J. Bradford DeLong's Blog, page 1135

Liveblogging World War II Today: October 16, 2014

: World War II Today:

Victoria Cross: No. 6092111 Private (acting Sergeant) George Harold Eardley, The King’s Shropshire Light Infantry (Congleton, Cheshire).

In North-West Europe, on 16th October, 1944, during an attack on the wooded area East of Overloon, strong opposition was met from well sited defensive positions in orchards. The enemy were paratroops and well equipped with machine guns. A Platoon of the King’s Shropshire Light Infantry was ordered to clear these orchards and so restore the momentum of the advance, but was halted some 80 yards from its objective by automatic fire from enemy machine gun posts. This fire was so heavy that it appeared impossible for any man to expose himself and remain unscathed.

Notwithstanding this, Sergeant Eardley, who had spotted one machine gun post, moved forward, firing his Sten gun, and killed the occupants of the post with a grenade. A second machine gun post beyond the first immediately opened up, spraying the area with fire. Sergeant Eardley, who was in a most exposed position, at once charged over 30 yards of open ground and silenced both the enemy gunners.

The attack was continued by the Platoon but was again held up by a third machine gun post, and a section sent in to dispose of it, was beaten back, losing four casualties. Sergeant Eardley, ordering the section he was with to lie down, then crawled forward alone and silenced the occupants of the post with a grenade.

The destruction of these three machine gun posts singlehanded by Sergeant Eardley, carried out under fire so heavy that it daunted those who were with him, enabled his Platoon to achieve its objective, and in so doing, ensured the success of the whole attack.

His outstanding initiative and magnificent bravery were the admiration of all who saw his gallant actions."

At the Oregon Economic Forum: Introducing Doug Elliott: "Making Wall Street Work for Main Street

Over at Equitable Growth: I am very happy to be here this morning to introduce the Oregon Economic Forum's Keynote Speaker, Doug Elliott of the Brookings Institution, and to set the stage for his talk.

To do that, let me ask all of you to cast yourselves back to 2006, to the end of Alan Greenspan's long tenure as Chair of the Federal Reserve, and to the days of what was then called the "Great Moderation". During Greenspan's term starting in 1987 the unemployment rate had never gone above 7.8% and it had gotten as low as 3.8%. The attainment of low unemployment under Greenspan did not signal any forthcoming inflationary spiral: The peak 12-mo PCE price index core inflation rate during Greenspan's tenure was 4.7%. The peak inflation rate that followed that 3.8% unemployment rate was 2.4%. Inflation had not been above 2.5% since December 1993. READ MOAR

This superb macroeconomic performance had not been the result of "good luck" understood as an absence of macroeconomic disturbances and shocks. We had seen the 25% fall in the stock market in one day in October 1987, the S&L financial crisis of the early 2000s, the Mexican peso crisis on our southern border in 1995, the East Asian financial crisis of 1997, followed the next year by the bankruptcy of Russia and then by the collapse of the world's then-largest hedge fund LTCM in the same year. 2001 had seen the collapse of the dot-com bubble, and the terror-attack on New York and the Pentagon on 9/11. Plus there had been large longer-term surges: the high-tech boom of the 1990s, the enormous Chinese export surplus surge of the late 1990s and 2000s, the Argentinian crash of 2002, the era of the global savings glut of the 2000s, the American construction and house-price boom, and the extraordinary rise in financial sophistication as the growth of derivative securities allowed risk to be finely sliced and diced and sold off to those who wished to hold that particular risk or make that particular bet. All of these held the prospect of producing significant macroeconomic disturbances to the underlying real economy of America. None of them did. Recessions were short. And small. And infrequent.

The conclusion that the economics profession--at least the macroeconomic mainstream of it--drew from this--call it 1984-2007--"Great Moderation" generation was that monetary policy had finally figured out how to do its proper job. A Federal Reserve that had painfully reestablished market trust in it as the guardian of price stability had set solid anchors foe inflationary expectations: no more creeping or trotting inflationary spirals. A Federal Reserve that no longer had to worry about making its bones with respect to its credibility as a price-stability guardian was thus free to throw its weight around and not fine tune but at least grossly adjust the economy to try to keep employment at high even if not full levels and growth and investment strong.

In such an environment allowing experimentation in the financial sector appeared to be wise. The large persistent gaps in average rates of return across asset classes appeared to economists to suggest an outsized price of risk. Financial innovation and experimentation that promised to generate forms of risk more investors would be more willing to bear more cheaply seemed to promise an improvement in economic efficiency. The risks of allowing and in fact encouraging cowboy finance appeared to be small: the princes of Wall Street had every incentive in their own portfolios and options to manage risk correctly, and in the experience of the Federal Reserve since the mid-1980s strongly indicated that whatever shocks were generated by financial disturbances the Federal Reserve could build firewalls to keep them from materially and significantly damaging the real economy of demand, employment, production, and incomes. And the peripheral financial crises--Argentinian, Russian, East Asian, Mexican? Not, the consensus of North Atlantic economists was, likely or perhaps even possible in the deep and sophisticated financial markets of the North Atlantic.

Thus when Raghu Rajan, then Chicago Business School professor and now head of the Reserve Bank of India, stood up at the Federal Reserve's Jackson Hole Wyoming conference in 2005 and said not just that there were large risks of financial crisis but that we had no grasp of what the risks were, the response was a general hooting. My friend and patron Larry Summers told him that the "slightly Luddite premise of [his] paper" was "largely misguided". The very sharp Armenio Fraga said that "risk is going where it belongs... we may be better off than before... [and] less of an impact of all these financial accidents on the real economy". The only defender he had was Alan Blinder, who wanted to: "defend Raghu a little bit against the unremitting attack he is getting here for not being a sufficiently good Chicago economist..."

And so when we went into 2008 we--certainly I--thought that the situation was serious but not desperate, that the likely outcome would be a small recession like 2001, and that certainly by 2011 we would be back to normal if we took the situation sufficiently seriously--which I was highly confident that we would.

Big mistake.

It turned out that the Federal Reserve did not have a power to build firewalls to protect the real economy of demand, employment, production, and incomes from the consequences of financial distress--and, in its origins, not all that much financial distress either. We built at most one million houses above trend during the housing bubble, and--without the snowballing and feedback vicious circles--there were only a couple of hundred thousand dollars of mortgage debt on each that was not going to be repaid and had to be allocated as losses. Triple that for losses on existing homeowners who became overextended, and we still have only $600 billion of losses due to bad investments. Yet those $600 billion of fundamental losses which should have been there barely noticeable in the world economy of $80 trillion of financial assets triggered a more than $20 trillion collapse in financial values, and landed us here.

Now Doug Elliott is here to tell us why, exactly, I and so many others were so mistaken in our estimates of the situation back in 2007, and what is to be done next.

Over at Equitable Growth: What Would Be Convincing Evidence That 2%/Year Is too Low for the Inflation Target?: Hoisted from the Archives from 1992

Over at Equitable Growth: God! We were (and are) so smart!

J. Bradford DeLong and Lawrence H. Summers (1992): Macroeconomic Policy and Long-Run Growth:

On almost any theory of why inflation is costly, reducing inflation from 10%/year to 5%/year is likely to be much more beneficial than reducing it from 5%/year to 0%/year. So austerity encounters diminishing returns. And there are potentially important benefits of a policy of low positive inflation. It makes room for real interest rates to be negative at times, and for relative wages to adjust without the need for nominal wage declines....

These arguments gain further weight when one considers the recent context of monetary policy in the United States. A large easing of monetary policy, as measured by interest rates, moderated but did not fully counteract the forces generating the recession that began in 1990. The relaxation of monetary policy seen over the past three years in the United States would have been arithmetically impossible had inflation and nominal interest rates both been 3%-points lower in 1989. Thus a more vigorous policy of reducing inflation to 0%/year in the mid-1980s might have led to a recent recession much more severe than we have in fact seen...

If the past 24 hours... the past six months... the past six years... are not convincing evidence that a 2%/year inflation target is too low, what would be convincing evidence to that effect?

Plus Bonus Hoisted from the Archives:

A 2%/Year Inflation Target Is too Low: First, the live question is not whether the Federal Reserve should raise its target inflation rate above 2% per year.

The live question is whether the Federal Reserve should raise its target inflation rate to 2% per year.

On Wednesday afternoon, Federal Reserve Chair Bernanke stated that he was unwilling to undertake more stimulative policies because "it is not clear we can get substantial improvements in payrolls without some additional inflation risks." But the PCE deflator ex-food and energy has not seen a 2% per year growth rate since late 2008: over the past four quarters it has only grown at 0.9%. At a 3.5% real GDP growth rate, unemployment is still likely to be at 8.4% at the end of 2011 and 8.0% at the end of 2012--neither of them levels of unemployment that would put any upward pressure at all on wage inflation. It thus looks like 1% is the new 2%: on current Federal Reserve policy, we are looking forward to a likely 1% core inflation rate for at least another year, and more likely three. A Federal Reserve that was now targeting a 2% per year inflation rate would be aggressively upping the ante on its stimulative policies right now. That is not what the Federal Reserve is doing. Would that we had a 2% per year inflation target.

But if we were targeting a 2% inflation rate--which we are not--should we be targeting a higher rate? I believe that the answer is yes.

To explain why, let me take a detour back to the early nineteenth century and to the first generations of economists--people like John Stuart Mill who were the very first to study in the industrial business cycle in the context of the 1825 crash of the British canal boom and the subsequent recession. John Stuart Mill noted the cause of slack capacity, excess inventories, and high unemployment: in the aftermath of the crash, households and businesses wished to materially increase their holdings of safe and liquid financial assets. The flip side of their plans to do so--their excess demand for safe and liquid financial assets--was a shortage of demand for currently-produced goods and services. And the consequence was high unemployment, excess capacity, and recession,.

Once the root problem is pointed out, the cure is easy. The market is short of safe and liquid financial assets? A lack of confidence and trust means that private sector entities cannot themselves create safe and liquid financial assets for businesses and households to hold? Then the government ought to stabilize the economy by supplying the financial assets the market wants and that the private sector cannot create. A properly-neutral monetary policy thus requires that the government buy bonds to inject safe and liquid financial assets--what we call "money"--into the economy.

All this is Monetarism 101. Or perhaps it is just Monetarism 1. We reach Advanced Macroeconomics when the short-term nominal interest rate hits zero. When it does, the government cannot inject extra safe and liquid money into the economy through standard open-market operations: a three-month Treasury bond and cash are both zero-yield government liabilities, and buying one for the other has no effect on the economy-wide stock of safety and liquidity. When the short-term nominal interest rate hits zero, the government has done all it can through conventional monetary policy to fix the cause of the recession. The economy is then in a "liquidity trap."

Now this is not to say that the government is powerless. It can buy risky and long-term loans for cash, it can guarantee private-sector liabilities. But doing so takes risk onto the government's books that does not properly belong there. Fiscal policy, too, has possibilities but also dangers.

My great uncle Phil from Marblehead Massachusetts used to talk about a question on a sailing safety examination he once took: "What should you do if you are caught on a lee shore in a hurricane?" The correct answer was: "You never get caught on a lee shore in a hurricane!" The answer to the question of what you should do when conventional monetary policy is tapped out and you are at the zero interest rate nominal bound is that you should never get in such a situation in the first place.

How can you minimize the chances that an economy gets caught at the zero nominal bound where short-term Treasury bonds and cash are perfect substitutes and conventional open-market operations have no effects? The obvious answer is to have a little bit of inflation in the system: not enough to derange the price mechanism, but enough to elevate nominal interest rates in normal times, so that monetary policy has plenty of elbow room to take the steps it needs to take to create macroeconomic stability when recession threatens. We want "creeping inflation."

How much creeping inflation do we want? We used to think that about 2% per year was enough. But in the past generation major economies have twice gotten themselves stranded on the rocks of the zero nominal bound while pursuing 2% per year inflation targets. First Japan in the 1990s, and now the United States today, have found themselves on the lee shore in the hurricane.

That strongly suggests to me that a 2% per year inflation target is too low. Two macroeconomic disasters in two decades is too many.

1149 words

"Quos Juppiter Vult Perdere, Prius Dementat" Weblogging: Live from the McCarran Airport Starbucks

If Cliff Asness was going to write the passage below, has there ever been a worse week for him to write it?

I mean "it's not over! The enormous pent-up inflation from the Fed's QE programs is out there bubbling under the surface!! Short Treasuries massively now!!!" has not been a winning rhetorical strategy for quite a while, and to double down on it this week does make you look like quite an idiot...

Cliff Asness: The Inflation Imputation | RealClearMarkets: "In 2010, I co-signed an open letter warning that the Fed's experiment with an unprecedented level of loose monetary policy... created a risk of serious inflation....

Paul Krugman lived up to his lifelong motto of 'stay classy'... lesser lights of the Keynesian firmament have also jumped in (collectivists, of course, excel at sharing a meme). Responding to Krugman is as productive as smacking a skunk with a tennis racket.... Paul's screeds.... I'll put our collective record up against Krugman's (and the Krug-Tone back-up dancers) any day of the week and twice on days he publishes... chicanery (silly Paul, you are no Rabbit)... never-uncertain-but-usually-wrong like Paul... malpractice... honest Paul Krugman (we will use this term again below but this is something called a "counter-factual")... former economists turned partisan pundits....

Much like when the Germans bombed Pearl Harbor, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases...

Look:

It was perfectly normal--well, not strikingly abnormal--for Cliff Asness to have taken a look at the speed at which the monetary base was increasing in 2009 and thinking that such policies, unless reversed, were likely to lead to a burst of inflation. Wrong, but not strikingly abnormal.

It was perfectly normal--well, not strikingly abnormal--for Cliff Asness to have taken a look at the speed at which the national debt was increasing in 2009 and thinking that such policies, unless reversed, were likely to lead to high Treasury real interest rates. Wrong, but not strikingly abnormal.

In order to avoid such predictions you had to:

have done your homework and brought yourself up to speed
uon the analyses predictions that Krugman, Woodford, Eggertssen, Hicks, Keynes, etc. had made
about how an economy operates in a liquidity trap, at the zero lower bound; and
have considerable confidence that those predictions were correct; or at least
have the wisdom to recognize that joining Bill Kristol in an attempt to joggle Ben Bernanke's elbow on an issue that Bernanke had been studying for literally all his adult life was an intellectual strategy that was likely to have a very large negative α.

For large increases in the monetary base not to make the likely future one of high inflation, and for large increases in the national debt not to make the likely future one of high Treasury real interest rates--well, something weird had to be going on.

But, as Krugman, Woodford, Eggertssen, Hicks, Keynes, etc. had noted, were warning, and were correct in warning back in 2009-2010, something weird was going on.

Because of how the economy had gotten itself wedged, the risk that extraordinary monetary easing would lead to an inflationary spiral was extremely low. Because of how the economy had gotten itself wedged, the risk that large government debt issuance would lead to exploding real interest rtes on government debt was extremely low. Only people who really did not understand what was going on would think that 2010 was a time to stress, highlight, obsess over, and freak out about INFLATION! DEBT! when the real risks to freak out about were DEPRESSION!! UNEMPLOYMENT!!!

But when something weird is going on, to get things badly wrong is normal--well, not that abnormal.

What is not normal--what is really abnormal--is to be a dead-ender.

What is not normal is to claim that your analysis back in 2010 that quantitative easing was generating major risks of inflation was dead-on.

What is not normal is to adopt the mental pose that your version of classical austerian economics cannot fail--that it can only be failed by an uncooperative and misbehaving world.

What is not normal is, after 4 1/2 years, in a week, a month, a six-month period in which market expectations of long-run future inflation continue on a downward trajectory, to refuse to mark your beliefs to market and demand that the market mark its beliefs to you. To still refuse to bring your mind into agreement with reality and demand that reality bring itself into agreement with your mind. To still refuse to say: "my intellectual adversaries back in 2010 had a definite point" and to say only: "IT'S NOT OVER YET!!!!"

Liveblogging World War II: October 15, 1944: Holland: Death in a minefield on the front line

World War II Today: 15 October 1944: Holland: Death in a minefield on the front line:

Battery Sergeant Major Ernest Powdrill describes life on the front line in Holland.

The weather was appalling, the drenching rain was intense and the days were permanently dark. It was bitterly cold. The locality was wooded and gloomy, the enemy were around us in some considerable numbers and the area was extensively mined. South of Oploo was not a comfortable position to be in, but there was no alternative.

On the night of 14th – 15th October Powdrill had to go forward with supplies for the Forward Observation tank, referred to as the RDon, which was concealed on the edge of woods, much closer to the enemy. He went forward in a carrier with Driver Smith:

… easing his way slowly in the dark night in first gear, through the wood along this narrow track, past a lone, empty cottage on the left that was probably the forester’s accommodation in normal times, and stopping just short of the edge of the wood where RDon was hidden in the trees and well camouflaged.

We managed a pleasant hour yarning about various incidents and drinking a mug of hot sweet tea, but still very conscious of the proximity of the enemy. We were a little apprehensive, too, as we had to manoeuvre our way back in the dark through the minefield.

We managed it by being extra careful, sometimes stopping for me to have a closer look by getting out and examining the ground in front (it was possible to walk over some German mines because the human body did not have sufficient weight to set them off — a tank or a Bren carrier was a different matter).

We eventually got back to the guns, safe and sound, thankful that it was not our job to spend the spooky night up there, although our gun position was not exactly a safe haven. I had only been back at the guns about an hour when an order came for the journey to be repeated, the reasons for which I forget. I was engaged in some task or other at the Command Post and a newcomer, Second Lieutenant Patrick Delaforce, a very young officer, was ordered to undertake the task.

He took my Bren carrier, with Driver Smith at the wheel, and I briefed Patrick on the route to go so as to avoid the mines. He had been given different orders, however, that required a change from the route I had taken. Naturally those orders took precedence over what I had to say and I was pleased that Driver Smith was going, as he was conversant with some of the risks.

Unfortunately, the changed route apparently had not been reconnoitred and the inevitable happened — the carrier was blown up on a mine. Driver Smith was killed instantly, his left leg torn off at the thigh. Patrick was injured, sustaining a severe head wound (he told me years later that he still has a piece of metal in his head).

RDon’s crew at the sharp end heard the explosion and, fearing the worst, conveyed this sad news to us over the wireless. Lance Bombardier Muscoe and I immediately ran about half a mile along the track, oblivious of the mines, to the scene of the tragedy. The carrier was laid on its side, with Driver Smith’s torn leg still on the clutch pedal, his body some yards away, having been pulled clear by RDon’s crew. He lay lifeless under a blanket.

We looked around in the dark night, out of sight of the Germans nearby, who must also have heard the explosion, amidst the proliferation of mines, for some suitable place to bury him. We were near to the forester’s empty cottage and the only place we could dig a shallow grave without undue disturbance from the enemy was, incongruously, by the front door of the cottage, just where a doormat might have been placed. We buried Driver Smith, said a few words over him and forlornly made our way back.

Patrick, I think, was attended to by RDon’s crew. Back at the guns, everyone anxiously wanted to know what had happened and there was great sorrow as Driver Smith was a popular member of the Troop. He was also one of the two oldest among us, having a wife and a young daughter at home.

Department of "Huh?!": Yet Another Thomas Piketty Edition

Let's quote Thomas Piketty:

...in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms...

Justin Wolfers: Fellow Economists Express Skepticism About Thomas Piketty: "Has he convinced his fellow economists?...

...They’re intrigued, but not convinced. Perhaps Mr. Piketty has isolated the forces that will drive wealth inequality in the future, but for now, they’re not convinced the forces he focuses on are central to understanding the recent rise in wealth inequality. At least that’s my reading of the latest survey run by the University of Chicago’s Initiative on Global Markets. I’ve written before about their Economic Experts panel, which is intended to be broadly representative of opinion among elite academic economists.... The expert economists were asked whether

the most powerful force pushing toward greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.

To translate, does the T-shirt slogan “r>g” explain why wealth has become more unequally distributed?... 18 percent... uncertain. The clear majority either disagreed (59 percent) or strongly disagreed (21 percent)....

But what was the point of this? We saw from the Piketty quote up at the top that Piketty does not think that "r>g" has been driving the rise in American inequality. Why is it an interesting question to ask?

Justin, in my view, buries the lead, for he does indeed point out later on in his article:

If surveyed, it is likely that he would have joined the majority view in disagreeing with the claim the survey asked about. In Mr. Piketty’s telling, rising incomes among the super-rich are responsible for the recent rise in wealth inequality...

But doesn't that make the IGM Forum poll not any sort of sober assessment of economists' views of Piketty's Capital in the Twenty-First Century but, rather, something else?

Shouldn't the IGM Forum at the Booth Business School of the University of Chicago have found somebody who had actually read Piketty's Capital in the Twenty-First Century to decide on what questions to ask?

I am sure that it was always such--that intellectual standards in the academy were always not that high, and that a great many of the people making arguments always were people who hadn't done their homework. But I do seem to be reminded of it more and more these days, especially since the beginning of the financial crisis back in 2007...

Tuesday Book Review Weblogging: Steven Brust

Jo Walton: After Paris: Meta, Irony, Narrative, Frames, and The Princess Bride: [Steven] Brust is definitely writing genre fantasy...

...and he knows what it is, and he is writing it with me as his imagined reader, so that’s great. And he’s always playing with narrative conventions and with ways of telling stories, within the heart of genre fantasy--Teckla is structured as a laundry list, and he constantly plays with narrators, to the point where the Paarfi books have a narrator who addresses the gentle reader directly, and he does all this within the frame of the secondary world fantasy and makes it work admirably.

In Dragon and Taltos he nests the story (in different ways) that are like Arabian Nights crossed with puzzle boxes. But his work is very easy to read, compulsively so, and I think this is because there’s always a surface there--there might be a whole lot going on under the surface but there’s always enough surface to hold you up. And like Goldman, he loves the work, and he thinks it’s cool, and he’s serious about it, even when he’s not. Thinking about narrative, and The Princess Bride, and Brust, and Diderot, made me realise the commonalities between them. They’re all warm, and the meta things I don’t care for are cold and ironic....

There’s no 'Ha ha, made you care!' no implied superiority of the author for the naive reader, there’s sympathy and a hand out to help me over the mire, even when Goldman’s telling me the story I didn’t want about 'his' lack of love, he’s making me care about 'him', in addition to caring about Inigo and Wesley. Nor is he mocking me for believing in true love while I read the fairytale, he’s trying his best to find a bridge to let even his imagined cynical reader believe in it too....

This is why Galaxy Quest works and everything else that tries to do that fails in a mean-spirited way. The Princess Bride is the same.... The Princess Bride in both incarnations has a real point to what its doing and cares about its characters and makes me care, including the characters in the frame. And you can read it as a fairytale with a frame, or a frame with a fairytale, and it works either way. And I might not be the intended audience, but I love it anyway.

No, Cliff Asness Still Has Not Done His Homework on What a Liquidity Trap Is: Why Do You Ask?

Clifford Asness: The Inflation Imputation: "In 2010, I co-signed an open letter warning that the Fed's experiment...

...with an unprecedented level of loose monetary policy... created a risk of serious inflation....Paul Krugman lived up to his lifelong motto of "stay classy" with a piece on the subject entitled Knaves, Fools, and Quantitative Easing. Some lesser lights of the Keynesian firmament have also jumped in.... Responding to Krugman is as productive as smacking a skunk with a tennis racket. But, sometimes, like many unpleasant tasks, it's necessary....

We did not make a prediction.... We warned of a risk....

What everyone... missed... was how little money would circulate.... The Fed clearly wanted this money lent by banks and spent.... They didn't get that, and we didn't get the inflation we feared.... How this is a victory for one side of the debate or another is beyond me, but obviously clear to Paul and his back-up singers....

Also remember, much like when the Germans bombed Pearl Harbor, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases. When monetary policy is back to historic norms, and economic growth is once again strong, a normal number of people are seeking and getting jobs, and inflation has not reared its head, I think we can close the books on this one....

We have indeed observed tremendous inflation in asset prices.... Inflation is hard enough to forecast, but where it lands is even harder. If one counts asset inflation it seems we've indeed had tremendous inflation....

Now for a real prediction: Paul will continue to be mostly wrong, mostly dishonest about it, incredibly rude, and in a crass class by himself (admittedly I attempt these heights sometimes but sadly fall far short). That is a prediction I'm willing to make over any horizon, offering considerable odds, and with no sneaky forecasts of merely "heightened risks." Any takers?"

The part that I have bolded does, I think, demonstrate to everyone rational's satisfaction that Asness still as not done his homework.

The entire point of the analysis of the liquidity trap since the 1930s has been that at the zero lower bound the substitutability of bonds and cash becomes very, very high: there is no opportunity cost in holding money rather than bonds. As a result:

The velocity of money becomes indeterminate, and the level of spending is no longer determined as equal to the money stock times the velocity of money by the requirement that households and businesses hold their desired quantity of money balances.
Instead, the velocity of money is determined as the level of spending divided by the money stock.
Instead, the level of spending is determined as equal to that level at which S=I by the requirement that households and businesses hold their desired quantity of financial savings vehicles.
If you understand how the liquidity trap works, you don't expect quantitative easing to have large effects--and the failure of quantitative easing to have large effects comes as no surprise.

That was what Paul Krugman has been arguing since at least... 1998, I believe:

Paul Krugman: Japan 1998: "Here’s the little wonkish paper (pdf) I wrote back in 1998...

...the one that alerted me to the danger of falling into a liquidity trap, so that I was intellectually prepared for the mess we’re in. The whole point of that paper was that when you’re up against the zero lower bound, it doesn’t matter how much money you print--not unless you credibly promise higher inflation...

So, yes, it is very clear to Paul Krugman and to his back-up singers that quantitative easing's effects are small unless it is taken as a credible signal of a régime change and thus generates a significant shift in expectations of inflation. It wasn't. So it didn't. That it had at best small effects is an intellectual win for the Keynesian side here.

Everybody who has done their homework recognizes that.

Cliff Asness appears to believe that Paul Krugman's beliefs are in some sense the flip side of his--that while Asness believed that QE would produce high inflation, instead Krugman believed that QE would produce a real economic boom: The Fed clearly wanted this money lent by banks and spent.... They didn't get that, and we didn't get the inflation we feared.... How this is a victory for one side of the debate or another is beyond me....

It is as if Asness never bothered to read things like this:

Paul Krugman: Not so easing (wonkish) - NYTimes.com: "Goldman Sachs report (no link) suggest[s] that the Fed’s policy of ‘unconventional easing’...

...isn’t very effective... that it would take between $1 trillion and $1.6 trillion of unconventional easing to accomplish as much as the Fed can achieve, in normal times, by cutting the Fed funds rate by 1 percentage point.... Bernanke and the Fed... have been gaming out what they would do if ‘it’ happened here for years. And a key element of the strategy was altering the composition of the Fed’s balance sheet--that is, unconventional easing. But that tool isn’t proving very potent.

And, truth to tell, Asness probably didn't both.

It's difficult to know what to say under such circumstances.

Department of "WTF?!": Yes, Clifford Asness's Views on Global Warming Are Insane: Why Do You Ask?

UPDATE: Cliff Asness states that I misinterpreted his column: that he did not intend for his:

I'm amazed that a Paul Krugman can look at 15+ years of the earth not warming and feel his beliefs [on global warming] need no modification...

to be a right-wingnut dog-whistle claim that global warming from human activity had stopped and was unlikely to resume.

On Twitter:

@delong: .@Cimmerian999 Suggest you replace “the earth not warming” with “surface atmosphere temperatures not exceeding extraordinary spike of 1998”

.@Cimmerian999: .@delong Yes, in a paragraph meant to be funny (lost on you and Jesse obviously) that would work much better.

END UPDATE

Clifford Asness: The Inflation Imputation: "I'm amazed that a Paul Krugman...

...can look at 15+ years of the earth not warming and feel his beliefs need no modification or explanation...

What next, Cliff? ShadowStats? Queen Elizabeth a secret lizard-person? Moon landing faked?

Noted for Your Morning Procrastination for October 14, 2014

Over at Equitable Growth--The Equitablog

Morning Must-Read: David Wessel: Lousy Economic Growth Is a Choice, Not an Inevitability - Washington Center for Equitable Growth
Morning Must-Read: Ann Marie Marciarille: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain - Washington Center for Equitable Growth
Morning Must-Read: Ryan Avent: Monetary policy: When Will They Learn? - Washington Center for Equitable Growth
Morning Must-Read: Paul Hannon: Eurozone Factory Output Slumps - Washington Center for Equitable Growth
Over at Grasping Reality: Monday DeLong Smackdown: Macroeconomy Mean-Reversion Edition - Washington Center for Equitable Growth
Afternoon Must-Read: Òscar Jordà, Moritz Schularick, and Alan M. Taylor: The Great Mortgaging - Washington Center for Equitable Growth
Infrastructure Investment Truly a No-Brainer : Tuesday Focus for October 14, 2014 - Washington Center for Equitable Growth

Plus:

Things to Read on the Morning of October 14, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

Douglas J. Elliott: Regulating Systemically Important Financial Institutions That Are Not Banks
Mike Bird: Europe Now Consists Of Two Factions: Germany, And Everybody Who Disagrees With Germany
Charlie Munger: The Psychology of Human Misjudgement
Òscar Jordà, Moritz Schularick, and Alan Taylor: The Great Mortgaging
Paul Hannon: Eurozone Factory Output Slumps
Ryan Avent: Monetary policy: When will they learn?
Ann Marie Marciarille: Missouri State of Mind: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain
David Wessel: Lousy Economic Growth Is a Choice, Not an Inevitability

And Over Here:

Catholic Bishops Push Back Against Pope Francis and His Message of "Don't Be Pricks!" and "Act Like Christians!": Live from The Roasterie (Brad DeLong's Grasping Reality...)
Over at Equitable Growth: Infrastructure Investment Truly a No-Brainer : Tuesday Focus for October 14, 2014 (Brad DeLong's Grasping Reality...)
Afternoon Must-Read: Òscar Jordà, Moritz Schularick, and Alan M. Taylor: The Great Mortgaging (Brad DeLong's Grasping Reality...)
Blazing Internet Speed in Search of a Killer App: Live from the Roasterie (Brad DeLong's Grasping Reality...)
Liveblogging the Conquest of England: October 14, 1066: Hastings and the Hermit King (Brad DeLong's Grasping Reality...)
Morning Must-Read: Ryan Avent: Monetary policy: When Will They Learn? (Brad DeLong's Grasping Reality...)
Morning Must-Read: Ann Marie Marciarille: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain (Brad DeLong's Grasping Reality...)

Òscar Jordà, Moritz Schularick, and Alan Taylor: The Great Mortgaging: "In 17 advanced economies since 1870.... (1) Mortgage lending was 1/3 of bank balance sheets about 100 years ago, but in the postwar era mortgage lending has now risen to 2/3, and rapidly so in recent decades. (2) Credit buildup is predictive of financial crisis events, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome. (3) Credit buildup in expansions is predictive of deeper recessions, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome as well..."

Paul Hannon: Eurozone Factory Output Slumps: "August Figures Show Largest Decline Since the Months Following the Collapse of Lehman Brothers: Factory output across the 18 countries that use the euro slumped in August, driven by the largest decline in the manufacture of capital goods since the months following the collapse of Lehman Brothers, and possibly reflecting a similar decline in global business confidence. The European Union’s statistics agency Tuesday said production by factories, mines and utilities during August was 1.8% lower than in July, and 1.9% lower than in the same month of 2013.... The decline more than reversed a 0.9% gain in July, and suggests it is possible output for the third quarter as a whole will be lower than for the second quarter..."

Ryan Avent: Monetary policy: When will they learn?: "THE monetary economics of a world in which interest rates are close to zero are not especially mysterious. Stimulating the economy at that point requires central banks to raise expected inflation. Disinflation, by contrast, results in passive tightening, since the central bank can't lower its policy rate.... In this world, the downside risks are much larger than those to the upside. There is infinite room to raise interest rates if inflation runs uncomfortably high.... But there is no room to reduce interest rates if inflation is running to low. That, in turn, forces central banks to use unconventional policy or run psychological operations to try to boost expectations. Central banks are not very good at those sorts of things. You need to overshoot, in other words, because undershooting feeds on itself..."

Ann Marie Marciarille: Missouri State of Mind: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain: "The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain
Who else felt a shiver go up their spine when the CDC announced that any acute care facility capable of implementing strict infection control procedures should be capable of caring for an Ebola Virus case? Well, if you know anything at all about infection control success at U.S. acute care hospitals, this should have given you pause. Strict infection control in U.S. acute care facilities has not been our long suit. When I made this observation in a talk  on health care quality at the University of Toledo School of Law's joint medical-legal conference ('Scalpel to Gavel') this past Friday, it provoked audible, if uneasy, laughter from the health care provider-heavy crowd. The way I see it, the least well informed about health care (those who think the Ebola virus is naturally spread by airborne measures) and the best informed about health care (those who are cognizant of our astonishingly poor record on implementing infection control procedures) share a common fear. The Ebola Virus certainly makes for some interesting bedfellows."

David Wessel: Lousy Economic Growth Is a Choice, Not an Inevitability: "The notion that all this is inevitable and economic policy has done all that it can do is defeatist and wrong.... The Federal Reserve has done a lot, more than some Fed policymakers would have liked, not enough for its critics. But fiscal policy in the U.S. at the local, state and federal levels has been a restraint on growth.... And gridlock in Congress is an obstacle.... Matters are even worse in Europe. Mario Draghi is stepping up his efforts at the European Central Bank with resistance from Germany. German politicians appear reluctant to take the widespread advice that a country with strong government finances, a trade surplus, decaying  infrastructure, a slowing (if still low-unemployment) economy, and a huge stake in the European project should be investing more in infrastructure, considering pro-investment tax cuts, and raising wages.... ‘There is a real risk of subpar growth persisting for a long period of time, but what is important is that we know it can be averted,’ Ms Lagarde said at the end of the weekend meetings of economic policymakers from around the world. ‘We know it can be averted. And, it will require some political courage, some will, some degree of realism on the part of national legislatures, but it can be done.’ In other words, settling for the ‘new mediocre’ is a choice."

Should Be Aware of:

A Four-Year-Old Reviews the French Laundry

 

Simon Wren-Lewis: mainly macro: The mythical Phillips curve?: "Suppose you had just an hour to teach the basics of macroeconomics, what relationship would you be sure to include? My answer would be the Phillips curve.... My faith in the Phillips curve comes from simple but highly plausible ideas. In a boom, demand is strong relative to the economy’s capacity to produce, so prices and wages tend to rise faster than in an economic downturn. However workers do not normally suffer from money illusion: in a boom they want higher real wages to go with increasing labour supply. Equally firms are interested in profit margins, so if costs rise, so will prices. As firms do not change prices every day, they will think about future as well as current costs. That means that inflation depends on expected inflation as well as some indicator of excess demand, like unemployment.... This combination of simple and formal theory would be of little interest if it was inconsistent with the data. A few do periodically claim just this.... (For example here is Stephen Williamson talking about Europe.)... If this was true, it would mean that monetary policymakers the world over were using the wrong framework in taking their decisions.... So is it true?... Just look at the raw data on inflation and unemployment for the US, and see whether it is really true that it is hard to find a Phillips curve.... We start down the bottom right in 1961.... The pattern[s] we get are called Phillips curve loops: falling unemployment over time is clearly associated with rising inflation, but this short run pattern is overlaid on a trend rise in inflation because inflation expectations are rising.... 2000 to 2013... looks much more like Phillips’s original observation: a simple negative relationship between inflation and unemployment. This could happen if expectations had become much more anchored as a result of credible inflation targeting, and survey data on expectations do suggest this has happened to some extent.... Once again the Phillips curve is pretty flat. We go from 4% to 10% unemployment, but inflation changes by at most 4%.... Given how ‘noisy’ macro data normally is, I find the data I have shown here pretty consistent with my beliefs."

John Cassidy: A Worthy Economics Nobel for Jean Tirole: "In general, I’m not a fan of the economics Nobel. Too often... used to reward free-market orthodoxy.... At other times... a glorified long-service award... Buggins’s turn... work... innovative and influential in its own context [that] has little broader social value.... The very existence of the prize has contributed to the pretense that economics can, with the application of enough mathematics, be converted from a messy social science into a hard science along the lines of physics and chemistry. However, if the Swedes are going to persist in celebrating economists on an annual basis, this year’s honoree, the French theorist Jean Tirole, is a worthy one.... Tirole and his colleagues, particularly the late Jean-Jacques Laffont, didn’t establish a set of hard-and-fast rules for governments to follow in individual cases. But they did create a unifying intellectual framework that regulators, aggrieved parties, and the companies themselves can draw on in thinking through the relevant issues.... The essential insight here is that regulation isn’t just a mathematical exercise in designing price schedules that lead to efficiency. It’s an ongoing game between two players with different goals and secrets that they can hide from each other... a ‘principal-agent’ problem, where the government is the principal and the firm is the agent. The general question then becomes this: Can you design a regulatory system that offers incentives to both sides—the regulators and the firms—to do things that are in the public interest?..."

Ezra Klein: "Yes Means Yes" is a terrible law, and I completely support it: "The Yes Means Yes law could also be called the You Better Be Pretty Damn Sure law. You Better Be Pretty Damn Sure she said yes. You Better Be Pretty Damn Sure she meant to say yes, and wasn't consenting because she was scared, or high, or too tired of fighting. If you're one half of a loving, committed relationship, then you probably can Be Pretty Damn Sure. If you're not, then you better fucking ask. A version of the You Better Be Pretty Damn Sure law is already in effect at college campuses. It just sits as an impossible burden on women, who need to Be Pretty Damn Sure that the guy who was so nice to them at the party isn't going to turn into a rapist if they let him into their dorm room — and that's not something anyone can be sure about. It's easier to get someone's consent than it is to peer into their soul..."