GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 11

[DrSpike]

I have never had an OCA debate with you lot.

I meant asymmetric, not symmetric, of course, since the target is a ceiling for the ECB not a symmetric target like at the fed or the boe. You are forgiven for being confused by my blunder.

The democratic deficit comment was meant to convey my disbelief that the ECB's implementation of a modern inflation target would survive in the face of high profile criticism (every economist whose opinion is worth anything knows an asymmetric 2% target is inappropriate) if attempted by a national central bank.

[Roland]

"I have never had an OCA debate with you lot."

I know, just I've had lots of those....

"I meant asymmetric, not symmetric"

Ok, still: what exactly do you mean by it, esp opposed to the BoE (forget the Fed) ?

"The democratic deficit comment was meant to convey my disbelief that the ECB's implementation of a modern inflation target would survive in the face of high profile criticism"

Well what do you think would be changed ? Would the ECB become the bank of bailouts like the Fed ? The fed's ultra-easy money policy has brought America into the current dilemma....

[DrSpike]

I said, for the ECB 2% is a ceiling. In the BOE and the Fed the target is a symmetric one, which means the interest rate is set to hit the target with a deviation of 0.1% either side being equally bad.

Since we are always talking about distributions (central bankers, whilst considerably more clever than Roland thinks, are not gods ) a ceiling is a bad idea. What is more, even without a ceiling 2% is a strange target.......every estimate of costs of inflation show little or no extra cost to 2.5% inflation than 2%.

Also one must consider the adverse effect of having to build credibility after the founding of a new CB. I don't know how much you guys know about the problem of dynamic inconsistency of monetary policy.....but it is the main reason we have CB at all. The ECB was always going to set slightly tight monetary policy early on.........it is the optimal thing to do when building credibility. This makes the 2% all the more unjustifiable.

[DanS]

"The fed's ultra-easy money policy has brought America into the current dilemma.."

The market better accommodate my upcoming new mortgage at new historic low interest rates!

What are the chances, Sten? Looking to close end-of-month or mid next month.

On other topics, productivity still looks strong at 4%...

[Roland]

Poly ate my reply....

Short version:

"I said, for the ECB 2% is a ceiling."

The ECB was quite easy when HICP approached 1 %. With the other factors in deciding policy, it turns out like a symmetric policy around 1.5 %...

"even without a ceiling 2% is a strange target...."

What is the point for a higher target ? Deflation fears ?

"The ECB was always going to set slightly tight monetary policy early on.........it is the optimal thing to do when building credibility. This makes the 2% all the more unjustifiable."

It's about 2.5-3 % by US CPI standards, is it not.... do you think a symmetric policy around 2 or 2.5 % HICP would have a benefit ?

[Roland]

Dan: Buying real estate or refinancing ?

[DanS]

Buying. I got a reasonable offering price for my condo (~$187.50/ft^2), so I'm gonna go for it.

Edit: To be clear, I'm buying the condo that I'm currently renting.

[DrSpike]

If Poly eats this as well I will perform a Heimlich maneouvre.

Why is inflation costly?

Seems a silly question, but most people cannot answer this satisfactorily. Menu and shoe leather costs (costs associated with changing price levels for producers and consumers respectively) are a factor, but the biggie is misallocation of resources due to shifting relative prices. There is also a key redistribution between borrowers and lenders.

Now what do economists know about the size of these costs?

Well a fair bit. They aren't large at low and stable levels of inflation........economies have developed defences like indexation......but the costs get _very_ large should inflation get out of control.

What do economists know about the cost in terms of GDP of reducing inflation?

Again a lot. It's big, and gets bigger more quickly (positive 2nd derivative) as inflation gets small.

The costs (in terms of foregone GDP) to monetary policy that turns out even to be moderately tighter than necessary to close the output gap at NAIRU are therefore large. And it's not just that.......the ECB handling of some PR issues has been bad........and an unhealthy obsession with monetary aggregates is undesirable.

To conclude, yes, a symmetric target at 2% or 2.5% would, IMO, be superior to the current system.

[DanS]

"The costs (in terms of foregone GDP) to monetary policy that turns out even to be moderately tighter than necessary to close the output gap at NAIRU are therefore large."

Interesting.

[Roland]

"The costs (in terms of foregone GDP) to monetary policy that turns out even to be moderately tighter than necessary to close the output gap at NAIRU are therefore large."

I don't believe in NAIRU, but apart from that - those are cycle management issues, or are you talking about a long term impact ?

"......and an unhealthy obsession with monetary aggregates is undesirable."

OBSESSION !?

Just proper consideration.

Do you really think the Fed's leniancy to tolerate 10, 12 or 13 % M3 growth while the economy is getting ever more imbalanced and asset prices inflate was a good idea ?

[MORON]

Uh..... so should a moron even try to learn macroeconomics and actually understand any of this or it is beyond my reach?

Damn it, why can't everyone play nice and follow the rules of classical economics so I don't get a huge headache.

[DrSpike]

Hehe no time, more later.

Moron: Of course........everyone should know some economics, evens morons.

Classical economics is fine for analysing long run issues.......I would far rather people understood classical economics well than had a flawed understanding of neo-classical and new classical/Keynesian economics. More on that later.

[Sten Sture]

DanS - for what it is worth, I think the Fed ease was counter-productive and almost purely a weaken the dollar move. If that is the case then we are headed for a very steep yield curve and higher borrowing rates. I'd lock in your financing, or wait to bid back the offer.

It has been a while since we discussed it here, but super high M growth during a flight-to-quality with a very steep yield curve may not be stimulative at all. Yield curve arbitrage doesn't make many credit based loans.

[DanS]

Thanks, Sten. Looks like a 5/1 or 7/1, 30-year loan is in order. Close the deal expeditiously.

[DanS]

Here's a funny article...

Back to the '50s.