Delong and mercy for a diddle diddle dumpling

Diddle diddle dumpling

Above, a retrieve from before the crisis of fall '08.

Sometimes you see more of a soul than you want or decency should permit. I find after viewing this ponderous cloud of a mind, I can take away only a shapeless emotion, a Rousseau-like pity for tubby little Brad the smart swaddled boy of Ivy privilege who has maturated into this gas-leaking tethered ideological blimp, a slightly chilly, mildly unpleasant but harmlessly sluggish university mammal, more the three-toed sloth than the orangutan of neoliberalism. Let us trouble him no more.

It's really simple, but somehow pwogs fail to understand the nature of transfer systems backed by the free source of all new dollars. You can only transfer real stuff produced today to a mouth or a warehouse. There is no other real saving or consuming. Anything else is paper chains that are as easily ripped apart as they are clapped on.

If I eat more today than yesterday, no one can go back in time and take it away tomorrow. And if they try to take it out of my next year -- I mean really take it out, that is, out of my real stream of goodies -- then the fight to stop it won't really be any the more difficult no matter what today's paperwork might say.

Rule one of corporate class exploitation: if they and their gubmint can take it away now, they will. There is no ease-off. You'll never hear 'em say "well, yeah, you cut your eats yesterday, so here's more today."

The Esau class needs to play by the same rules. Tomorrow's Esaus oughta consider it a point of honor to default on any inter-class agreements made today and yesterday.

They've got the right, based on the backside of the golden rule: it oughta be just as decent -- if not as easy -- as the corporate class default during these past 35 years on all of their post-WWII inter-class agreements.

We can always reverse any pact to cut future benefits -- and it will be even hard er to cut the the social security benefit stream than to restore the taxes that pretend to pay for 'em today.

The only part of Uncle's spending we job-class oriented lefties oughta fuss over is the transfer systems to regular folks and all the taxes on regular folks. And I mean, of course, today's taxes and benefits, and maybe next year's, but never ten years from now.

Uncle is not limited by the laws of prudent finance. Uncle is not a corporation, or even a California times ten.

Fellow avatars of Esau, take as much as you can from Uncle in cash right now and block as much of his taxation on you as you can -- right now. The rest is rabbit's-foot/black cat superstition.

----------

Seeing stuff too soon, and from too great a distance, can make a snarling sniping growling dark-hole critter out of even the least asocial of us poor parlor pinks -- that is, if it don't make us completely into just another catatonic mute in the nation's basement.

@ sumner acolyte

You use the term  "Free trade "

Maybe that's just too ambiguous a label 
Be more precise 

Free of barriers quotas tarrilffs 
By any and all system agents 
From tax men to smugglers 

Trade today has one principal organizational vehicle 
The for profit private firm 
Can you say that mediator left to operate
Solely by its own self determined interests 
 Is an agent of free trade ?

Rents and interest like payments buried inside total payments to factors as lease payments creates the chimera of " real capital "

Beware the monstrous chimera masquerading as supply priced evaluations of factors of production..Class shares versus factor shares

What are production factors and how can they be commonly evaluated

Factors are real elements of real production systems
Big categories

Humans with skills and experience

Machines of certain types and functions

Structures

 fields  mines   Forests lakes streams rivers oceans And  land lots
Raw materials and natural products and powers
----------------
How to evaluate them ?

Existing  prices at market for their respective outputs
 Generate
ever changing historically developing ....market generated payments to factors
By mediating  organizers of production
Often called
lease rates
all of which may include arbitrage profits  wind fall profits innovation profits
....  pro tem  rents *


* ND
there are no pure rents
Because nothing over time has a fixed supply

Now we aggregate  by category
Then sum categories

There will be surpluses and deficits at the level of productive units

This residue should not be congealed into a factor
Example
net revenue above factor payments
Come in stream
This stream can be projected and evaluated
But this is not the value of a real factor

It is not categorically like
the evaluation of a stream of  revenue attributed to a machine
Ie a sustainable lease rate
Or a assembly line worker

Now comes the human social division

Two big categories

Producer income  for the owners of human factors

And the income to owners of non human factors

This split is a class split

There is no technical determination of this split

It's a historical process

In a system of wage earning producers
Ie human factors paid by wage

The  split is a rate of surplus value

The revenues that  are surplus payments are not  factor payments

The sum of factor payments is not equal to aggregate social net revenue

This is more then a bit lacuna fied
But in short there is no productive factor called capital

There are capitalized factor payment streams
And that may get mixed with rent streams
In some monstrous hybrid
But strictly speaking lot payments  are surplus payments too

Not factor payments
Factor payments only cover the reproduction " costs "
Of the factor given that factors rate of consumption in use and over time

Lerner trade games

Assume a trading game
Re contracting continues
Until results conform to
Certain rules


Including

Trades each period must balance

 QxP  for imports equals  QxP for exports


All Trade in and out runs thru a monopoly/  monopsony  cartel

    All proceeds from pricing adjustments  are returned to the factor owners in lump sums



To be continued. ....

Scott. Stumbler takes the biscuit

"This is a very basic error. International economists almost universally agree that a VAT is neutral with respect to trade. "
Assumptions please !



"An across the board 10% import tax, combined with a 10% export subsidy, offset each other, leaving no net impact on trade. Instead they convert the tax from a production tax to a consumption tax. But it's a consumption tax that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial."


     My guess it's not a slip 
He's got an export subsidy where he needs an export tax 

And what he's got is the approximate equivalent of a devaluation that is not off set
Devals by trading partners 

Where this certainty comes from

The congealed teachings of his mentors 

Congealed mangled transposed over the years
in scotts mind vat ( the iron pot variety )
 in search of justifications  for sky hooked class ideology 



This prods a comment 


Lots of comp stat theorems get " generalized "
 In the eager mind 

Assumptions forgotten ?

Well if this above is influenced by say

Lerners symmetry theorem 

Not only has he got 
The export subsidy part wrong
It's a tax 

He's left out trade always in balance 
Preferences of citizenry identical 
Factors distributed evenly 
Tax revenue lump sum per capita
returned to the citizens 

Probably much else 
It's a model for Jesus sake !

And a beautiful counter intuitive one
Like Ricardo's " implicit "
comparative advantage theorem 

He seems to have reached into his virtual file draw and pulled out the consequences of a UUCD

Unilateral un off set
 currency devaluation 

Nominal minimum wage equalization system thru forex regulations ...Abba's minimum wage

What about this ? " Rather than a democratically driven deficit bias we seem to be infected with a democratically driven surplus bias. "

All hail deficit bias ? ......well maybe in trade but heavens ...not in state budgets ....

First fiscal frugals seem to be the votin majority

" Rather than a democratically driven deficit bias we seem to be infected with a democratically driven surplus bias. " 

This is the angel of mediocre progress SWL



"The standard view among economists before the financial crisis was that economies were prone to deficit bias: a tendency for government budget deficits and debt (as a share of GDP) to slowly increase."

 " view " or well recognized bogus verity 
Errr behind the veil of public omertà 


 " Although there are a number of theories about why deficit bias occurs, "

Occurs or posited comrade ?


" several involve voters being at best unconcerned about it, and at worst conniving in it. "
Where and when ?

"Such theories are miles away 
from an electorate giving strong support to a government 
campaigning on reducing the deficit." 

We have arrived at the starting line at last
What follows is a brief narration of debt horror stories post crisis 08

But light dawns

The phobic response
voting majority masses has a "sell by date "

Once households aren't feeling their asses pinched ...

The return of the deficit bias ....


And
There's this also

Warning fuss budgeting as leaning against the bias
Gets labeled austerity

.as part of the on going crypto  pro deficit bias campaign ?

SWL

" austerity keeps interest rates low. So not only does austerity hit wages and profits, but it also hits 

those who rely on interest income to supplement their pension, a group who in case you need reminding have a high propensity to vote."

Love this 

"  Although asset values have gone up as well, many in this group will be reluctant or unable to turn this into income." !!! 

Now SWL  throws the baby out 

" As to the political economy question"

" i  think pro deficit bias ( among the masses - op-  ) 
" would be a genuine puzzle if austerity was a long term 
phenomenon."
But it's not 
Where as anti deficit bias among elites
Is a long term ....shell game 
To hoodwink the asshole innocent votin majority 
When needed 
Yup debt crises come and go
Speaking of tighter uncle belting 

"  But  as deficit bias is not  ( long term among the proto jaquerie - op) 
we need to bring in (hopefully) short term failures of knowledge and information. "
What follows or precedes 

Here's the punch out passage 

" I (SWL PhD ) 
have not noticed campaigns to ‘save our savers’ also arguing for less austerity, 
and I suspect the reason is because they just do not see the connection. 
Who makes that connection for them? ..........
the media just does not do this kind of thing. 
Central 
banks should, but for their own reasons rarely do."

But who can argue too much with Simon on this:

" People may not act in their own self-interest if they do not know what is in their own interest, and in the short term at least this knowledge may not be made available to them." 

Did Nordhaus destroy PS's economics text ....I doubt it ..though he helped !

Samuelson's mind contained an unstable Keynesian isotope

This wonderful paradigm in his head unfortunately
decayed over the decades from 1940  to 1990

Yes the unfolding facts  post 1946 may have seemed to him
The cause of his growing non Keynesianism
But it's clear
Facts were selected by his mind that confirmed his new world synthesis
Of Marshall Walras and Keynes
Alas the M and  W  isotope remained hideously stable over time
Coming to dominate the synthesis by the mid 70's
And nearing obliteration of the K isotope by 1990 !!

Yes after there was a sort of dreaming Samuelson
Where the ghost of the K isotope walked the halls of late edition " economics "

Nordhaus ?

Like an anti ghost of Xmas coming
Nordy cheered on the  new neoclassical hegemony of the editions after his ascension to co author
In the mid Reagan quagmire

Farmer expositing the stationary assumption in NK models

The thought experiment is this: Suppose there was no government debt, and the Fed raised nominal interest rates to 20% and held them there forever. What would happen to real rates? Well, they wouldn't rise to 20% forever, because there's just no way that our society can physically, technologically deliver a 20% riskless rate of return to bondholders. Eventually, one of two things would have to happen: either 1) the Fed's control over the nominal interest rate would break down, or 2) inflation would rise (the Neo-Fisherite result). If the Fed can't control the nominal interest rate, then our standard models of monetary policy all break down, and we have to think about the microeconomics of money demand, which is hard to do. But the only alternative would be the Neo-Fisherite result.

Progressive mission ...Killing the Phillips curve one way or other

The fed Losing control

Imagine of the fed pegged the safe rate at 20%
And refused to issue direct loans to firms with a guaranteed roll over

What would happen

Private funds would be drained from corporate et al bond markets
Prices of old bonds plummet
At roll over time
Massive defaults layoffs idled production
A cat after it's tail triggered  Demand collapse

Out put price scrambles
Without coherent direction
As liquidations struggle with still viable self funded or self refunding firms
Even as nominal demand shrinks with falling nominal incomes and revenues
Or
What ?

Chaos ....collapse ..resurrection ...

Say its uncle


Well the dollar soars as outsiders buy them to then buy that fabulous safe debt
Privateers stampede to get
Replacement funds on the euro or yen loan markets from privateer sources
Until the ...

Beyond intuitions narrow vision to know what would happen

But it would never happen

Noah Brains joins the nick Rowe boat oarsmen

Imagine fed maximizing the policy rate

".,,,Suppose there was no government debt, and the Fed raised nominal interest rates to 20% and held them there forever. What would happen to real rates? Well, they wouldn't rise to 20% forever, because there's just no way that our society can physically, technologically deliver a 20% riskless rate of return to bondholders. Eventually, one of two things would have to happen: either 1) the Fed's control over the nominal interest rate would break down, or 2) inflation would rise (the Neo-Fisherite result). If the Fed can't control the nominal interest rate, then our standard models of monetary policy all break down, and we have to think about the microeconomics of money demand, which is hard to do. But the only alternative would be the Neo-Fisherite result."

That's Noah Brains 

Is there a third outcome possible

Massive defaults
If so why the policy
To prevent leading to a drying up credit system demand
the state credit systems direct lending to commanded firms
Leads to this weird loop of bail outs from
The endless re supply capability of the state thru fiat money creation

Looking glass outcome from logic box wonder lands
Pop up every where
Push any model to its extremes and they result is a tornado ride
To oz or rabbit hole fall to wonder land

Farmers stock market control as an instrument of output stabilization

First off
The goal is restoring sustainable levels of employment

Not mobilizing maximum output


So the stock market price level will be managed to oscillate around the " assumed NAIRU rate "

Mobilizes have no fear of NAIRU so long as the state is willing to implement a price level regulator

Like Weintraub and Lerner proposed in the roller coaster 70's

Yes the state can end corporate capitalism as we know it

Aka  perpetual 1942 43 44
A "matrix " mode for social production
( see the movie matrix
Substitute this mobilization model
For the collective dream of the deep sleeper
human power sources for the great and all powerful  machines

Confused metaphor alert ? !

Neo fisher ism and long term financial repression

If low nominal rates are pushed hard and long
In the end ...ie at some point
The repression of real financial rates
Is neutralized by an off setting and equal output price deflation

The neo fisherian dart boards bulls eye :what if we turn this idea on its head, and we think of the causation running from the nominal interest rate targeted by the central bank to inflation? This, basically, is what Neo-Fisherism is all about. Neo-Fisherism says, consistent with what we see in Figure 1, that if the central bank wants inflation to go up, it should increase its nominal interest rate target, rather than decrease it, as conventional central banking wisdom would dictate. If the central bank wants inflation to go down, then it should decrease the nominal interest rate target.

But what if central banks have inflation control wrong? A well-established empirical regularity, and a key component of essentially all mainstream macroeconomic theories, is the Fisher effect—a positive relationship between the nominal interest rate and inflation. The Fisher relationship, named for Irving Fisher, is readily discernible in the data. Look at Figure 1, for example, which is a scatter plot of the inflation rate (the four-quarter percentage change in the personal consumption deflator—the Fed's chosen measure of inflation) vs. the fed funds rate for the period 1954-2015. In Figure 1, a positively sloped line would be the best fit to the points in the scatter plot, indicating that inflation tends to rise as the fed funds rate rises.
Many macroeconomists have interpreted the Fisher relation observed in Figure 1 as involving causation running from inflation to the nominal interest rate (the usual market quote for the interest rate, not adjusted for inflation). Market interest rates are determined by the behavior of borrowers and lenders in credit markets, and these borrowers and lenders care about real rates of interest. For example, if I take out a car loan for one year at an interest rate of 10 percent, and I expect the inflation rate to be 2 percent over the next year, then I expect the real rate of interest that I will face on the car loan will be 10 percent – 2 percent = 8 percent. Since borrowers and lenders care about real rates of interest, we should expect that as inflation rises, nominal interest rates will rise as well. So, for example, if the typical market interest rate on car loans is 10 percent if the inflation rate is expected to be 2 percent, then we might expect that the market interest rate on car loans would be 12 percent if the inflation rate were expected to be 4 percent. If we apply this idea to all market interest rates, we should anticipate that, generally, higher inflation will cause nominal market interest rates to rise.
But, what if we turn this idea on its head, and we think of the causation running from the nominal interest rate targeted by the central bank to inflation? This, basically, is what Neo-Fisherism is all about. Neo-Fisherism says, consistent with what we see in Figure 1, that if the central bank wants inflation to go up, it should increase its nominal interest rate target, rather than decrease it, as conventional central banking wisdom would dictate. If the central bank wants inflation to go down, then it should decrease the nominal interest rate target.
But how would this work? To simplify, think of a world in which there is perfect certainty and where everyone knows what future inflation will be. Then, the nominal interest rate R can be expressed as
R = r + π,
where r is the real (inflation-adjusted) rate of interest and π is future inflation. Then, suppose that the central bank increases the nominal interest rate R by raising its nominal interest rate target by 1 percent and uses its tools (intervention in financial markets) to sustain this forever. What happens? Typically, we think of central bank policy as affecting real economic activity—employment, unemployment, gross domestic product, for example—through its effects on the real interest rate r. But, as is widely accepted by macroeconomists, these effects dissipate in the long run. So, after a long period of time, the increase in the nominal interest rate will have no effect on r and will be reflected only in a one-for-one increase in the inflation rate, π. In other words, in the long run, the only effect of the nominal interest rate on inflation comes through the Fisher effect; so, if the nominal interest rate went up by 1 percent, so should the inflation rate—in the long run.
But, in the short run, it is widely accepted by macroeconomists (though there is some disagreement about the exact mechanism) that an increase in R will also increase r, which will have a negative effect on aggregate economic activity—unemployment will go up and gross domestic product will go down. This is what macroeconomists call a non-neutrality of money. But note that, if an increase in R results in an increase in r, the short-run response of inflation to the increase in R must be less than one-for-one.
However, if inflation is to go down when R goes up, the real interest rate r must increase more than one-for-one with an increase in R, that is, the non-neutrality of money in the short run must be very large.
To assess these issues thoroughly, we need a well-specified macroeconomic model. But essentially all mainstream macroeconomic models predict a response of the economy to an increase in the nominal interest rate as depicted in Figure 2. In this figure, time is on the horizontal axis, and the central bank acts to increase the nominal interest rate permanently, and in an unanticipated fashion, at time T. This results in an increase in the real interest rate r on impact. Inflation π increases gradually over time, and the real interest rate falls, with the inflation rate increasing by the same amount as the increase in R in the long run. This type of response holds even in mainstream New Keynesian models, which, it is widely believed, predict that a central bank wanting to increase inflation should lower its nominal interest rate target. However, as economist John Cochrane shows, the New Keynesian model implies that if the central bank carries out the policy we have described—a permanent increase of 1 percent in the central bank's nominal interest rate target—then the inflation rate will increase, even in the short run.4

Neo fisher dart board

During the 2007-2009 global financial crisis, many central banks in the world, including the Federal Reserve, cut interest rates and resorted to various unconventional policies in order to fight financial market disruption, high unemployment, and low or negative economic growth. Now, in 2016, these central banks are typically experiencing inflation below their targets, and they seem powerless to correct the problem. Further unconventional monetary policy actions do not seem to help.
Neo-Fisherites argue that the solution to too-low inflation is obvious, and it may have been just as obvious to Irving Fisher, the early 20th century American economist and original Fisherite. The key Neo-Fisherian principle is that central banks can increase inflation by increasing their nominal interest rate targets—an idea that may seem radical at first blush, as central bankers typically believe that cutting interest rates increases inflation.
To see where Neo-Fisherian ideas come from, it helps to understand the roots of the science of modern central banking. Two key developments in central banking since the 1960s were the recognition that: (1) the responsibility for inflation lies with the central bank; and (2) the main instrument for monetary control for the central bank is a short-term (typically overnight) nominal interest rate. These developments were driven largely by monetarist ideas and by the experience with the implementation of those ideas by central banks in the 1970s and 1980s.
Monetarism is best-represented in the work of the economist Milton Friedman, who argued that "inflation is always and everywhere a monetary phenomenon" and that inflation can and should be managed through central bank control of the stock of money in circulation.1 Friedman reasoned that the best approach to inflation control is the adoption by the central bank of a constant money growth rule: He thought the central bank should choose some monetary aggregate—a measure of the total quantity of currency, accounts with commercial banks and other retail payments instruments (for example, M1)—and conduct monetary policy in such a way that this monetary aggregate grows at a constant rate forever. The higher the central bank's desired rate of inflation, the higher should be this constant money growth rate.
During the 1970s and 1980s, many central banks, including the Fed, adopted money growth targets as a means for bringing down the relatively high rates of inflation at that time. Monetarist ideas were a key element of the policies adopted by Paul Volcker, chairman of the Fed's Federal Open Market Committee (FOMC) from 1979 to 1987. He brought the inflation rate down from about 10 percent at the beginning of his term to 3.5 percent at the end through a reduction in the rate of growth in the money supply.2
Though monetarist ideas were useful in bringing about a large reduction in the inflation rate, Friedman's constant-money-growth prescription did not work as an approach to managing inflation on an ongoing basis. Beginning about 1980, the relationship between money growth and inflation became much more unstable, due in part to changes in financial regulation, technological changes in the banking industry and perhaps to monetarist monetary policy itself. This meant that using Friedman's prescriptions to fine-tune policy to target inflation over the long term would not work.
As a result, most central banks, including the Fed, abandoned money-growth targeting in the 1980s. As an alternative, some central banks adopted explicit inflation targets, which have since become common. For example, the European Central Bank, the Bank of England, the Swedish Riksbank and the Bank of Japan have targets of 2 percent for the inflation rate. The U.S. is somewhat unusual in that Congress has specified a "dual mandate" for the Fed, which, since 2012, the Fed has interpreted as a 2 percent inflation target combined with the pursuit of "maximum employment."3

Conventional Practice

If a central bank is to move inflation toward its inflation target without reference to the growth rate in a measure of money, how is it supposed to proceed? Central banks control inflation indirectly by relying on an intermediate instrument—typically an overnight nominal interest rate. In the U.S., the FOMC sets a target for the overnight federal funds rate (fed funds rate) and sends a directive to the New York Federal Reserve Bank, which has the responsibility of reaching the target through intervention in financial markets.
Conventional central banking practice is to increase the nominal interest rate target when inflation is high relative to the inflation target and to decrease the target when inflation is low. The reasoning behind this practice is that increasing interest rates reduces spending, "cools" the economy and reduces inflation, while reducing interest rates increases spending, "heats up" the economy and increases inflation.

Neo-Fisherism

But what if central banks have inflation control wrong? A well-established empirical regularity, and a key component of essentially all mainstream macroeconomic theories, is the Fisher effect—a positive relationship between the nominal interest rate and inflation. The Fisher relationship, named for Irving Fisher, is readily discernible in the data. Look at Figure 1, for example, which is a scatter plot of the inflation rate (the four-quarter percentage change in the personal consumption deflator—the Fed's chosen measure of inflation) vs. the fed funds rate for the period 1954-2015. In Figure 1, a positively sloped line would be the best fit to the points in the scatter plot, indicating that inflation tends to rise as the fed funds rate rises.
Many macroeconomists have interpreted the Fisher relation observed in Figure 1 as involving causation running from inflation to the nominal interest rate (the usual market quote for the interest rate, not adjusted for inflation). Market interest rates are determined by the behavior of borrowers and lenders in credit markets, and these borrowers and lenders care about real rates of interest. For example, if I take out a car loan for one year at an interest rate of 10 percent, and I expect the inflation rate to be 2 percent over the next year, then I expect the real rate of interest that I will face on the car loan will be 10 percent – 2 percent = 8 percent. Since borrowers and lenders care about real rates of interest, we should expect that as inflation rises, nominal interest rates will rise as well. So, for example, if the typical market interest rate on car loans is 10 percent if the inflation rate is expected to be 2 percent, then we might expect that the market interest rate on car loans would be 12 percent if the inflation rate were expected to be 4 percent. If we apply this idea to all market interest rates, we should anticipate that, generally, higher inflation will cause nominal market interest rates to rise.
But, what if we turn this idea on its head, and we think of the causation running from the nominal interest rate targeted by the central bank to inflation? This, basically, is what Neo-Fisherism is all about. Neo-Fisherism says, consistent with what we see in Figure 1, that if the central bank wants inflation to go up, it should increase its nominal interest rate target, rather than decrease it, as conventional central banking wisdom would dictate. If the central bank wants inflation to go down, then it should decrease the nominal interest rate target.
But how would this work? To simplify, think of a world in which there is perfect certainty and where everyone knows what future inflation will be. Then, the nominal interest rate R can be expressed as
R = r + π,
where r is the real (inflation-adjusted) rate of interest and π is future inflation. Then, suppose that the central bank increases the nominal interest rate R by raising its nominal interest rate target by 1 percent and uses its tools (intervention in financial markets) to sustain this forever. What happens? Typically, we think of central bank policy as affecting real economic activity—employment, unemployment, gross domestic product, for example—through its effects on the real interest rate r. But, as is widely accepted by macroeconomists, these effects dissipate in the long run. So, after a long period of time, the increase in the nominal interest rate will have no effect on r and will be reflected only in a one-for-one increase in the inflation rate, π. In other words, in the long run, the only effect of the nominal interest rate on inflation comes through the Fisher effect; so, if the nominal interest rate went up by 1 percent, so should the inflation rate—in the long run.
But, in the short run, it is widely accepted by macroeconomists (though there is some disagreement about the exact mechanism) that an increase in R will also increase r, which will have a negative effect on aggregate economic activity—unemployment will go up and gross domestic product will go down. This is what macroeconomists call a non-neutrality of money. But note that, if an increase in R results in an increase in r, the short-run response of inflation to the increase in R must be less than one-for-one.
However, if inflation is to go down when R goes up, the real interest rate r must increase more than one-for-one with an increase in R, that is, the non-neutrality of money in the short run must be very large.
To assess these issues thoroughly, we need a well-specified macroeconomic model. But essentially all mainstream macroeconomic models predict a response of the economy to an increase in the nominal interest rate as depicted in Figure 2. In this figure, time is on the horizontal axis, and the central bank acts to increase the nominal interest rate permanently, and in an unanticipated fashion, at time T. This results in an increase in the real interest rate r on impact. Inflation π increases gradually over time, and the real interest rate falls, with the inflation rate increasing by the same amount as the increase in R in the long run. This type of response holds even in mainstream New Keynesian models, which, it is widely believed, predict that a central bank wanting to increase inflation should lower its nominal interest rate target. However, as economist John Cochrane shows, the New Keynesian model implies that if the central bank carries out the policy we have described—a permanent increase of 1 percent in the central bank's nominal interest rate target—then the inflation rate will increase, even in the short run.4

The Low-Inflation Policy Trap

What could go wrong if central bankers do not recognize the importance of the Fisher effect and instead conform to conventional central banking wisdom? Conventional wisdom is embodied in the Taylor rule, first proposed by John Taylor in 1993.5 Taylor's idea is that optimal central bank behavior can be written down in the form of a rule that includes a positive response of the central bank's nominal interest rate target to an increase in inflation.
But the Taylor rule does not seem to make sense in terms of what we see in Figure 2. Taylor appears to have thought, in line with conventional central banking wisdom, that increasing the nominal interest rate will make the inflation rate go down, not up. Further, Taylor advocated a specific aggressive response of the nominal interest rate target to the inflation rate, sometimes called the Taylor principle. This principle is that the nominal interest rate should increase more than one-for-one with an increase in the inflation rate.
So, what happens in a world that is Neo-Fisherian (the inflationary process works as in Figure 2), but central bankers behave as if they live in Taylor's world? Macroeconomic theory predicts that a Taylor-principle central banker will almost inevitably arrive at the "zero lower bound."6 What does that mean?
Until recently, macroeconomists argued that short-term nominal interest rates could not go below zero because, if interest rates were negative, people would prefer to hold cash, which has a nominal interest rate equal to zero. According to this logic, the lower bound on the nominal interest rate is zero. It turns out that, if the central bank follows the Taylor principle, then this implies that the central bank will see inflation falling and will respond to this by reducing the nominal interest rate. Then, because of the Fisher effect, this actually leads to lower inflation, causing further reductions in the nominal interest rate by the central bank and further decreases in inflation, etc. Ultimately, the central bank sets a nominal interest rate of zero, and there are no forces that will increase inflation. Effectively, the central bank becomes stuck in a low-inflation policy trap and cannot get out—unless it becomes Neo-Fisherian.
But maybe this is only theory. Surely, central banks would not get stuck in this fashion in reality, misunderstanding what is going on, right? Unfortunately, not. The primary example is the Bank of Japan. Since 1995, this central bank has seen an average inflation rate of about zero, having kept its nominal interest rate target at levels close to zero over those 21 years. The Bank of Japan has an inflation target of 2 percent and wants inflation to be higher, but seems unable to achieve what it wants.
Over the past several years, membership in the low-inflation-policy-trap club of central banks has been increasing. This club includes the European Central Bank, whose key nominal interest rate is –0.34 percent and inflation rate is –0.22 percent; the Swedish Riksbank, with key nominal interest rate of –0.50 percent and inflation rate of 0.79 percent; the Danish central bank, with key nominal interest rate of –0.23 percent and inflation rate of 0 percent; the Swiss National Bank, with key nominal interest rate of –0.73 percent and inflation rate of –0.35 percent; and the Bank of England, with key nominal interest rate of 0.47 percent and inflation rate of 0.30 percent. Each of these central banks has been missing its inflation target on the low side, in some cases for a considerable period of time.7 The Fed could be included in this group, too, as the fed funds rate was targeted at 0-0.25 percent for about seven years, until Dec. 16, 2015, when the target range was increased to 0.25-0.50 percent. The Fed has missed its 2 percent inflation target on the low side for about four years now.

How a Trapped Central Bank Behaves

Abandoning the Taylor principle and embracing Neo-Fisherism seems a difficult step for central banks. What they typically do on encountering low inflation and low nominal interest rates is engage in unconventional monetary policy. Indeed, unconventional policy has become commonplace enough to become respectably conventional.
Unconventional monetary policy takes three forms in practice. First, central banks can push market nominal interest rates below zero (relaxing the zero lower bound) by paying negative interest on reserves at the central bank—charging a fee on such accounts, as has been done by the Bank of Japan, the Swiss National Bank, the Danish central bank and the Swedish Riksbank. Second, there can be so-called quantitative easing, or QE—the large-scale purchase of long-maturity assets (government debt and private assets, such as mortgage-backed securities) by a central bank. Such programs have been an important element of monetary policy in the U.S., Switzerland and Japan, for example, in the years after the financial crisis (2007-2009). Third, central banks can engage in forward guidance—promises concerning what they will do in the future. Typically, these are promises that interest rates will stay low in the future, in the hope that this will increase inflation. But will any of these unconventional policies actually work to increase the inflation rate? Neo-Fisherism suggests not.
First, given the Fisher effect, a negative nominal interest rate will only make the inflation rate lower, as has happened in Switzerland, where nominal interest rates have been negative for some time and there is deflation—negative inflation. Second, some theory indicates that QE either does not work at all or acts to make inflation lower.8 This is consistent with what we have seen in Japan, where an extensive QE program in place for two years has not yielded higher inflation. Third, forward guidance, which promises more of the same unconventional policies and continued low interest rates if the low-inflation problem persists, will only prolong the problem.

Conclusion

Among the major central banks in the world, the Fed stands out as the only one that is pursuing a policy of increases in its nominal interest rate target. This policy, referred to as "normalization," was initiated in December 2015. Normalization, however, is projected to take place slowly and is not motivated explicitly by Neo-Fisherian ideas, though James Bullard, president of the Federal Reserve Bank of St. Louis, has shown interest.9
What is the risk associated with Neo-Fisherian denial—a failure to take account of the Fisher relation in formulating monetary policy? Neo-Fisherian denial will tend to produce inflation lower than central banks' inflation targets and nominal interest rates that are at central banks' effective lower bounds—the low-inflation policy trap. But what of it? There are no good reasons to think that, for example, 0 percent inflation is worse than 2 percent inflation, as long as inflation remains predictable. But "permazero" damages the hard-won credibility of central banks if they claim to be able to produce 2 percent inflation consistently, yet fail to do so. As well, a central bank stuck in a low-inflation policy trap with a zero nominal interest rate has no tools to use, other than unconventional ones, if a recession unfolds. In such circumstances, a central bank that is concerned with stabilization—in the case of the Fed, concerned with fulfilling its "maximum employment" mandate—cannot cut interest rates. And we know that a central bank stuck in a low-inflation trap and wedded to conventional wisdom resorts to unconventional monetary policies, which are potentially ineffective and still poorly understood.

Figure 1

---

Figure 2

Endnotes

1. See Friedman. [back to text]
2. The inflation rate is measured as the four-quarter percentage increase in the personal consumption deflator. [back to text]
3. See Federal Open Market Committee. [back to text]
4. See Cochrane. [back to text]
5. See Taylor. [back to text]
6. See Benhabib, Schmitt-Grohé and Uribe; Andolfatto and Williamson; and Bullard's 2010 work for examples. [back to text]
7. Data are for April 2016. For the European Union, Switzerland and the United Kingdom, the key nominal interest rate refers to the April average of the overnight interbank lending rate, while for Denmark it is the average of the tomorrow-next interbank rate. For Sweden, the rate refers to the end-of-period value of the central bank-pegged repo rate. Inflation rate refers to the 12-month percent change in consumer prices. [back to text]
8. See Williamson. [back to text]
9. See Bullard's 2016 work. [back to text]

References

Andolfatto, David; and Williamson, Stephen. "Scarcity of Safe Assets, Inflation, and the Policy Trap." Journal of Monetary Economics, 2015, Vol. 73, C, pp. 70-92.

Benhabib, Jess; Schmitt-Grohé, Stephanie; and Uribe, Martín. "The Perils of Taylor Rules." Journal of Economic Theory, 2001, Vol. 96, Nos. 1-2, pp. 40-69.

Bullard, James. "Seven Faces of 'The Peril.'" Federal Reserve Bank of St. Louis Review, 2010, Vol. 92, No. 5, pp. 339-52.

Bullard, James. "Permazero in Europe?" Presentation at the Ninth International Research Forum on Monetary Policy, Frankfurt, Germany, March 18, 2016.

Cochrane, John. "Do Higher Interest Rates Raise or Lower Inflation?" Working paper, Hoover Institution, Feb. 10, 2016.

Federal Open Market Committee. "Statement on Longer-Run Goals and Monetary Policy Strategy," Jan. 26, 2016

Friedman, Milton. The Counter-Revolution in Monetary Theory. London, U.K.: Transatlantic Arts, 1970.

Taylor, John. "Discretion versus Policy Rules in Practice." Carnegie-Rochester Series on Public Policy, 1993, Vol. 39, pp. 195-214.

Williamson, Stephen. "Scarce Collateral, the Term Premium, and Quantitative Easing." Journal of Economic Theory, 2016, Vol. 164, pp. 136-65.

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Fragments toward a Neo fisherian prolegomena ...Default ...coupon rates on new debt .....market price of existing debt ....distribution of debt by Remaining .term of existing debt

......... Revaluation of existing debt with change up or down
in coupon rate for new debt .....
Change in default rate as rate on new debt changes up or down

Farmer and Wall Street macro

" Do not build roads and bridges as a temporary stimulus. A better way to prevent the recession that might otherwise occur when the Bank raises the Bank Rate would be an explicit commitment by the Financial Policy committee of the Bank of England, to support the value of the stock market. This could be achieved by offering to buy or sell shares in anExchange Traded Fund at a value linked to the performance of the unemployment rate. "



"The private sector does not typically find the right price for stocks and shares. Animal spiritsrepresent a separate independent fundamental of the economy; they are like technology or preferences. And the state of animal spirits is reflected in the price that households are prepared to pay for stocks and shares.

The role of fiscal policy is to counteract the influence of animal spirits by helping markets to coordinate on a ‘good equilibrium’. In the absence of the direction of the Treasury or the Central Bank, asset markets are often trapped like the proverbial prisoner in the ‘prisoners’ dilemma’ who confesses to avoid the fate that would await him if his partner in crime were to confess first.

My argument is not made lightly. My recent books and articles provide a coherent alternative to the conventional New Keynesian paradigm and I provide empirical evidence that demonstrates a stable link between asset prices and the unemployment rate.

Conventional wisdom argues that the path to higher inflation lies through lowering interest rates. That path is supposed to trigger a demand expansion, higher employment and higher wages and prices. But the link from unemployment to wage inflation, the so-called ‘Phillips Curve’ has not existed since Phillips published his eponymous article in 1958. It was an artifact of the gold exchange standard when monetary policy operated very differently from the way it operates today.

The evidence from twenty years of stagnation in Japan does not inspire confidence in a policy of lowering interest rates further. It’s time for new approach."


Maybe
That last sentence suggests the likely impact of farmers stock market State props 

George tax country .....this may have a point...let the migration continue ...let residential compression continue ..simply tax away the sky rocketing ground rents instead of rationing and zoning lots and lot use ...this is not capitalism per SE ...this is development from a billion pairs of feet up not the elite eyes of the party cliques

HONG KONG – Real-estate prices in China’s top cities are spiking, generating contradictory predictions of either bursting bubbles or a coming economic turn-around. What’s really going on in China’s hot property markets?

China’s National Bureau of Statistics (NBS) revealed last week that ten of the 70 large and medium-size Chinese cities surveyed had recorded annual price increases of more than 20% for newly built commercial housing. In the first-tier cities of Shanghai and Shenzhen, those gains were even higher: above 37%. In the second-tier cities of Xiamen and Hefei, the increases exceeded 40%.

Whither Turkey?

Sinan Ülgen engages the views of Carl Bildt, Dani Rodrik, Marietje Schaake, and others on the future of one of the world’s most strategically important countries in the aftermath of July’s failed coup.

Chris Watling of Longview Economics compares China’s property market today to the Dutch tulip mania that peaked in 1637. He points out that property prices in Shenzhen, in particular, jumped 76% since the start of 2015, bringing a typical home to $800,000, just below the average home price in Silicon Valley. This, he suggests, may be the last hurrah before a market meltdown
Liu Shijin, former Vice Minister of the Development Reform Center of China’s State Council, disagrees. Instead, he posits that after six years of reduced investment in infrastructure and construction, growth in the Chinese property market may be bottoming out, and liquidity and consumer confidence may be shifting back to housing.

To determine who is right, it is important, first, to recognize that not all Chinese cities’ property markets are surging. In 42 of the cities surveyed by the NBS – those with industrial overcapacity and 
excessive property inventories – price increases amounted to less than 5%, with eight cities recording falling or stagnant property prices. This pattern of divergence creates a dilemma for Chinese 



----------------





















This is well beyond dubious however :


" policymakers and investors, who now must weigh carefully the insights of two economic giants: John Maynard Keynes and Friedrich Hayek.

At a time of slowing economic growth, some are advocating more Keynesian macro-stabilization measures, much like those China used to sustain growth after the global economic crisis of 2008 


. But in many areas, particularly in the northeast, central, and western parts of the country, the slowdown cannot be resolved through more stimulus."



Wrong !!!
Even if this is true:

" In fact, stimulus in those regions would largely flow out, along with the labor and capital that is already being propelled toward coastal areas, which boast more advanced technology, higher rates of innovation, superior infrastructure, and a more market-friendly business environment."



------------





"  What slower-growth regions need, therefore, is time to carry out supply-side structural reforms, including cutting inventories, reducing overcapacity, and writing off the bad debts of local governments and state-owned enterprises."

True but not 
an "either or "

Combine. Restructuring  with demand stimulus 

It's a case of  "both and " 


-/-------

" The regions with surging property prices, meanwhile, tend to be the ones that are drawing labor and capital with high growth and superior job opportunities. "

Of course 
and there is no reason to try to check this process strategically 
Or even using mid term rationing tactics slow the flow down appreciably 
Today chi com elite policy circles may be inducing this slow down
But it's the macro equivalent of blood letting 

" A study by China Securities International showed that, in 2000-2010, cities in eastern China received 82.4% of total migrant inflows. By 2010, the migrant population in Beijing, Shanghai, and Tianjin had more than doubled, to 34.5%, 37.9%, and 21%, respectively.

In an attempt to manage the growth of these cities....." 

Prepare yourself for a party mis perception or willful distortion 

" ...which faced a huge shortage of land..."


Nonsense  the lot to gross space ratio is only limited by infra structure and building technology 

But yes obviously there was and is a chronic dynamic 

" ...shortage in housing inventories, and urban public infrastructure, "

Now the bad flinch 

" China’s government imposed restrictions on both demand for and supply of housing.
 But, as the spike in housing prices in these cities shows, their efforts didn’t work."

Of course not 
A system half free and have regulated can not long stand 

" Chinese policymakers had forgotten about Hayek. Otherwise, they would have expected that labor and capital markets would continue to drift toward growth and innovation in urban centers."

Hayek indeed pérsonifies the worship of spontaneous emergent pattern 


 " They would also have recognized that market prices naturally transmit complex, specific, and changing local knowledge, which is distributed among individuals and corporations, not controlled by central planners."

Gratuitous agit prop 

Central planners must seek facts from spontaneous emergencies 

"  And they would have appreciated that if supply is to be matched with demand over time, real-estate and infrastructure investments must reflect that knowledge." 

But capture the rents for all the people not a horde of private interests 

Instead, China’s policymakers inadvertently created bottlenecks in local land supply. Residential land transactions in first- and second-tier Chinese cities remain thin and heavily influenced by urban planning policies, despite the depth and sophistication of residential property markets.

Fortunately, there is scope for China’s urban planners to relax restrictions on the supply of land and on the floor area ratio (the ratio of gross floor area to the size of the lot on which the building stands). According to a study by China International Capital Corp, the urban built-up area in Shanghai is only 16%, compared to 44% in Tokyo and 60% in New York City. Within that area, only 36% is used for residential functions in Shanghai, compared to 60% in Tokyo and 44% in New York City.

In other words, the available residential land for sale in Shanghai is considerably smaller than that available in New York City or even Tokyo, which is a major reason for surging property prices in these cities. And, in fact, if the supply of land and usable floor area is not increased, more spending on local public infrastructure will cause prices of existing space to rise even higher.

Liu’s observation that households are becoming increasingly confident in the housing market also seems to be correct. The recent increase in demand for housing may reflect households’ desire to hedge their high savings against inflation or, more fundamentally, the sense that they must secure housing urgently, given limited supply. Either way, they now seem convinced that investment in housing is a relatively safe bet.

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If that is the case, the risk of a property bubble in China is probably being overstated. But that does not mean that all is well in China’s property sector. If the government ignores market price signals, mismatches between supply and demand could build up, undermining growth in dynamic regions, while leaving low-growth regions weighed down by excess capacity and bad assets.