Crowding Out Watch, Heritage Edition

The Heritage Foundation’s Salim Furth writes:

If interest rates are responsive to news, most macroeconomic models agree that government “stimulus” spending crowds out private investment. In usual times, with responsive interest rates, New Keynesian models[4] typically have a strong role for monetary (Fed) policy but little or no role for fiscal policy (stimulus spending or tax rebates). In Neoclassical[5] as well as New Keynesian models, government stimulus spending diminishes private activity—especially investment—as private borrowers are crowded out of the market by government borrowing. In contrast, New Keynesian models suggest that when the interest rates relevant for investing are constrained by the zero lower bound, the crowding-out mechanism stops functioning and fiscal policy can be expansionary.

…in 2009, Christina Romer and Jared Bernstein published the economic bases of the Obama Administration’s $800 billion stimulus plan.[8] The cornerstones of their estimates were the multipliers reported on page 12, in a table entitled “Output effects of a permanent stimulus of 1% of GDP.”[9] These estimates came from forcing their models to constrain all interest rates at the zero lower bound regardless of the performance of the economy.[10] …

I find this description odd, as the multipliers used are an average of the Fed’s FRB/US and a private macroeconometric model (my guess is Macroeconomic Advisers, a standard in EOP and Treasury, at least back in my day). This description of FRB/US makes clear that even if the Fed funds rate was kept at zero, the long term rate would not necessarily be zero; in other words, there’s a term premium, so a pure EHTS is not imposed. (And if Macro Advisers is the private model, then the same applies — see here).

In any case, what did nominal rates actually do? I plot a slightly longer sample than Furth does (starting in 1967 rather than 1990), highlighting exactly how extraordinarily low long rates are.
co_heritage1.gif

Figure 1: Nominal constant maturity yields on 10 year Treasurys (red), and on 5 year Treasury’s (blue). Source: St. Louis Fed FRED.

Furth cites a Swanson and Williams paper that indicates a responsiveness of long term rates to announcements through 2011, as proof that there is no liquidity trap. Hence, in this interpretation, the American Recovery and Reinvestment Act (ARRA) might have crowded out investment.

In order to evaluate crowding out, one needs to examine the correlation of the stimulus package with real interest rates. This is shown in Figure 2.
co_heritage2.gif

Figure 2: American Recovery and Reinvestment Act (ARRA) outlays and tax cuts as share of GDP (blue, left scale), and 10 year constant maturity TIPS, % (red, right scale), and expected inflation adjusted 10 year constant maturity Treasurys, % (green, right scale). NBER defined recession dates shaded gray. Source: CEA, BEA, NBER, St. Louis Fed FRED, and Survey of Professional Forecasters.

A big upward shift in real rates is not apparent to me. It is true that real rates might have been even lower had there been no stimulus package. Whether that would have spurred significantly more investment is an interesting question.

The interesting thing is that according to the Swanson and Williams paper Furth cites, we are now in a liquidity trap-like situation. Now is exactly the time to undertake expansionary – not contractionary — fiscal policy. At the very least, one would not want to cut government spending without cause. Interestingly, this implication Dr. Furth fails to note.

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42 thoughts on “Crowding Out Watch, Heritage Edition

  1. Chris Herbert

    Anyone who works at Heritage, or Cato, is part of a well compensated ‘hive’ and has zero interest in real academic investigation. Think of them as creative advertising guys. The marketing department.

  2. jonathan

    As I read the Heritage piece, the argument is that since LT rates* respond to macroeconomic “news”, they aren’t at the 0 bound and will be “responsive to policy changes” so therefore government spending – aka stimulus – would crowd out. As the post notes, they alter the idea of 0 bound to include all rates. That’s a neat manipulation of the kind Heritage specializes in: present a definition that isn’t right as though it is the definition.
    In this piece, they also play around with nominal by not mentioning real rates and thus the entire mechanism used by the Fed now to play with inflation and other expectations to drive short real rates down.
    I’m always interested by their ability to take an idea, twist it around and then selectively edit material to present an argument that appears rational on its face.
    *Mostly LT but he also mentions 1 and 2 years rates in 2009.

  3. kharris

    jonathan,
    Your point about Heritage types (let’s not forget AEI, Shlaes, Jane Galt and to some extent Harvard’s history department, the Hoover Institute and the Chicago economics and finance departments) being able to “take an idea, twist it around and then selectively edit material to present an argument that appears rational on its face” is strong evidence that simple econo-religious zeal does not account for their behavior. It would be highly unlikely that a dogmatist of honest intent could come up with the sorts of distortions that we see coming from the right in public discussion of economics. There is too much low guile involved to believe that disagreements over economics are honest matters of opinion.

  4. tj

    I just noticed this post from 2slugs in an old post by JDH.
    Feldstein – the Fed’s long-term asset purchases reduced the extent to which the federal deficits crowded out equity purchases.
    2slugs – “Earth to tj…Earth to tj…The economy is in a liquidity trap with short term interest rates at the zero lower bound. Government debt is not crowding out private sector investment. If anything government spending is crowding in private investment by increasing aggregate demand. This is not 1979.”
    Posted by: 2slugbaits at May 10, 2013 02:56 PM
    2slugs, no. If the FED did not purchase $2T in debt, then the large institutional investors and others would have shifted some purchases from equities to government debt. The implication is that without FED purchases of debt, the demand for equities would be lower. The converse is, with FED purchases of debt, the demand for equities is higher.
    Thus, Feldstein’s claim is true – the Fed’s long-term asset purchases reduced the extent to which the federal deficits crowded out equity purchases.
    I’m not sure why you find that surprising, it’s actually quite intuitive.
    2lsugs, you have a pattern of getting so tangled in theory that you lose sight of reality.

  5. Jonathan

    Kharris, I’m mostly interested in understanding things and am attracted to looking at Heritage stuff because they have a method. It repeats. They must have a way of instilling that, which is interesting. I think the point of a “think tank” is in many ways to generate and then perpetuate a method of analysis.
    I’m currently studying how Deuteronomy was enacted in relation to vassal state treaties of the Assyrians and how that transformed the presentation of ideology. We use models. The story of Exodus is retold in Deuteronomy. It is then retold in the New Testament, mostly in John. It is then retold in parts of the Quran.
    I assume we adopt models because we think they fit best, which is an argument about the nature of statistics and probability. Best fit is related to power, which also plays off the power of significance in our relation to reality and so on.
    It’s really interesting watching how the Heritage method continues even as the content shifts. Pro-immigration becomes anti but the method remains. If you agree with the content, you see less method and more truth and vice versa. So I find myself looking at old Heritage stuff about the conservative nature of an individual mandate to see the method there as well.
    I’m always interested in what is left out – or put in an appendix. I take apart CBPP releases in the same way; their method similarly obscures but it is theirs.

  6. Warren

    The Heritage Foundation is not a source of rational analysis and discussion. It is a tax-exempt(!) propaganda mill, run by a Tea Party demagogue, that does no research, and cranks out disinformation and lies to keep the know-nothings stirred up. It is a menace to society, but not the “research and education thinktank” it falsely claims to be. There are, unfortunately, many such spin factories, many political, others science deniers about climate change, tobacco, and other industry-sponsored issues, all aimed at large uninformed and gullible audiences.

  7. CoRev

    Warren rants: “There are, unfortunately, many such spin factories, many political, others science deniers about climate change spin factories, tobacco, and other industry-sponsored issues, all aimed at large uninformed and gullible audiences.”
    Really, all those issues are only valid if discussed by progressive spin factories like Pro Publica? http://www.newsmax.com/Headline/propublica-irs-conservative-tea/2013/05/14/id/504481
    Any one still believing in catastrophic climate change is gullible. And, it is the gullible who elected, then re-elected Obama. You wanted him, but we all must live with his ineptness.

  8. Johannes

    Menzie, just wonder why you care about the Heritage Foundation… are you serious ?
    Have a nice work week Menzie, only two more days.

  9. Warren

    CoRev—
    Your political prejudice is not a substitute for science. The for-hire science-denial industry rightly assumes that the gullible ideologues it targets know no physics, are arithmetically challenged, and will never study any of the voluminous primary data and technical literature on atmosphere, oceans, Earth, and cryosphere that flatly disprove its message. Anti-government and anti-science politicians, journalists, Fox News, and other amateurs parrot the lies and paranoia.
    At issue is not a slight northward shift of isotherms and a foot or two of sea-level rise. Major change is coming, although great uncertainty clouds specific predictions because the rapidity of our experimental changes to our small planet have no precedent in the geologic record. Anthropogenic climate warming is not an instant response: if we stopped adding CO2 to the atmosphere today (we won’t), the inertia of melting and other factors already underway will keep adding change for many decades. Yearly-minimum volume of Arctic sea ice has decreased 80% in 35 years, at increasing rate; the ocean will soon be ice free during much of the summer, and global climatic and oceanographic effects of the decreasing northward temperature gradient will be profound. Agriculture and civilization have developed entirely within the last 10,000 years of stable climate and CO2. Our additions of the last 150 years have increased that CO2 by 40%, to levels last matched 4.5 million years ago when global climate averaged about 8 degrees F warmer than now. Yes, we know that, and vastly more. Anthropogenic CO2 increase is fast headed for the amount last seen 25 million years ago, when sea level was 80 feet higher.

  10. CoRev

    Warren, I see the same rubbish is still being presented.
    Try to explain this graph: http://jonova.s3.amazonaws.com/graphs/lappi/gisp-last-10000-new.png
    or this one of current conditions: http://www.woodfortrees.org/graph/rss/from:1997/plot/rss/from:1997.9/trend/plot/uah/from:1997/plot/uah/from:1997.9/trend/plot/rss/from:1997.9/trend/detrend:-0.0735/offset:-0.080/plot/esrl-co2/from:1997.9/normalise/offset:0.68/plot/esrl-co2/from:1997.9/normalise/offset:0.68/trend
    Note the divergence of temps from CO2.
    Only the hangers on still believe and preach catastrophic anthropogenic global warming/climate change. Even the big names, Hansen and Pachauri { http://en.wikipedia.org/wiki/Rajendra_K._Pachauri } have been forced to admit the hiatus in warming.
    The latest science has centered on ways to explain the hiatus, or support a “Hockey Stick” temperature structure for printing in the new IPCC AR5. Hail Mary attempts to save the AR5. They are failing. Climate sensitivity is being revised lower and lower as reality has overwhelmed the models.
    Scientific consensus is overstated: http://hockeyschtick.blogspot.com/2013/05/new-paper-finds-only-33-consensus-on.html
    This argument is over and lost by the catastrophists. http://wattsupwiththat.com/2013/05/14/the-beginning-of-the-end-warmists-in-retreat-on-sea-level-rise-climate-sensitivity/
    Study more, your info and views are woefully dated.

  11. tj

    Warren
    You confuse global warming with man-made global warming. You have been brainwashed to believe that every extreme weather event is caused by mankind’s carbon dioxide emissions. Cold spells, hot spells, drought, flood. Is there any extreme weather event in the past 10 years that has not been blamed on man?
    Ask yourself this question: When I read an article that contains the term “global warming” I automatically think “man-made global warming”. If you answered ‘yes’ to that question, then ask yourself why you answered yes. Global warming did not always mean man-made global warming. It took a concerted effort by government and the media to make the two terms synonymous in the public consciousness.
    Critical thinking is a lost art, and you and countless others are prime examples.

  12. Rick Stryker

    I was seriously thinking about defending Heritage yet again against these attacks. But then I thought of the new data that has been coming in. First, we find that Administration has been listening in to the professional and personal conversations of AP reporters. Then, we find that conservatives who have been publicly critical have been aggressively audited by the IRS. We also hear that private tax records of conservative organizations have been given out to their political enemies.
    And it got me thinking back to 2010 when Austan Goolsbee, chairman of the Council of Economic Advisors, referred in a press conference to the Koch brothers company’s tax situation, which created a stir since the Koch company is private and so its tax records aren’t public.
    I started to think that maybe the Administration’s economists had access to a richer data set than many of us imagined. Given that, I realize I’ve been wrong in questioning whether the stimulus worked. It was effective and created or saved millions of jobs. The only problem is that it needed to be twice as big, which it would have been if tea party Republicans had not stood in the Administration’s way.
    I’ve also realized that Obamacare will deliver affordable health care to millions, slow the growth of health care spending, and help to solve our long term deficit problems.
    And Menzie, I’ve realized that you have been right all along in exposing the global warming- denying crazies at the Heritage foundation. They are long overdue for an IRS audit, if they haven’t received it already.
    Jeff, Corev, Ricardo and others, you might want to rethink your positions as I have. 2slugbaits, you can rest easy–you have nothing to worry about.

  13. Joseph

    First, we find that Administration has been listening in to the professional and personal conversations of AP reporters. Then, we find that conservatives who have been publicly critical have been aggressively audited by the IRS. We also hear that private tax records of conservative organizations have been given out to their political enemies.
    Interesting that not one single thing you said above is true. Do you just make up fantasies in your own head or do you find them on line at your favorite conspiracy sites?

  14. tj

    joseph
    As 2slugs would say, ‘earth to joseph’ ;)
    The same IRS office that deliberately targeted conservative groups applying for tax-exempt status in the run-up to the 2012 election released nine pending confidential applications of conservative groups to ProPublica late last year. http://www.propublica.org/article/irs-office-that-targeted-tea-party-also-disclosed-confidential-docs
    Attorney General Eric Holder confirmed Wednesday that Deputy Attorney General James Cole, a longtime friend of Holder’s and the number two official at the Justice Department, signed off on subpoenaing a wide range of Associated Press phone records. The AP had revealed Monday that the Justice Department informed the news organization last week that it had obtained phone records for more than 20 different AP phone lines over the course of a two-month period last year.http://www.huffingtonpost.com/2013/05/15/james-cole-ap-subpoena_n_3280527.html?ir=Politics
    It’s all about suppressing political opposition through indimidation.
    Here’s another one that has been buried in the news. The legal name for intimidating others to ‘donate’ to your cause or face the nasty consequences is extortion.
    In a letter to Secretary Sebelius, full committee Chairman Fred Upton (R-MI), Chairman Emeritus Joe Barton (R-TX), Vice Chairman Marsha Blackburn (R-TN), Oversight and Investigations Subcommittee Chairman Tim Murphy (R-PA), Health Subcommittee Chairman Joe Pitts (R-PA), and Vice Chairman of the Health and Oversight and Investigations Subcommittees Michael C. Burgess, M.D. (R-TX) expressed concern that HHS is potentially soliciting funds from companies that are simultaneously doing business with HHS. The leaders wrote, “Currently, health insurers are seeking HHS approval to qualify for the health exchanges established by the Patient Protection and Affordable Care Act so that they may attempt to sell their services to the public when enrollment begins in a few months. Your agency also has the power to review the insurance rates that providers wish to charge.”
    http://energycommerce.house.gov/press-release/committee-launches-probe-following-reports-hhs-soliciting-donations-companies-it

  15. Warren

    Re global warming: Those of you suckered by the disinformation industry have been kept unaware that air temperature change is the tiny tip of the iceberg of anthropogenic global warming. As much heat goes into melting sea and glacial ice (is latent heat in your toolkits?) as into the atmosphere, and about 90% of all added heat goes into the oceans, which have >1000x the heat capacity of the atmosphere. (55% of anthropogenic CO2 also goes into the oceans, where it is producing an acidification crisis.) Blips like El Ninos and La Ninas cause a little more or less heat than usual to move in either direction between air and water, and such caused the 1998-2009 “hiatus” in the tiny atmospheric part of global warming. Ice melting continued to accelerate during that period, and the oceans continued to warm. And the hockey stick is very real in global data. You have been had,

  16. Joseph

    Let’s take Rick Stryker’s claims one by one:
    First, we find that Administration has been listening in to the professional and personal conversations of AP reporters.
    False. The FBI was not listening in on conversations. They subpenaed logs of phone numbers. That is not listening to conversations.
    Then, we find that conservatives who have been publicly critical have been aggressively audited by the IRS.
    False. The IRS was processing applications for tax-exempt status. It did this for both liberal and conservative groups. It was not auditing them. These groups had not even filed tax returns yet so there was nothing to audit.
    We also hear that private tax records of conservative organizations have been given out to their political enemies.
    False. The press asked for information on groups with tax-exempt status. These are not private tax records. In fact, they are not tax records at all. Tax-exempt status is public information. And is the press considered political enemies?
    When Rick just makes things up whole hog, what are we to think about his credibility? Is he a liar or is he simply confused. Either way, anything he says should be suspect.

  17. CoRev

    I see Joseph believes that a semantical argument is a meaningful, but others thin otherwise. 1) The ACLU last night condemned the DOJ’s acts as “press intimidation” and said it constitutes “an unacceptable abuse of power”. The Electronic Frontier Foundation denounced it as “a terrible blow against the freedom of the press and the ability of reporters to investigate and report the news”. The New York Times’ Editorial Page Editor Andy Rosenthal called the DOJ’s actions “outrageous” while Washington Post Executive
    Editor Marty Baron said they were “shocking” and “disturbing”. Even Democratic Sen. Pat Leahy, chairman of the Senate Judiciary Committee, said: “I am very troubled by these allegations and want to hear the government’s explanation.”
    2) There is a plethora of anecdotal evidence that what Rick claims re: aggressive auditing actually did occur. We will find out when this investigation ripens. We do know this: “I.R.S. Apologizes to Tea Party Groups Over Audits of Applications for Tax Exemption” (my emphasis)
    3) You believe that a significant difference exists between releasing confidential tax return data confidential tax status application data. BTW, some of that status data does include tax and revenue information.
    For all your protests, it is only semantical and cover up for the actual misconduct. How high it will go? Dunno, we shall discover soon.

  18. tj

    Warren
    Again, you allow the Heritage Foundation of Climate Science i.e. Mann, et.al. to bias your views.
    Regarding acidification, actually, you mean less alkaline, not acidic – - Ocean ph is above 7. Thus, on both a monthly (Fig. 2) and annual scale (Fig. 4), even the most stable open ocean sites see pH changes many times larger than the annual rate of acidification. This natural variability has prompted the suggestion that “an appropriate null hypothesis may be, until evidence is obtained to the contrary, that major biogeochemical processes in the oceans other than calcification will not be fundamentally different under future higher CO2/lower pH conditions.
    http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0028983
    Warren, you are correct that surface temperatures are the tip of the iceberg. However, have you noticed that Mann and the fellow high priests of climatology focused the public’s attention on surface temperatures until they stopped rising? Then they began looking for other measures they could use to sell their baloney.
    I’m afraid you are terribly misled on ENSO. It’s measured by monitoring temperature change in a small part of the ocean, but it actually causes huge changes in sea temps on a global scale. For example, the 1998 el nino redistributed a huge amount of warm water poleward to the sea surface surrounding the arctic. No man-made CO2 involved at all.
    Regarding the 1998 – 2009 hiatus you note, (actually through the present, not 2009, temps are still not increasing).
    Take a look at this chart of temps from 1979 to the present – http://www.drroyspencer.com/wp-content/uploads/UAH_LT_1979_thru_Apr_2013_v5.5.png
    The trend in temperatures is flat before the 1998 el nino and flat after the 1998 el nino. Notice that the all the global warming took place in a roughly 3 year period from 1999 – 2002, a period within which the globe responded to the massive amount of heat released by the 1998 el nino. A completely natural event. Please point out the evidence in that chart to support your claim that the steady rise in man-made CO2 is causing a consistent rise in temperature. Or are you claiming that the entire response to decades of rising man-made CO2 levels was a 3 year burst of rising temperatures ! I haven’t seen that theory yet, but I’m sure the high priests of climatology are working on it !

  19. Anonymous

    I see Joseph believes that a semantical argument is a meaningful
    I believe that words have meaning. When someone says that the “Administration has been listening in to the professional and personal conversations of AP reporters,” that is a false statement. If you want to sound like a conspiratorial nut, continue to make fact free statements.
    There is a plethora of anecdotal evidence … — you mean no real evidence.
    I.R.S. Apologizes to Tea Party Groups Over Audits of Applications for Tax Exemption
    It’s interesting that you would lovingly quote your despised New York Times. Let’s see what the New York Times said on their editorial page in March 2012. “Taxpayers should be encouraged by complaints from Tea Party chapters applying for nonprofit tax status at being asked by the Internal Revenue Service to prove they are “social welfare” organizations and not the political activists they so obviously are.
    Tea Party supporters claim they are being politically harassed with extensive I.R.S. questionnaires. But the service properly contends that it must ensure that these groups are “primarily” engaged in social welfare, not political campaigning, to merit tax exemption under section 501(c)(4) of the tax code.” So a year ago, the NYT was “hey, this is great” and now they are “OMG!” What changed? Why is a year old story suddenly the latest scandal?
    You believe that a significant difference exists between releasing confidential tax return data confidential tax status application data.
    I don’t know what confidential data you are referring to. Applications for 501(c)(4) organizations are public information. It appears that one news organization asked for a download of application information, which is public information, and in a data dump from the IRS, accidentally received 9 applications before they had been formally approved. This should not have happened, but all nine eventually had their applications approved at which time the data legally became public anyway. An error on the part of the IRS, but not exactly the conspiracy that Rick implied.

  20. 2slugbaits

    tj If the FED did not purchase $2T in debt, then the large institutional investors and others would have shifted some purchases from equities to government debt. The implication is that without FED purchases of debt, the demand for equities would be lower.
    Sounds plausible, but it’s ersatz economics. The problem is that we’re in a liquidity trap, so investors are indifferent between holding cash and holding govt bonds. When you’re in a liquidity trap dumping bonds on the market does not induce investors to swap cash for bonds.
    David Glasner has a devastating takedown of Feldstein’s op-ed:
    http://uneasymoney.com/2013/05/09/martin-feldstein-is-at-it-again/
    And this comment from Glasner (economist with the Federal Trade Commission) pretty well sums up why you’re wrong:
    What Feldstein fails to ask, much less answer, is why anyone is willing to pay more for the stocks than they are worth (based on expectations of the future net cash flows generated by the underlying assets) just because they have excess cash in their pockets. Feldstein is covertly attributing irrationality to investors
    And over at FedWatch Tim Duy piles on with a couple of slams at Feldstein’s braindead op-ed:
    http://economistsview.typepad.com/timduy/2013/05/dodged-that-bullet.html
    http://economistsview.typepad.com/timduy/2013/05/lumping-everything-into-the-wealth-effect.html
    As Duy’s post points out, a better reason for the rise in equity prices is the big increase in corporate profits.
    Now there is a sense in which the Fed’s purchases of Treasury bonds could influence equity prices in a liquidity trap, but it’s not the way you describe. If the central bank buys Treasuries and promises to monetize the debt, this will create inflationary pressures, and that will tend to increase equity prices. Look at Japan’s experiment with Abenomics.

  21. 2slugbaits

    CoRev You cited Newsmax??? Really? That explains a lot.
    The problem isn’t that the IRS decided to investigate political groups claiming 501(c)(4) status; the scandal is that the IRS was only investigating the status of small fish conservative groups. Large conservative and large liberal groups were not being examined. All of them should be. But in any event, are these small-fry conservative groups whining that they’re the only ones being singled out, or are they trying to pretend that they didn’t lie on the tax exempt status requests?
    tj Global warming did not always mean man-made global warming. It took a concerted effort by government and the media to make the two terms synonymous in the public consciousness.
    Wrong. Absent manmade introduction of greenhouse gases into the atmosphere the earth would be in a long term cooling trend. Over long periods of geologic time there have been periods of non-anthropogenic global warming, but not now. You should ask yourself why the earth is warming at all when everything we know about climate science tells us the earth should be cooling were it not for greenhouse gases.
    Rick Stryker Jeff, Corev, Ricardo and others, you might want to rethink your positions as I have. 2slugbaits, you can rest easy–you have nothing to worry about.
    I feel better. My life motto has always been “Missionary Work Among Savages.” Good to know that my efforts have not been wasted.

  22. CoRev

    Warren has fallen completely for the AGW crisis claims. He says: “…(55% of anthropogenic CO2 also goes into the oceans, where it is producing an acidification crisis.)” Without the crisis claims there is no issue. Anyone else notice the failure of the crises to manifest?
    Warren, you have hit on a truth. The oceans actually store heat for decades, centuries, and millenia, while GHGs only slow IR exit for a fraction of a second. When that stored from Bob Tisdaleheat in the oceans is released near land it gets measured.
    If you wonder if the SSTs match the atmospheric temps, here is a chart: http://bobtisdale.files.wordpress.com/2013/05/figure-14.png?w=640&h=397 From Bob Tisdale: http://bobtisdale.wordpress.com/2013/05/14/multidecadal-variations-and-sea-surface-temperature-reconstructions/#more-4235
    Note the past ~16 years of SSTs. They are similar, and both are in hiatus or lowering.

  23. tj

    2slugs
    Your model is too simple. Why would investors be indifferent between holding cash and debt? Think about it. The real return to cash is a certain negative return. Investors had several opportunities (and continue) to have opportunities to buy debt and sell it for a positive real return. Few investors buy and hold debt to maturity. Why would any investor be indifferent to cash and debt in a real-world scenario that offers a positive probability of positive return weighed against a certain negative return to cash?
    The FED causes the price of debt to be higher than it otherwise would be relative to equities. The result is a reduction in the quantity demanded of debt, or does the law of demand no longer apply? Institutional investors don’t want to hold cash so some of that cash goes to equities driving the price up, just as Feldstein claimed.
    I’m not sure why you cling to theory and ignore reality.
    The same is true for global warming. Theory says the globe should be warming, but reality says otherwise. You seem to confuse the upslope of a multi-decadal cycle for a warming trend. You know as well as anyone that time series cycle around the trend. Perhaps the problem is that you are accustomed to business cycle frequencies. Climate cycles are much longer, involving a number of cycles that converge harmonically. For example, what happens when the warming phase of 30, 60, 360, etc cycles converge? You guessed it, warming that appears to be anomalous.
    Go back and look at that chart I linked, then come back and tell me how man-made CO2 explains 2 long periods of no warming during the past 35 years, separated by a 3 year jump in temperatures. This man-made CO2 is some amazing stuff !

  24. Robert Hurley

    I am astounded at the why man made global warming deniers whose evidence is weak and supported by such a sliver of the climate scientists come here to preach their rants. There are a lot of other places that welcome ideological driven statements. Here you only expose your ignorance.

  25. CoRev

    I wondered how long 2slugs could resist staying away. BTW, arguing by assertion is just opinion: ” Absent manmade introduction of greenhouse gases into the atmosphere the earth would be in a long term cooling trend. Over long periods of geologic time there have been periods of non-anthropogenic global warming, but not now.” BTW, we are in a long term cooling trend: http://jonova.s3.amazonaws.com/graphs/lappi/gisp-last-10000-new.png

  26. 2slugbaits

    tj One last time. We’re in a liquidity trap. Being indifferent to bonds or cash is exactly what it means to be in a liquidity trap. That’s why it’s called a trap. The usual monetary tools don’t work.
    weighed against a certain negative return to cash?
    More evidence that you’re stuck in 1979. With deflation in a liquidity trap cash earns a positive rate of return and equities earn a negative return. We don’t quite have deflation, but inflation is so low that basically the very small difference in nominal returns between cash and bonds reflects the transaction costs associated with converting bonds to cash; i.e., liquidity costs. If we had inflation, then yes…holding cash would not make sense and the kind of portfolio balancing you’re talking about would be fine. But that’s not the world we live in. Look, Feldstein has been wrong about a lot of stuff lately…and not just wrong but seriously wrong about just about everything ever since the start of the Great Recession. Go look at his track record.
    Theory says the globe should be warming
    No, theory says that absent CO2 and other greenhouse emissions the globe should be getting colder. We’re not. And I’m not talking about mysterious cycles. (And by the way, what’s with conservatives and this mumbo jumbo about cycles and epicycles? What is this? Polybius does climate modeling? You see this same kind of stuff with Austrian economics.) I’m talking about well known physical laws having to do with the tilt of the earth’s axis, gradual changes in the distance from the sun, continental drift, etc. All things that should be making the earth cooler.
    To date most of the effects of CO2 have been fairly tame; but every molecule of CO2 we pump into the atmosphere is going to be with us for well over 100 years. We’re already at 400ppm and we got thee ahead of schedule. China dumping sulfur dioxide into the air acts as a temporary cooling agent, but that’s not a plan to solve global warming. No one is terribly worried about the relatively small amount of warming to date. The concern is that an 11 degree warming within the lifetime of your great-grandchildren is now this side of the 5% tail probability. When dealing with potentially catastrophic events in which the costs are uncertain (in the Knightian sense of the term), you focus on events at the tail and not events around the first moment.
    CoRev The ACLU last night condemned the DOJ’s acts as “press intimidation”
    Just about everyone on the left and the right has this one completely wrong. No one is trying to intimidate the press. Obama is calling for stronger shield laws to protect the press. And he’s probably sincere. But sincere or not it’s all something of a smokescreen. The Justice Dept was not trying to intimidate the press; they were trying to intimidate government workers who talk to the press. But the press is so self-absorbed that they have completely botched the story.

  27. Joseph

    But the press is so self-absorbed that they have completely botched the story.
    And talk about self-absorbed! The feckless press has been ignoring complaints from the ACLU and others about the abuses of the Patriot Act for over a decade. But that’s just regular folks. On the other hand, when the press feels a slight affront, they squeal like stuck pigs. Not me, me, me!

  28. CoRev

    2slugs asks: “We’re not. And I’m not talking about mysterious cycles. (And by the way, what’s with conservatives and this mumbo jumbo about cycles and epicycles?” Mysterious? Perhaps you might recognize some of those mysteries? They do have names, like: days, seasons, years, and the big one glaciations. Yep, all well described by know orbital factors.
    He then goes on to describes some orbital cycles: “I’m talking about well known physical laws having to do with the tilt of the earth’s axis, gradual changes in the distance from the sun, continental drift, etc.”
    The mistake we see, and that you are continuing, is the overlaying and over weighting of a very, very short period, the recent ~135 year temp records, to the current interglacial. When we actually look at the current interglacial we do see gradual cooling in the peaks. (?cyclical?) Each preceding high period was higher starting with the Minoan, Roman, Medieval, and today’s. Here are a couple of graphs for the current interglacial. N Hemi. http://jonova.s3.amazonaws.com/graphs/lappi/gisp-last-10000-new.png
    S. Hemi. http://notalotofpeopleknowthat.files.wordpress.com/2013/03/pastclimate2_1.gif
    What is amazing is the blind belief in a single minor Green House Gas (GHG), 3% of the total GHGs, and Anthropogenic CO2 (ACO2) 3% of total CO2 versus the largest occurring GHG, H2O, 95% of GHGs. And you make claims of mysterious cycles which effect the amount of solar radiation where 99+% of the heating originates.
    Logic? Where has it gone in liberal minds?

  29. tj

    2slugs
    Being indifferent to bonds or cash is exactly what it means to be in a liquidity trap.
    One simple question – Who are these mysterious people who are indifferent to cash and bonds based on interest rates? I can’t seem to find them. Cash earns 0%, bonds earn > 0%. It’s irrational.
    the very small difference in nominal returns between cash and bonds reflects the transaction costs associated with converting bonds to cash
    You can’t seem to grasp a very simple concept, it’s called ‘trading’. The vast majority of bonds are from investors who don’t plan to hold the bond to maturity. QE1,2,3,…,N was a slam dunk for bond traders. By your definition we have been in a liquidity trap since the start of QE when we hit the zero bound. Bond traders have made a killing. Buy a 10 year Treasury with a 2% handle and sell it at anything less than 2% and you have a profit. It has nothing to do with the stated yield. Your definition of liquidity trap is not in question, your application of it to the real world is.
    No, theory says that absent CO2 and other greenhouse emissions the globe should be getting colder.
    Over eons. Take a look at what you are missing. Huge departures from your cooling trend.
    400K years
    http://cdiac.ornl.gov/trends/temp/vostok/graphics/tempplot5.gif
    At 65 million years you can see your cooling trend.
    http://img172.imageshack.us/img172/2464/tempvsco267m.png
    Let’s see, to make the math easy, a 130 year warming, is 130/65million is .0002% of 65 million years. As you can see from the 400,000 year record linked above, this type of departure from your cooling trend that we are currently experiencing is quite common.
    Regarding CO2 emissions, we will never see the scenario you describe unless you believe:
    1) fossil fuel use will continue to grow into the indefinite future.
    2) the dramatic positive climate feedbacks to CO2 claimed by the high priests of the church of Climatology are real. There is more evidence of negative feedbacks than positive, thus limiting the theoretical impact of man-made CO2 to about 1 degree per century until we begin using less fossil fuel, which is likely to occur sometime in the next 100 years. A 1 degree warming does more good than harm.

  30. 2slugbaits

    tj By your definition we have been in a liquidity trap since the start of QE when we hit the zero bound.
    Well, yes. And not just by my definition. It’s pretty much the standard definition. In fact, we were already in a liquidity trap before QE got going. QE was a response to an already existing liquidity trap.
    Cash earns 0%, bonds earn > 0%.
    The 3-month just closed at 0.03% today. That sounds like pretty close to zero if you ask me. That miniscule difference barely covers the liquidity transaction cost.
    Buy a 10 year Treasury with a 2% handle and sell it at anything less than 2% and you have a profit.
    Oh my. This is really very wrong. You do know that buying a 10 year with a 2% yield and then selling it 3 months later will only earn you a 0.03% annual return. You know that, right? You see, there’s this thing called arbitrage that evens out rates across maturities. The only reason the 10 year rate carries a higher yield is due to inflationary expectations over the next 10 years. If you sell that 10 year bond to someone then that potential buyer also has to account for the same inflation risk. You seem to believe in finding $20 bills on the street.
    Here’s yet another economist blasting Feldstein’s nonsense about equity market prices going up because of QE:
    http://fatasmihov.blogspot.com/2013/05/the-myth-of-liquidity-and-bubbles-in.html
    And bringing up the rear, Krugman finally chimed in as well:
    http://krugman.blogs.nytimes.com/2013/05/17/too-much-talk-about-liquidity/

  31. Warren

    tj,
    You are very quick at calling up selective-data charlatans like Roy Spencer and Anthony Watts to obfuscate any global-warming discussion.
    You make many false and misleading statements in your climate postings. I’ll elaborate just one: your assertion that the ocean is not being acidified by anthropogenic CO2 because pH is 7+, which will mislead people who remember only a trifle of their high-school chemistry. pH is defined as the logarithm of 1/H+ activity, and thus, by definition of the pH scale, hydrogen ions (= acidity) increase logarithmically throughout the entire range of decreasing pH, on the “base” as well as the “acid” side of 7.0. CO2 reacts with water to produce H+ plus HCO3-. Calcium carbonate stability (critical to vast numbers of marine organisms, particularly in larval stages) is decreased by increasing H+ and the ratio of HCO3- to CO3–, independent of which side of pH = 7.0 the water is on. For one example, increasing CO2 is already killing off all oyster larvae at some times of each year in the upwelling coastal waters (cold, more CO2 and its products) of the NW US, and playing hell with oyster farms. That the increase is anthropogenic, from fossil fuels rather than natural sources, is shown by changing carbon-isotope ratios. Global acidification crisis is coming.
    You type yourself as either another science denier who counts on the ignorance of his intended audience, or as far out of your depth.
    Menzie–I’m sorry I started this, with an offhand mention of climate change. But the paid climate-science deniers are to science as Heritage shills are to economics, and Heritage is into disinformation on climate and many other topics beyond economics. Browsing the website of tax-exempt Heritage casts light on the present flap over IRS scrutiny of such organizations.

  32. CoRev

    Warren, paid!?!??? Is it so hard to believe that there is another side to your own view(s), and that side’s view is supported with data? You lost any credibility when you resorted to name calling (deniers) and silly claims of being paid.

  33. Rick Stryker

    Warm-mongers always try to pretend that only the scientifically illiterate would deny the reality of global warming. Here’s physics professor Harold Lewis’s resignation from the American Physical Society, sent to Curt Callan of Princeton U and President of the society. It sums up the true situation on the global warming groupthink so well I’ve copied in its entirety below. Note that Ivar Giaver, Nobel laureate in Physics also resigned from APS because he considered the evidence on global warming to be overstated. Also, Nobel laureate in Physics Rober Laughlin of Stanford University expressed his skepticism here:
    http://theamericanscholar.org/what-the-earth-knows/#.UZbHTsrW5Gc
    Now on to the letter:
    Dear Curt:
    When I first joined the American Physical Society sixty-seven years ago it was much smaller, much gentler, and as yet uncorrupted by the money flood (a threat against which Dwight Eisenhower warned a half-century ago). Indeed, the choice of physics as a profession was then a guarantor of a life of poverty and abstinence—it was World War II that changed all that. The prospect of worldly gain drove few physicists. As recently as thirty-five years ago, when I chaired the first APS study of a contentious social/scientific issue, The Reactor Safety Study, though there were zealots aplenty on the outside there was no hint of inordinate pressure on us as physicists. We were therefore able to produce what I believe was and is an honest appraisal of the situation at that time. We were further enabled by the presence of an oversight committee consisting of Pief Panofsky, Vicki Weisskopf, and Hans Bethe, all towering physicists beyond reproach. I was proud of what we did in a charged atmosphere. In the end the oversight committee, in its report to the APS President, noted the complete independence in which we did the job, and predicted that the report would be attacked from both sides. What greater tribute could there be?
    How different it is now. The giants no longer walk the earth, and the money flood has become the raison d’être of much physics research, the vital sustenance of much more, and it provides the support for untold numbers of professional jobs. For reasons that will soon become clear my former pride at being an APS Fellow all these years has been turned into shame, and I am forced, with no pleasure at all, to offer you my resignation from the Society.
    It is of course, the global warming scam, with the (literally) trillions of dollars driving it, that has corrupted so many scientists, and has carried APS before it like a rogue wave. It is the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist. Anyone who has the faintest doubt that this is so should force himself to read the ClimateGate documents, which lay it bare. (Montford’s book organizes the facts very well.) I don’t believe that any real physicist, nay scientist, can read that stuff without revulsion. I would almost make that revulsion a definition of the word scientist.
    So what has the APS, as an organization, done in the face of this challenge? It has accepted the corruption as the norm, and gone along with it. For example:
    1. About a year ago a few of us sent an e-mail on the subject to a fraction of the membership. APS ignored the issues, but the then President immediately launched a hostile investigation of where we got the e-mail addresses. In its better days, APS used to encourage discussion of important issues, and indeed the Constitution cites that as its principal purpose. No more. Everything that has been done in the last year has been designed to silence debate
    2. The appallingly tendentious APS statement on Climate Change was apparently written in a hurry by a few people over lunch, and is certainly not representative of the talents of APS members as I have long known them. So a few of us petitioned the Council to reconsider it. One of the outstanding marks of (in)distinction in the Statement was the poison word incontrovertible, which describes few items in physics, certainly not this one. In response APS appointed a secret committee that never met, never troubled to speak to any skeptics, yet endorsed the Statement in its entirety. (They did admit that the tone was a bit strong, but amazingly kept the poison word incontrovertible to describe the evidence, a position supported by no one.) In the end, the Council kept the original statement, word for word, but approved a far longer “explanatory” screed, admitting that there were uncertainties, but brushing them aside to give blanket approval to the original. The original Statement, which still stands as the APS position, also contains what I consider pompous and asinine advice to all world governments, as if the APS were master of the universe. It is not, and I am embarrassed that our leaders seem to think it is. This is not fun and games, these are serious matters involving vast fractions of our national substance, and the reputation of the Society as a scientific society is at stake.
    3. In the interim the ClimateGate scandal broke into the news, and the machinations of the principal alarmists were revealed to the world. It was a fraud on a scale I have never seen, and I lack the words to describe its enormity. Effect on the APS position: none. None at all. This is not science; other forces are at work.
    4. So a few of us tried to bring science into the act (that is, after all, the alleged and historic purpose of APS), and collected the necessary 200+ signatures to bring to the Council a proposal for a Topical Group on Climate Science, thinking that open discussion of the scientific issues, in the best tradition of physics, would be beneficial to all, and also a contribution to the nation. I might note that it was not easy to collect the signatures, since you denied us the use of the APS membership list. We conformed in every way with the requirements of the APS Constitution, and described in great detail what we had in mind—simply to bring the subject into the open.

  34. Rick Stryker

    2slugbaits,
    You said:
    “Oh my. This is really very wrong. You do know that buying a 10 year with a 2% yield and then selling it 3 months later will only earn you a 0.03% annual return. You know that, right? You see, there’s this thing called arbitrage that evens out rates across maturities. The only reason the 10 year rate carries a higher yield is due to inflationary expectations over the next 10 years. If you sell that 10 year bond to someone then that potential buyer also has to account for the same inflation risk. You seem to believe in finding $20 bills on the street.”
    Oh my. This is really very wrong.
    TJ said that if interest rates go down, the price of a bond will go up and if you sell it you’ll realize a gain. That’s absolutely correct.
    Moreover, the term structure of interest rates is not determined by arbitrage. And expected inflation is not the only reason 10 year rates are higher than short rates. You know that right?
    I think we’ve established that you are not an interest rate derivatives or bond trader.

  35. 2slugbaits

    Rick Stryker tj said that if interest rates go down, the price of a bond will go up and if you sell it you’ll realize a gain. That’s absolutely correct.
    Except at the time when you first bought the bond you had no way of knowing interest rates would go down. The price you paid at the time you bought the bond reflects the market’s best guess as to the value of the market. The price you paid reflected the expected value of the bond. After-the-fact the price of the bond could change, but it could change in either direction. And with the 3 month rate at 0.03% why would you expect the interest rate to go down any further? The stochastic error component of the yield is asymmetric at this point because it is bounded by zero at the bottom (although there were a few nanoseconds when bonds traded at a nominal negative interest rate). At the zero bound there is more room to go up than to go down. So if interest rates go up, then the price of the bond you just bought falls.
    But both you and tj seem to be missing the point. The only difference between a 10 year bond rate and a 3-month bond that is continually rolled over 40 times is the risk premium. And the risk premium on a US Treasury primarily represents inflation risk. If you were a bond trader then you would know that’s why bond traders use fancy GARCH-in-Mean models to identify the risk premium. Contrary to what Feldstein and tj claim, the way QE moves equity prices is through expectations of inflation. If investors believe the Fed will monetize the debt this will increase expected inflation, and higher inflation expectations will tend to drive up equity prices. The Feldstein version is that aggressive central bank actions like QE are supposed to absorb the supply of Treasuries which in turn pushes investors into equities. The Feldstein theory is that this will lead to portfolio rebalancing, higher equity prices and increased aggregate demand due to a wealth effect. Feldstein’s simply wrong here. He’s got the transmission mechanism completely bassackwards. That’s why so many economists have been piling on and enjoying Feldstein’s howlers. As several economists have pointed out, it is true that Bernanke did peddle this wealth effect through portfolio rebalancing stuff, but that was mostly for Tea Party consumption. Bernanke is already a wanted man in Texas, so he couldn’t very well come right out and say the economy needed some inflation. So he told a bedtime story. The expectation was that real investors would understand this was just a bedtime story.
    Krugman was a little late to join the piling on, and his post was relatively gentle with Feldstein. And that’s really been Krugman’s pattern. I suspect it’s because he feels some sense of loyalty to Feldstein since it was Feldstein who first recognized Krugman’s talents and gave him his first job with the Reagan Administration.
    Warren Poster tj‘s math skills are legendary around here. A few months back he linked to a website showing that sea levels were rising at a constant rate, apparently forgetting that the earth is sphere, so if the radius increases at a constant rate the volume increases at an increasing rate.
    Rick Stryker I first joined the American Physical Society sixty-seven years ago
    That just about says it all. As another famous physicist quipped, science makes progress funeral by funeral.

  36. tj

    2slugs
    Oh my. This is really very wrong. You do know that buying a 10 year with a 2% yield and then selling it 3 months later will only earn you a 0.03% annual return. You know that, right? You see, there’s this thing called arbitrage that evens out rates across maturities.
    No my friend, you are wrong. You’ve really embarrassed yourself here. You can’t do a calculation that a 1st year undergraduate can do.
    Let me prove it to you.
    Buy a 10 year T bond issued today at par value for $10,000 with a 2% coupon and 2% yield to maturity. (By definition the coupon rate = the yield to maturity when the bond = par value, you do know that right?)
    Assume 6 months later that the yield on the bond has fallen to 1.8%. What is the price of the bond now? You claim the price of the bond has gone up by less than 1%. (I’d make it exact but since your claim above is wrong, I don’t know how to make the same error that you did.)
    Here is the correct way to determine the new price of the bond: First I’ll show you that the price of the bond is par value at issue. Let C = periodic coupon payment (2% x Face of $10,000 = $200 per year or $100 per 6 months), r = yield (2% or 1% per 6 months), let the years to maturity = 10 so 20 periods of compounding.
    Price = (C/r)[1-1/(1+r)^t] + Face/(1+r)^t
    Price = (100/.01)[1-1/(1+.01)^20] + 10,000/(1+.01)^20
    Price = $10,000.
    Now, to make the math easy, assume that 6 months has passed, one coupon payment has been made and the QE has forced the yield on the bond down to 1.8%. ( 1st year undergrads would understand the intuition, but I’ll explain for you – The price of the bond issued 6 months ago must be higher. Why? Because it offers a coupon of $200 per year. Bonds issues today when yields are 1.8% only pay $180 per year. Thus, the price of the 2% bond, with 19 periods to maturity and the yield down to .9% every 6 months is bid up to -
    Price = (100/.009)[1-1/(1+.009)^19] + 10,000/(1+.009)^19
    Price = $10,174.
    My 6 month return is (10,174-10,000)/10,000 = 1.7% or 3.4% annualized.
    Now take a look at the TNX chart and notice how many times in ONE YEAR the yield on the bond fluctuated by 20 basis points.
    http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#symbol=^tnx;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
    There were literally dozens of opportunities to make a 3% annualized return over the course of ONE YEAR.
    Now tell me again, who are these mysterious people who are indifferent to cash and buying and selling bonds when it is possible to earn a double digit return on bonds and 0% on cash? Talk about irrational.

  37. tj

    2slugs
    The price you paid reflected the expected value of the bond. After-the-fact the price of the bond could change, but it could change in either direction.
    Except with QE in progress. QE effectively put a floor on the price of debt (ceiling on the yield). Over the last year, you could have bought the 10 year each time the yield hit 1.8% and had at least 1 chance to sell it for a nice profit within 4 months. Many times you had several chances to sell. That possibility alone is enough to show that bonds are preferred to cash, even in the midst of your liquidity trap.
    I think ‘liquidity trap’ is better suited to describing policy ineffectiveness, and forget the constraint that everyone is indifferent to holding bonds versus cash.

  38. Rick Stryker

    2slugbaits,
    Tj’s statement that if rates go down the price of the bond will go up is absolutely correct. There’s no way to dispute that statement. You seem to be disputing some other idea here although I’m not sure what it is.
    The rest of your statement confirms that you are not a bond trader. Bond traders aren’t using GARCH in mean models. Also, long term rates today reflect expected short term rates, time-varying risk premia, and potential term premia. Expected short term rates reflect both expected future real interest rates and expected inflation. It’s much more complicated than you are making it out to be.
    Is that really your argument on Lewis, that he’s old? In fact, he passed away over a year ago. How do you explain the two Nobel prize winners?

  39. 2slugbaits

    tj Take a second look at your example. You forgot something. You forgot to include inflation risks.
    There were literally dozens of opportunities to make a 3% annualized return over the course of ONE YEAR.
    But there were also plenty of opportunities to make less than the 2% yield. What you’re forgetting is that having to wait for the right random change to occur imposes a liquidity cost on the owner of the bond. If an opportunity comes up and the bond is currently selling below the price you paid for (e.g., because the economy is improving and rates have gone up), then you would have to take a loss on the bond. That’s a liquidity cost. That’s why investors are sitting on trillions in cash and near-cash 3-month Treasuries. And that also answers your question as to just who these people are that are indifferent to holding bonds and cash in a liquidity trap. It’s the investors who are sitting on trillions in cash and short-term Treasuries. I suspect that part of the problem is that you really don’t understand the concept of a liquidity trap.
    Rick Stryker Tj’s statement that if rates go down the price of the bond will go up is absolutely correct. There’s no way to dispute that statement.
    Where did I dispute that? All I did was simply turn tj‘s statement around by saying:
    if interest rates go up, then the price of the bond you just bought falls.
    When interest rates are already bumping against the ZLB it is more likely that rates will go up rather than down.
    You seem to be disputing some other idea here although I’m not sure what it is.
    Correct. I’m disputing tj‘s assertion that the ex ante expected risk and transaction cost adjusted return on a 3-month Treasury is lower than the ex ante risk and transaction cost adjusted return on a 10 year Treasury. If there were a difference, that difference would have been arbitraged away. tj seems to believe there are lots of unclaimed $20 bills just lying on the street. tj‘s approach seems to be an exercise in imagining some situation in which you could make make profits in the bond market if you can find the right kind of fool. No doubt that’s true, but that’s not the issue here. At this point I think tj and I are talking past one another. I’m talking about Feldstein’s transmission mechanism in which the Fed’s purchase of bonds dried up the supply of bonds that would have been otherwise demanded by investors, and that this created an equity bubble. Feldstein has the mechanics all wrong. To the extent that the Fed’s actions influenced equity prices it did so through inflationary expections, as it had to when the economy was in a liquidity trap.
    As to GARCH-in-Mean models…well, I have to disagree. You said: “Also, long term rates today reflect expected short term rates, time-varying risk premia, and potential term premia.” Of course, that’s exactly what a GARCH-in Mean model does. There are dozens of different species within the genus GARCH models and hundreds of varieties within each species. But GARCH-in-Mean models were explicitly developed to look at how conditional volatility influences the risk premium in the expected mean component of the return on bonds. In fact, the classic paper looked at the 3-month and 6-month bonds. True, today’s models are much more sophisticated than those of 20 years ago and include all kinds of threshold factors, integrated unit roots and exotic distributions, but they still capture the basic intuitions of the simple GARCH-in-Mean models of yesteryear. And of course they’re ubiquitous in VaR analyses.

  40. tj

    2slugs
    That’s why investors are sitting on trillions in cash and near-cash 3-month Treasuries
    In other words they are not indifferent to cash and debt. Near-Cash, as you call it, is not cash.
    You don’t get it. All those factors, expected inflation, liquidity, etc, are already in the price.
    To the extent that the Fed’s actions influenced equity prices it did so through inflationary expections,
    This is completely incorrect. Inflation is the last thing on investors minds, unless you are talking about persistently low real returns over the past 3 years. The result is that the FED has driven investors to take on more risk in pursuit of a reasonable return. Without QE, rates of return on debt would be higher and the demand for equities lower, another way to confirm Feldstein’s claim that QE reduced the FED’s crowding out of equity relative to debt.

  41. tj

    New paper in Nature:Geoscience – Energy budget constraints on climate response.
    http://www.nature.com/ngeo/journal/vaop/ncurrent/extref/ngeo1836-s1.pdf
    Climate response to a doubling of CO2 is 1.4 degrees per century. Hardly catastophic.
    The authors include fourteen climate scientists, well known in their fields, who are lead or coordinating lead authors of IPCC AR5 WG1 chapters that are relevant to estimating climate sensitivity. Two of them, professors Myles Allen and Gabi Hegerl, are lead authors for Chapter 10, which deals with estimates of ECS and TCR constrained by observational evidence.
    The end of this charade is near.

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