is technically correct in arguing that Fed money creation is lowering the value of the dollar in your pocket, relative to what it would have been in the absence of QE2. Okay, stipulated.
And on the larger political question of calling that "treason"? - As opposed to promoting deflation in a moribund, heavily-indebted economy?"
I am referring to the post, which shows an inflation chart to try to make a point that I believe is incorrect.
I agree that Perry's attitude is inappropriate, but agree with his statement about the dollar.
Posted by: Paul Andrews at August 16, 2011 07:01 AM
Well, ole Rick doesn't have to worry about any dadgum money nonsense. He's got the Bank of Narcoreserves lubricating the Texas Republic to the tune of 30 billion or so (give or take) a year, at least. Why, you go to El Paso or San 'Tone, ain't no such thing as a mortgage anymore. It's all cash.
He's a pathetic idiot, a hypocrite, and quite possibly, the unintended (?) beneficiary of the biggest black economy in the world. That's why Texas is recession proof. Nose candy and la mota.
Posted by: RJS at August 16, 2011 07:29 AM
There is very little about which I feel a high degree of certainty. But one thing I am certain about is that the Professional Forecasters are seriously wrong in predicting 2.5% avg inflation for the next decade. We will be lucky if it isn't double that.
Inflating away the value of our debts & unfunded liabilities is the path of least resistance & therefore the craven way politicians elected by voters [badly educated in govt schools] will choose. In the final analysis, the Bernanke is a politician, beholden to politicians.
Posted by: Bryce at August 16, 2011 08:17 AM
Here's my model, low interest rates shift consumption from the future to the present while decreasing productivity and increasing income inequality.
Low rates are not causing investiment in increased production or cost reducing capital.
People with access to cheap capital bid away future returns, allowing current holders to sell rather than wait. This also allows people with wealth and cheap credit to buy stock before the broader population is able to save money to invest.
Low interest rates only apply to new debt; they are only availible to a small, privlaged minority, so the broader population sees no benefit (propped up house prices aren't helping them, they're still trapped in their mortgages, and the propped up prices may be keeping them in mortgages that are ultimately bad).
Instead of investing in productive capital, investors are using borrowed money to buy commodities. Costs go up, decreasing most people's discretionary income (leaving little room for new products and services) and reducing savings and investment for those without access to cheap credit, and making existing debt more difficult to pay down.
Posted by: aaron at August 16, 2011 08:43 AM
CPI is bunk.
Posted by: Anonymous at August 16, 2011 08:49 AM
Where is the $US v yen graph? The $US v euro graph? The $US v pound sterling graph? The $US v Canadian dollar graph? and the grandaddy of them all - THE $US V GOLD graph?
Posted by: Ricardo at August 16, 2011 08:56 AM
The US dollar is not devaluing. The US dollar was devalued by 47% during Bush's reign of idiocy. The dollar is now bouncing along the bottom. It is currently the currency of choice to short in a "Carry Trade". Short US Treasuries, Buy Euro Debt. Wager is Euro will stabilize.
Posted by: Scott at August 16, 2011 09:11 AM
Menzie, your commenters are plumbing new depths of stupidity. I hope you see the humor in it.
Posted by: jonathan at August 16, 2011 09:34 AM
Anonymous (8:49AM)/David/Dave: Would you happen to have any more thoughtful analysis than that "CPI is bunk"? Do you prefer PCE, PPI, GDP deflator, Shadowstats' massaged data, or your own personally-generated-but-unreplicatable series in your head?
Posted by: Menzie Chinn at August 16, 2011 09:41 AM
I am not quite sure why, but as jonathan noted above, this site has deteriorated badly with respect to the quality of the comments. This used to be a place where people with some actual training in economics and finance and some historical perspective could comment on interesting observations and the occasional early stage model that sought to increase our understanding of the current environment. Now we have people telling us that the inflation rate isn't the real inflation rate; asserting that looking at cherry picked foreign currency differentials means something and making statements that are trivial to demonstrate as historically inaccurate. For example, a trade weighted index of the dollar over the last 30 years shows that the dollar declined significantly in the last few years of the Reagan administration and early George W. admin, rallied a bit during the Clinton years and fell precipitously during the Bush years and has bounced in a trading range since then. Having noted that, I am not sure why it is viewed as a horrific negative that a freely floating currency actually floats according to market movements, or why it should not be obvious that in the long run as the US economy makes up a smaller part of the world economy it will most likely continue a secular decline, and that its value is to some degree currently distorted by the mercantilist policies of China creating a complex relationship for all other freely floating currencies relative to one another. And for all of you who are convinced that markets are perfect and government is evil, why are you so sure the market is wrong about its implied inflation forecast? If markets are so wonderful you should be pleased to know that inflation is under control. If you think the market is so easily misled then that sound you hear is the rest of your intellectual edifice crumbling around you. As Barry Ritholz would say some of you need to GYOFB.
Posted by: Randy at August 16, 2011 10:31 AM
I really think that Bachmann and Perry are in a contest to prove which one is the stupider. When one says something unbelievably idiotic, the other one rushes to top it. And on it goes, a real clown show.
Posted by: Chris at August 16, 2011 10:34 AM
That's the problem Professor if there isn't a nice, neat little model for everything the world just doesn't make sense to you. My response to your post was just as lazy as your response to Rick Perry's concerns, so i don't think you should be so offended.
Posted by: Dave at August 16, 2011 11:51 AM
Menzie, surely it would not be difficult to show how good these projections are historically relative to actual measured inflation?
Posted by: Moopheus at August 16, 2011 11:57 AM
not a huge Bernanke fan but which former texas gov appointed him? anyone anyone?
Posted by: AWH at August 16, 2011 12:08 PM
so if he stays a while at former govs ranch, will Perry send a posse?
for history buffs. Down to zero rates and QE1 was done late 2008 by B under W.
Posted by: AWH at August 16, 2011 12:16 PM
East-coast, Wall-Street-connected Republican vs Southwest, crony-ist, religion-exploiting Republican. One will have the backing of the more traditional, business-oriented corporatist branch of the GOP. The other will have the backing of the social-issues GOP. How does Perry, fresh out of the gate, make clear who he is pandering to? Bash the Fed. That's a gauntlet thrown down to the champion of the squishy, East-coast GOP. Romney has to choose to stand stand up for his class or be dragged all over the issues landscape by Perry. Neither is a pretty choice, and that's just the way Perry likes it.
Posted by: kharris at August 16, 2011 12:38 PM
Moopheus: Reader CarlC provided a link to one assessment, for one-year-ahead inflation rates. I would say it's difficult to do in a sensible fashion -- and I think you would agree -- once you consider how many non-overlapping ten year observations on CPI inflation one observes in the sample.
Posted by: Menzie Chinn at August 16, 2011 01:43 PM
As of July the trade weighted dollar was 94.8
as compared to 95.4 in July 2008.
That means over the last three years the dollar has fallen less than 1%.
But during the Bush years the dollar fell from 129.0 in early 2002 to the July 2008 low,
or well over a third.
And exactly who is accusing who of devaluing the dollar.
Posted by: spencer at August 16, 2011 01:49 PM
Yeah. Let's print more money. Rick seems to fear that Ben can save the economy (and thus, by extension, Obama.) I think his fears are misplaced. Maybe he should be hoping for the opposite. What good is inflation of food and energy prices if it does not help raise nominal wages? Maybe all Ben will accomplish by printing more money (or probably more accurately, by increasing excess reserves of banks) is to help overcome rigidities in the system and speed up a drop in real wages.
Ben's policy will be even more likely to devalue the dollar internationally. Good idea? The main effect would likely be to increase the already overvalued euro even more (since Asian currencies will remain pegged) and hasten its collapse. If that happens, Rick can probably count on a result worse than the one we got from Lehman's collapse.
Posted by: don at August 16, 2011 01:55 PM
I would strongly support Rick Perry over Barack Obama.
However, I disagree with the rhetoric here. QE3 is needed, and printing money will become a semi-permanent feature of the world economy. Eventually, QE will not even be given numbers.
Posted by: GK at August 16, 2011 02:24 PM
You hit the nail on the head. Well spoken. Thanks for your comments
Posted by: JD at August 16, 2011 08:34 PM
I don't prefer 10-yr expectations. 1,2,3,4 yr expecations for breakeven inflation are well under 2% (1.25% at 3 yrs, 1.75% at 5 yrs). (click link to bloomberg charts below, breakeven on TIPS)... suggesting poor growth or worse.
BTW, does anyone know which economist is advising perry? I know mankiw is advising romney.
Posted by: dwb at August 17, 2011 06:09 AM
Other than for the gross ineptitude of the economics profession itself, the Federal Reserve is the agent most responsible for the economic crisis we are in. Greenspan ginned the money supply each recession until the market famously named this policy the Greenspan put. This built the long credit cycle which well ahead of time Hyman Minsky warned would bust. Bernanke was present at the creation of the housing bubble. And after he had the reins at the Fed it was abundantly clear from his “contained” remark regarding subprime just weeks before the crisis erupted in 2007 that he was clueless. Certainly he deserves credit for championing the raft of creative support facilities in 2008, the massive injection of base money, somewhat belatedly taking the funds rate to zero, strongly supporting the TARP, initiating the QEs, and engineering the all-vital stress-testing of the big banks which (along with these other actions and fiscal stimulus) halted the plunging stock market and helped turn the economy up.
Yet after all this, in his keynote address to the American Economic Association in Atlanta last year he proffered a defense that the Fed was not culpable for the housing boom. His argument was logically flawless but for one thing – it was based on a false postulate, namely that the two-variable Taylor rule is the correct guide for monetary policy. Whether this was out of ignorance or duplicity I do not know. What I do know is it is high time that a real political leader come forth and raise to high visibility the bad road the Fed has been taking this country down. It has gone on for decades and enough is enough. However clumsily it came out, that is what Perry did with his remark. And though for right now monetary ease is the correct policy, until and unless the inept policies of the Obama administration are undone, all this monetary ease is moving the economy straight toward stagflation regardless what TIPS are saying.
Posted by: JBH at August 17, 2011 07:21 AM
JBH: the Federal Reserve is the agent most responsible for the economic crisis we are in
true, but not for the reason you specify. The Fed, OCC, HUD, and most other regulators were asleep at the wheel while a lot of people borrowed to buy houses they could not afford, primarily based on the assumption that "the housing market has never declined nationally" and housing appreciation would continue indefinitely. libertarian greenspan, i suppose, felt the banks would regulate themselves. Lending standards were not just lax, they were non-existent.
It was not the "taylor rule" per say - which is not actual policy and comes in many specifications - it was the de-facto printing of money via ever-looser lending standards as the housing boom wore on.
Of course, now we have gone to the exact opposite end of the pendulum on lending standards.
raise to high visibility the bad road the Fed has been taking this country down. It has gone on for decades and enough is enough.
*sigh* i wish actual evidence was informing the policies of the nutter right.
Posted by: dwb at August 17, 2011 08:33 AM
Dave aka Anonymous (8:49): I'm not offended. Although I don't think it was so lazy; the time series plot provided information. I then added two additional plots, which incorporated in the background some theoretical and empirical work by respected economists, which augmented the debate. Your comment, in contrast, provided no information whatsoever, above and beyond demonstrating your inability to lay out a thesis, amass supporting information and data, and then interpret. But I thank you for serving as exhibit 1 for Randy's characterization
Posted by: Menzie Chinn at August 17, 2011 09:42 AM
I agree with Jonathan and Randy - the vitriolic ignorance of many of the commenters here spoils the browsing experience for me, and, I suspect, many others lurking in the ether.
My suggestion: change the blog format so that the comments are separate from the main posting. Lots of blogs use this format.
Posted by: wired at August 17, 2011 12:56 PM
QE3 would be a waste considering the results of QE2 which were:
- leveraging up the Fed balance sheet over 50-1
- serving as a catalyst in financial market speculation
- negatively impacting commodities which hurt the poor around the globe
- hurt those who are risk adverse (savers)
- provided cheap credit which some engage in but never repay profitably
That said, treason is an inappropriate word to use to describe Mr. Bernanke
Menzie, wouldn't the PPI indicate that inflation has occurred in crude goods? http://www.bls.gov/news.release/ppi.nr0.htm
Posted by: Babinich at August 18, 2011 03:04 AM
I just had a gander at Rick Perry's college transcript. He earned a D in Principles of Economics. Sounds like a shoe-in for the Republican nomination to me.
P.S. His overall GPA was 2.22. Gives whole new meaning to a "Gentleman's C".
Posted by: Mark A. Sadowski at August 19, 2011 02:18 PM