Re: clarifying FOMC

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

Warren

If I strongly expect interest rates are going to be lowered in the US, why
can I not just short interest rate futures? But it can't be so easy??

If it is, which future should I short?? Is there anything written up on this?
Oh to be a bond trader in such times.

Basil

08:30 PM 11/30/00 -0500, you wrote:
>Well put, but you already know that!
>
>Feels like the US budget surplus is biting hard domestically now?
>And they are already blaming the Fed for raising rates too high.
>Looks like Japan with a 10 year lag all over again...
>
>Best,
>w
>
>Basil Moore wrote:
>
>> >
>> >Barkley
>>
>> May I be so rude as to give you a short lecture? Thank you.
>>
>> Monetarism is based on the twin notions that
>> 1) monetary change explains changes in  income and prices, and that
>> 2) the money supply (MS) is under the exogenous control of the monetary
>> authorities.
>>
>> The PK recognition and proof that the MS moves endogenously in response to
>> changes in demand for bank credit, and that the authorities provides
>> reserves endogenously and passively (accomodate the banking system's demand
>> for reserves), but at a price (short term interest rate) of their choosing,
>> puts paid to the second monetarist notion.
>> Banks are retailers of credit, not portfolio managers, and like other
>> retailers the amount they sell depends primarily on the demand for their
>> product.
>>
>> The monetarist supporting empirical evidence for their theory was 1) that
>> reserves moved closely with money, so that if reserves were under the
>> control of CB openmarket operations they could be regarded as exogenous,
>> and 2) that the money supply moved closely with prices and output, so that
>> if the money supply was exogenous, "inflation was always and everywhere a
>> monetary phenomenon".
>>
>> But endogenous money also moves closely with prices and output. The demand
>> for bank credit, which drives the money supply, comes primarily from
>> business demand for working capital, i.e. changes in the wage and materials
>> bill. If the growth of money wages does not exceed the growth of average
>> labour productivity, prices will be broadly stable, and inflation will be
>> low. The monetary authorities will take credit for this, and demonstrate
>> that the low rate of growth of the money supply explains the low rate of
>> price inflation. The numbers will back them up. The growth rate of reserves
>> will also be low. But the true explanation is that money wage growth is low
>> and not in excess of labour productivity growth.
>>
>> My point is that the empirical evidence will always appear to support the
>> monetarist argument. In periods of price stability and in periods of rapid
>> inflation central bankers can always point to the numbers supporting their
>> argument. The key point is that although the relationships between money
>> and prices and output and reserves may be stable, the monetarists have the
>> direction of causation backwards in both instances. Many economists were
>> and are still taken in by the apparently confirming empirical relations.
>> Economists cannot show the direction of causation by empirical
>> relationships, in spite of Granger-Sims causality tests. The money supply
>> will always "behave in a way supporting the monetarist arguments".
>>
>> One must first understand how deposits grow (banking overdraft lending
>> processes), and how prices are determined (business markup price-setting
>> processes) in order to sort out the causal relationships. Causal processes
>> can only be demonstrated with theories, never with numbers.
>>
>> But of course you know all this.
>>
>> Best
>>
>> Basil
>>
>> >James,
>> >        My discussion has nothing to do with
>> >the period since 1990 and German unification.
>> >The policy since then has certainly been muddled
>> >by the problems associated with the unification,
>> >with the Deutsches Bundesbank having initially
>> >strongly opposed the one-to-one exchange rate
>> >that was imposed by Kohl between the Ostmark
>> >and the Deutschemark.
>> >        I would agree that monetarism should be
>> >defined as following Milton Friedman's description.
>> >Frankly, I would have to dig around to find a good
>> >citation for the claims that have been made about
>> >German (and Swiss) policy in the 1950-90 period.
>> >But, I know that I have seen these claims made and
>> >specifically by Brunner.  I would note that a successful
>> >supply-side oriented Post Keynesian policy that keeps
>> >wage and cost pushes under control could allow for a
>> >situation where a central bank could control the money
>> >supply (I realize that Basil and others object to such a
>> >concept, thus, we can say that the money supply was
>> >endogenously behaving in a way resembling a desired
>> >monetarist outcome) and still achieve low interest rates.
>> >        My point about the Korean War was that this was
>> >a source of external aggregate demand that helped the
>> >German economy, not that it was a source of inflationary
>> >pressure, although you are correct that there was a runup
>> >in the prices of many raw materials at that time.
>> >        I have read nothing about (actually existing post-
>> >World War II) Austrian monetary policy.  I have seen no
>> >claims that has been monetarist or anything else in
>> >particular, although Austrian macroeconomic performance
>> >has been quite good and it has had a very vigorous and
>> >very centralized corporatist economy-wide wage
>> >bargaining system.
>> >       The claims about German and Swiss monetary
>> >policy have also gone along with observations of their
>> >high degrees of independence from political authorities.
>> >For better or for worse, their alleged success has lain
>> >behind the model for the ECB, with various other
>> >countries, including the UK and Japan, moving in that
>> >direction of greater central bank independence.
>> >Barkley Rosser
>> >Professor of Economics
>> >James Madison University
>> >Harrisonburg, VA 22807 USA
>> >http://cob.jmu.edu/rosserjb
>> >-----Original Message-----
>> >From: schulte-baeuminghaus <cresscourt@xxxxxxxxx>
>> >To: J. Barkley Rosser, Jr. <rosserjb@xxxxxxx>
>> >Date: Tuesday, November 28, 2000 4:18 PM
>> >Subject: Re: clarifying FOMC
>> >
>> >
>> >Barkley Rosser,
>> >
>> >I'm not quite sure what your question has now become.
>> >It's for you to judge for yourself whether a policy of low interest
>> >rates "disproves the claim that they followed monetarism." I wouldn't
>> >want to press any particular point of view but rather to present the
>> >facts as I understand them.
>> >Emphasis on low interest rates tended to be the mark of Keynesian
>> >policies and of course was a feature of Full Employment White Papers
>> >at the end of the war.
>> >The huge difference between Germany and Austria in the last ten years
>> >or so has been that Germany was reunified during that period and had
>> >to endure the torment of the adjustments that went with it. Austria
>> >was "reunified" in the sense that the occupying powers, and
>> >particularly the Soviet Union, withdrew way back in 1955. As you know,
>> >Austria has had problems recently which have tended to be highlighted
>> >by the support given to Haider and the FPÖ; but I'm not sure that
>> >monetarism has any particular place in this, one way or the other.
>> >I'm not sure either that what Kohl found it necessary to do to manage
>> >the problem of reunification could be identified as "monetarism." What
>> >the ECB does and how its policies can be identified are of course
>> >something else.
>> >The Korean War caused a sharp increase in commodity prices for a year
>> >or so but those prices quickly fell back again. As an example,
>> >Australia experienced a "spike" in demand for its exports in about
>> >1950-51. For the first time, wool sold for a "pound a pound" but it
>> >didn't last. The Communist victory in China in 1949 had a more lasting
>> >effect, for example, on the price of tungsten; and, more generally, on
>> >the intensity of the Cold War in the Asian/Pacific region and the
>> >role, for example, of Japan.
>> >I don't think these developments affected Germany particularly
>> >although the Cold War, NATO, the stationing of American troops in
>> >Germany and so on did have a continuing and substantial impact on
>> >Germany.
>> >But again, I'm not sure what this proves or disproves on whether
>> >Germany followed monetarist policies or not. Bear in mind of course
>> >that the monetarism we're talking about is normally taken to be the
>> >monetarism as advocated and defined by Friedman - however it was
>> >re-defined or practised by others. Friedman's ideas had their main
>> >impact on economic policies from, as I recall, the early to
>> >mid-seventies.
>> >
>> >James Cumes
>> >
>> >
>> >----------
>> > >From: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
>> > >To: <pkt@xxxxxxxxxxxxxxxx>
>> > >Subject: clarifying FOMC
>> > >Date: Tue, Nov 28, 2000, 8:55 pm
>> > >
>> >
>> > >        This responds to James Cumes while
>> > > leaving off the long extra stuff.
>> > >        Certainly the Wirtschaftswunder largely
>> > > took off in the late 40s and early 50s, and I
>> > > would not minimize the Korean War demand
>> > > and the impact of the formation of the EU
>> > > with the associated expanded markets in
>> > > its sustaining after the initial takeoff.
>> > >        Brunner and a lot of others have claimed
>> > > that the FRG and Switzerland followed
>> > > monetarist policies.  I don't know.  Showing
>> > > that the Germans kept interest rates low does
>> > > not disprove the claim that they followed
>> > > monetarism.
>> > >        One factor I can see for the FRG and
>> > > Austria, if not Switzerland so much, is that
>> > > they followed corporatist policies that limited
>> > > wage increases and thus cost-push inflation
>> > > to some degree, arguably a Post Keynesian
>> > > policy approach.   In the FRG this operated
>> > > through the Mitbestimmung co-management
>> > > approach which partly succeeded because
>> > > of the unions' memory of and fear of past
>> > > hyperinflations.  In Austria it took a more
>> > > centralized form.  In the current FRG this has
>> > > clearly broken down.  I am not so sure about
>> > > Austria.
>> > > Barkley Rosser
>> > >
>> >
>
>