Friday, January 20, 2017

Macro Musings Podcast: Anat Admati

My latest Macro Musing podcast is with Anat Admati. Anat is a professor of finance and economics at Stanford University. Since the crisis in 2008, she has also been a fervent advocate of banks using more equity and less debt to fund their investments. As part of this effort, Anat coauthored the book "Bankers' New Clothes: What's Wrong with Banking and What to Do About it". She joined me to talk about these and other issues related to the stability of the U.S. banking system.

It was a fun and interesting conversation throughout. We covered everything from the distortions created by the Basel bank regulations to the still inordinate amount of bank leverage to the prospects for a safer financial system. One of the more sobering implications of our discussion is that the U.S. banking system is not much safer today than it was in 2008. This is a point also made by Larry Summers in a recent Brookings Paper

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Related Links
Anat Admati Homepage
Anat Admati Twitter Account
Paper - It Takes a Village to Maintain a Dangerous Financial System
Paper - Contingent Liability, Capital Requirements, and Financial Reform

Friday, January 13, 2017

Macro Musings Podcast: Allan Meltzer

My latest Macro Musing podcast is with Allan Meltzer. Allan is a professor of economics at Carnegie Mellon University and a visiting fellow at the Hoover Institution. He is also a well-known monetarist and author of the authoritative multi-volume history of the Fed

We had a wide-ranging conversation on everything from Allan's role in the Monetarist's Counterrevolution to his reinterpretation of Keyne's General Theory to his take on current Fed policies. Among other things, I learned that Allan formerly worked under Paul Volker in the Kennedy Administration.  

This was a fun interview and Allan showed he still has a lot of spunk in him. The interview taped live in front of audience at the Southern Economic Association meetings last November. 

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Friday, January 6, 2017

Macro Musings Podcast: Ylan Mui

My latest Macro Musings podcast is with Ylan Muy of the Washington Post. She was the Fed beat reporter for several years and now covers economic policy at the White House. She joined me to discuss what it was like covering the Fed and what we might expect going forward from President Trump's economic policies.

This was a fascinating conversation throughout and we covered everything from the tight security of FOMC press meetings to the future of the Fed's balance sheet to whether the Fed will ever have a truly symmetric 2% inflation target. We also considered whether Trump's economic policies will truly live up to the market's expectations for them. One thing we do know for sure is that 2017 will be an interesting year for U.S. economic policy and Ylan will have much to cover for the Washington Post.

Ylan also shared that she is working with the Brookings Institute on a book about negative interest rates as a tool for monetary policy. It sounds interesting and I look forward to reading it.

Finally, Ylan and I discussed the lack of women in macroeconomics. A recent article in the Journal of Economic Perspectives reminded us that a disproportionately small share of women are in the economics profession. This problem seems to be even more pronounced in macroeconomics. Ylan shared her observation on this challenge and talked about her related work on Janet Yellen breaking barriers in macroeconomics.

This was great episode to start the new year. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Related Links
Ylan Muy's articles at the Washington Post
Ylan Muy's Twitter Account

Friday, December 23, 2016

Macro Musings Podcast: Xmas Economics

My latest Macro Musings podcast is a special holiday edition on the economics of Christmas.Two special guests joined me all the way from Germany to discuss this topic. My first guest was Anna Goeddeke, a professor of economics at ESB Business School in Reutlingen, Germany. My second guest was Laura Birg, a postdoctoral researcher at the Center for European, Governance, and Economic Development Research, University of Göttingen 

Together they coauthored an article in Economic Inquiry titled “Christmas Economics—a Sleigh Ride” that surveys and summarizes the economics literature on Christmas. It is a great read for this time of the year and was the basis of our conversation. We touched on a number of interesting topics like the seasonal business cycle, the deadweight loss of Christmas, and charitable giving during the holidays.

The seasonal business cycle discussion was particularly fascinating for me. There is a literature that starts with Barksy and Miron (1989) (ungated version) that shows most of the variation in aggregate economic measures like GDP comes from seasonal fluctuations. Yet most macroeconomists, myself included, typically start our analysis with seasonally-adjusted data. Here is a Barky and Miron summarizing their findings on GDP for 1948:Q2-1985:Q5:
The standard deviation of the deterministic seasonal component in the log growth rate of real GNP is estimated to he 5.06%, while that of the deviations from trend is estimated to be 2.87%. Deterministic seasonal fluctuations account for more than 85% of the fluctuations in the rate of growth of real output and more than 55% of the (percentage) deviations from trend. Business cycle fluctuations and/or stochastic seasonal fluctuations represent a relatively small percentage of the fluctuations in real output. Plots of the log level of real output (Figure 1) and the log growth rate of real output (Figure 2) make this point even more clearly. The seasonal fluctuations in output are so large and regular that the timing of the peak or trough quarter for any year is rarely affected by the phase of the business cycle in which that year happens to fall. 
Unfortunately, the BEA no longer makes available non-seasonally adjusted GDP data. However, we can look at other times series to see how large seasonal swings can be relative to recessions. For example, below is retail sales:

What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level. Most of the seasonal boom is in real activity. Put differently, there is an exogenous demand shock every fourth quarter where prices remain relatively sticky so real activity surges. This is a microcosm of demand-side theories of the business cycle. It seems, then, that more could be learned about broader business cycle theory from studying GDP and other time series in their raw non-seasonally adjusted form. That will have to wait, however, until the BEA starts releasing the data.

This was a fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming.

Monday, December 19, 2016

The Trump Shock and Global Interest Rates

One more quick note on the Trump shock and interest rates. For some time I have been following the global safe asset shortage problem and how it has created a downward march of safe assets interest rates. This can be seen in the figure below:

The latest development in this story is that the safe asset interest rates have all started heading up, as seen in the above figure. Even Japan's which is supposed to be targeted at 0 percent but has climbed to 0.8 percent. Now these yields have a long ways to go before reaching normal levels and they started rising before Trump's election. But since the election the ascension of these interest rates has accelerated in many cases. This is a bit puzzling. It is one thing to think the Trump shock has changed the growth and inflation outlook in the United States so that treasury yields are now going up, but why the other advanced economies?

As you may recall, the safe asset shortage story says there has been a price floor (ceiling) on safe asset interest rates (bond prices) that has kept the market for safe assets from properly clearing. (See this pre-2008 figure and post-2008 figure for a graphical representation of this story.) The shortage was a big deal because these securities functioned as transaction assets for institutional investors. The shortage, therefore, amounted to an effective shortage of money that was evident in the below trend growth of broad monetary aggregates that measure both retail and institutional money assets. 

There were there three solution paths that could solve this problem: increase the supply of safe assets, decrease the demand for safe assets by improving the economic outlook, or do negative interest rates. These three paths are depicted below:

The Trump shock seems to be working through the first two options for U.S. treasuries. First, the Trump infrastructure plans and tax cuts imply larger budget deficits. Second, the spending and supply-side reforms suggest an improved economic outlook that is decreasing demand for treasury securities. This story, though, only explains the U.S. situation. 

What is puzzling is why the Trump shock seems to be causing foreign safe assets yields to rise. Maybe it is the reverse of the Caballero, Fahri, Gourinchas (2016) story that says shortage of safe assets problem will spread from one country to another. That is, the easing of safe asset pressures in the United States is causing an easing of safe asset pressures elsewhere. But that story runs up agains the potential global economic downside from a stronger dollar that will result from a stronger U.S. economy. So I am left a bit puzzled. 

Friday, December 16, 2016

The Trump Shock and Interest Rates

I have a new piece in The Hill where I argue markets are increasingly seeing the Trump shock as an inflection point for the U.S. economy:
It seems the U.S. economy is finally poised for robust economic growth, something that has been missing for the past eight years. Such strong economic growth is expected to cause the demand for credit to increase and the supply of savings to decline 
Together, these forces are naturally pushing interest rates higher. The Fed’s interest rate hike today is simply piggybacking on this new reality. 
Here are some charts that document this upbeat economic outlook as seen from the treasury market. The first one shows the treasury market's implicit inflation forecast (or "breakeven inflation") and real interest rate at the 10-year horizon. These come from TIPs and have their flaws, but they provide a good first approximation to knowing what the bond market is thinking. In this case, both the real interest rate and expected inflation rate are rising. This implies the market expects both higher real economic growth and higher inflation. The two may be related--the higher expected inflation may be a reflection of higher expected nominal demand growth causing real growth. The higher real growth expectations are also probably being fueled by Trump's supply-side reforms.

The next figure shows the New York Fed's decomposition of the 10-year treasury into the term premium and a 'risk-neutral' nominal interest rate. Both have gone up since Trump's election. The term premium going up can be seen as investors being less risk averse and therefore demanding higher compensation for holding longer-term safe asset-bonds. The risk-neutral part can be seen as a product of the real interest rate and the expected inflation. And, as we saw in the first figure above, they are both growing:  

These figures, as well as the surge in the stock market, indicate the markets see more robust growth ahead. Given the timing of these surges, the figures seem to attribute the improved economic outlook largely to the Trump shock. 

Now markets may be getting ahead of themselves, but if these expectations come to fruition there is another big lesson to be learned from the Trump shock:
One of the big lessons from this rate decision is that the Fed cannot sustainably push up interest rates through the brute force of monetary policy. Rather, interest rates have to be pulled up by robust economic growth with the Fed following suit.  
This understanding also means the Fed did not push interest rates to zero percent in late 2008. Rather, it followed the collapsing market forces that were pulling interest rates down at the time. 
To the extent the Fed wants a stable economy, it is limited in how much it can adjust interest rates. Its interest rate adjustments have to follow the health of the economy.  
Luckily for the Fed, the health of the U.S. economy seems to have turned the corner and begun a robust recovery. This has allowed the Fed to finally break free from the chains of low interest rates.
This is a point I have repeatedly made over the past eight years. For example, see this older National Review article with Ramesh Ponnuru or this more recent piece from the Mercatus Center's Interest Rate Colloquium.[Update: See also this post to which Paul Krugman replied] My hope is that the lesson sinks in to the many Fed watchers claiming the Fed created 'artificial interest rates'.

Update: Just to make it clear, here is a figure showing both the stock market and treasury market response since Trump's election.

Macro Musings Podcasts: The Macroeconomics of Star Wars and Star Trek

My latest  Macro Musings podcast is special one where we look at the macroeconomics of Star Wars and Star Trek. We do so with the help of two guests who are experts on the economics of these two scifi franchises. [Update: sound quality starts out poor, but gets better a few minutes into the show.]

Our first guest is Zachary Feinstein. Zach is an assistant professor at Washington University in St. Louis and  the author of a study titled "It's a Trap: Emperor Palpatine's Poison Pill" where he provides a fascinating look at the financial consequences of the destruction of the second death star. This article received a lot of media coverage last year when Star Wars: the Force Awakens came out. For example, below is a screen shot from a Bloomberg interview discussing the financial burden of building the two death stars. Now with the release of Star Wars: Rogue One upon us it was only fitting to have him join the show and share with us his knowledge of the economics of Star Wars.

Our second guest is Manu Saadia. Manu is a writer based in Los Angeles and a lifelong Trekkie. He published this year titled Trekonomics: the Economics of Star Trek which is a must read for any serious Trekkie. The book was hailed by Nobel Laureate Paul Krugman as "the book on the topic". This book too has received a lot of media attention. One reason for its popular reception is that book wrestles with many of the issues now facing advanced economies as they become increasingly automated and run by smart networked machines. Below is the cover of the book.

This was super fun conversation. We started out discussing the basic economic institutions--money, interplanetary trade, trade, labor specialization, taxes, banking systems, etc-- of Star Wars and Star Trek. We next turned to business cycle issues--the destruction of the second death start created the mother of all depression--and then to the long-run economic growth in both scifi universes. We concluded by considering the implications from these franchises for us today.

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming.