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Even With a Crisis, No Deflation Coming
Recently I’ve been thinking a lot about what might happen in the event of a banking crisis redux. While I’m not very concerned about US banks these days, there is a ‘developing situation’ in China that could well eventually lead to crisis (although the state might prevent outright collapses), and of course ongoing gnashing of teeth over Deutsche Bank’s capital situation if it is fined as heavily as some have suggested they will be.
I am not yet really worried about the banking side of things. But there are plenty of sovereign issuers who are clearly heading down unsustainable paths (not least of these is the US, especially if either of the leading Presidential candidates really implements the high-cost programs they are declaring they will), and when sovereigns tremble it is often banks that bear the direct brunt. After all, you can’t form a line outside of the sovereign to withdraw your money.
But, in a spirit of looking forward to anticipate potential crises, let us pretend we are confronting another banking crisis. The question I often hear next is, “how deflationary would it be to have another crisis when inflation is already low?”
Unpeeling the onion, there are several reasons this doesn’t concern me much. First, inflation is stable or rising in most developed nations. Yes, headline inflation is still sagging due to energy prices, but median inflation is 2.6% in the US and core inflation is 0.8% in Europe and 1.3% in the UK. To be sure, all of those are lower than they were in mid-2008. But remember that in 2009 and 2010, median (or core) inflation never got below 0.5% in the US, 0.8% in Europe, and 2.7% in the UK. Japan of course experienced deflation, but that wasn’t the fault of the crisis – as I’ve pointed out before, Japan has been in long-running deflation due to the BOJ’s inability or unwillingness to grow the money supply.
So, if the worst crisis in 100 years didn’t take core inflation negative – a major, major failure of Keynesian predictions – then I’m not aflutter about it happening this time. Heck, in 2009 and 2010 core inflation wouldn’t even have been as low as it was, had the cause of the crisis not been the bursting of the housing bubble. The chart below (source: Bloomberg) shows the Atlanta Fed’s “sticky” CPI (another way to measure the underlying inflation trend) ex-shelter. Note that in 2010, the low in this measure was about 1.25%…it was actually lower in 2014 and 2015.
But we can go further than that. One reason that inflation decelerated in 2009 and 2010 was because money velocity dropped sharply. As I’ve shown before, and argued in my book, the decline in money velocity was not particularly unusual given the decline in interest rates. That is, if you had known what was going to happen to interest rates, you would have had a very good forecast of money velocity and, hence, core inflation.
Back in 2008, I never dreamed that interest rates would go so low, or stay so low for so long. Few of us did! But the outcome, in the event, was consistent with the monetarist model while being completely inconsistent with the Keynesian model. And here’s the point, when thinking about the next crisis: interest rates are already at incredibly low levels, lower even than the 36-year downtrend channel would have them (see chart, source Bloomberg).
With the wisdom of experience, I would never be so cavalier as to say that interest rates cannot go lower from here! But in 2008, 10-year rates were around 3.80% and they’re 1.60% now (in the US, and lower elsewhere). Real rates were around 2% at the 10-year point; they are at 0% now. It is difficult to imagine how rates can have another dramatic move as they did in 2008-09.
It is important to understand, that is, just why inflation tends to fall in recessions. It is not, as the Keynesians would have it, that a growing “output gap” reduces the pressure on resources and relieves price increases. It is because slack demand for credit causes interest rates to decline, which leads to lower money velocity and hence, lower inflation. If the central bank responds in a timely manner to increase money supply growth by increasing reserves, then inflation doesn’t fall very far. In the last crisis, the Fed and other central banks added enough liquidity to ramp up M2 growth, and that kept the decline in money velocity from causing outright deflation (then, they kept adding reserves for a few more years, which led to the situation we are in now – too many reserves in the system, so that central banks no longer control the marginal dollar that goes into the money supply).
So, in the next crisis I expect central banks will add still more reserves to the pile of excess reserves, which will be meaningless but will make them feel better. Interest rates will decline, but not by as much as they did in the last crisis, and money velocity will fall. So, in a real serious crisis, inflation will decline – however, it will not decline very much.
That is the world we are now living in: higher highs to inflation on each subsequent peak, and higher lows in each subsequent trough. The vicious cycle counterpart to the virtuous cycle we have enjoyed for 35 years. This is true, I think, whether or not we get a crisis or just a garden-variety recession.
I should be clear that I think that such a crisis would be horrible for growth. That is, our current weak growth in global GDP would turn negative again, and possibly even more painful. And times would be truly bad in the stock market. But inflation will not follow, just as it didn’t follow in 2009-2010, and turn into deflation.
Japan Is Doomed. Again.
Japan is doomed. Again.
A couple of years ago, the Bank of Japan began to pursue QE, with the intention of doubling its money supply. While this is a bad plan for almost every country, it was exactly the right plan for Japan, whose economy had been mired in deflation from 1999 until this policy began (see chart, source Bloomberg).
To a monetarist, it was no surprise that Japan was experiencing deflation. Since the early 1990s, annual money supply growth in Japan has been below 4% (see chart, source Bloomberg). It averaged 2.4% from 1992-2012. (The new policy pushed M2 growth above 4% for the first time since the 1990s, albeit briefly as it turned out).
Remember, the monetarist equation says MV≡PQ. With unchanged money velocity and an economy with, say, a 3% potential growth rate in GDP, a 2.4% growth in M2 should result in deflation. And, in fact, just as in the US lower interest rates in Japan produced lower monetary velocity.
Quantitative easing does nothing to help economic growth, and so QE was the wrong prescription for most of the world after 2010. But if deflation is your disease, QE is your cure and that is Japan’s situation. When the BOJ decided to start QE, money supply growth moved above 4% for the first time in years, and “miraculously” core inflation moved above zero as the first chart above illustrates. (Abstract from the spike over 2%, which was due to a one-time consumption tax effect; but core inflation in Japan was over 1% even excluding that spike). When that happened, I wrote in our Quarterly Inflation Outlook that Japan was no longer the poster child for inept central banking; that award had been moved to the European Central Bank.
Unfortunately, even though QE did exactly what it was supposed to do, to Japanese policymakers it seemed to have failed because their intention had been to raise real growth. So, since the hammer they were using did not function very well as a saw, they discarded the tool.
Japan’s problems with growth are structural. There’s not a lot that can be done, and nothing that can be done in the short run and with monetary policy, about the demographic train wreck they are experiencing. But the problem with inflation was, and is, fixable. But only if the Bank of Japan does QE, and a lot of it, and keeps doing it. As they shifted from straight QE to targeting negative interest rates, money supply growth began to ebb (now back to 3.3% y/y) and inflation began to roll over (now 0.3% ex-food-and-energy). Indeed, with lower rates the BOJ is making it worse by helping to push money velocity even lower.
There had been hope that the BOJ might abandon the NIRP experiment, which was clearly not working by every metric you can use to measure it, and go back to the policy that had been working at least with respect to the fixable problem. But instead, last night the Bank of Japan “shifted the policy framework” to targeting the yield curve. According to the Bloomberg story, the Bank is moving away from a “rigid target for expanding the money supply, while seeking to control bond yields across different maturities.”
So money? The heck with that. We just want to make sure that prices are at the “right” levels. Clearly, the BOJ thinks the market is totally failing when it comes to setting the interest rate correctly (to be fair, all central banks seem to now view interest rates as a tool rather than an indicator, as they used to), and so it is assuming control of that job. Clearly, only the wise policymakers at the BOJ can divine the right level for interest rates: the one which leads to great growth and moderate inflation for the country. Sure.
Japan had a chance. Whether by design or pure chance, they had stumbled on the policy that was able to banish the deflation that had plagued them, and perverted decision-making, for two decades. But because they are pursuing a pot of gold at the end of the rainbow – growth springing from monetary policy in the same way that you can plant olive trees and harvest carrots – they abandoned the working policy to pursue one that has no chance of success.
Japan is back in its comfort zone: the developed world’s basket case. Congratulations to the Bank of Japan.
Do Shortages Cause Lower Prices?
This is a quick post this morning because it is rainy and I am grumpy and feel like complaining.
Over the weekend I saw a post from a major market news website. I don’t want to name the website, because what they wrote was embarrassingly obtuse. I wouldn’t like it if someone cited my blog when I write something obtuse, so I won’t link to theirs. Consider it professional courtesy.
Here is what they wrote: “The global bond selloff was blamed largely on fears the European Central Bank and the Bank of Japan will eventually run out of bonds to buy.”
At this point, time yourself to see how long it takes you to figure out what’s wrong with that sentence. Score yourself with this table:
1 second or less: Congratulations! You have excellent common sense.
2-30 seconds: You have good common sense but maybe spend too much time around markets.
31-2 minutes: You are smart enough to figure this out, but you watch too much financial TV.
Over 2 minutes: You can be a Wall Street economist!
“I don’t see anything wrong” : You can write for the blog in question.
I could give an answer key, but in the interest of ranting let me present instead an analogy:
In a certain town there is a grocery store, whose proprietor sells apples for 50 cents. One day, a man walks in, flags down the proprietor, and says, “Hello kind sir. I see you have apples for sale. I would like to buy your apples. You see, I have bought all of the apples in this state, and in the surrounding state. I have bought every apple in this town. In fact, I have bought almost all of this year’s harvest. So, I’d like to buy your apples because I have money to buy apples and you have the only apples left.”
The proprietor responds, “Great! I will sell them to you for a nickel each!”
Because, you see, since the apple buyer has just about run out of apples to buy, the price of apples should fall. Right? Well, that’s exactly the point the blog made about bonds: because investors fear the ECB and BOJ will eventually run out of bonds to buy, bond prices fell. If there are really investors out there who think that when the supply of something declines, its price will fall…please introduce me to them, because I’d like to trade with them.
The fact that global central banks continue to buy bonds is the single, best reason to think that yields may not rise. In normal times, bond yields would be rising right now to reflect the fact that inflation is rising, just about everywhere we measure inflation (maybe not in Japan – core inflation in Japan was rising thanks to more-rapid money growth, but when the BOJ lowered rates into negative territory it lowered money velocity and may have squashed the recent rise). But if central banks are buying every bond they can, then prices are more likely to stay high and yields low – even in places like the US where the central bank is not currently buying bonds, because a paucity of Japanese and European bonds tends to increase the demand for US bonds. The risk to the bulls is actually that central banks stop buying bonds.
Maybe that is the weird reasoning that the blog in question was employing: once there are no bonds, central banks will have to stop buying them. And when the central banks stop buying bonds, their prices should fall. Ergo, when there are no bonds to buy the prices should fall. Sure, that makes sense!
Summary of My Post-CPI Tweets
Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.
- OK, 8 minutes to CPI. Street forecast is 0.14-0.15%, so a “soft” 0.2% or a “firm” 0.2% on core.
- y/y core wouldn’t fall with that b/c last August’s core CPI was 0.12%. In fact, a clean 0.2% would cause the y/y to round up to 2.3%.
- Either way, Fed is at #inflation target based on historical CPI/PCE spread. And arguably above it if you rely (as we do) on median.
- Quick commercial message: our crowdfunder site for the capital raise for Enduring Investments closes in 2 weeks.
- Commercial message #2: sign up for my articles at http://mikeashton.wordpress.com! And #3: my book!
- Fed’s job just got a lot harder, with weaker growth but a messy inflation print. 0.25% on core, y/y rises to 2.30%.
- And looking forward BTW, for the balance of the year we’re rolling off 0.19, 0.20, 0.18, and 0.15 from last year.
- …so it wouldn’t be hard to get a 2.4% or even 2.5% out of core by year-end.
- Housing rose to 2.58% y/y from 2.45%. Medical Care to 4.92% from 3.99%. Yipe. The big stories get bigger.
- checking the markets…whaddya know?! they don’t like it.
- starting to drill down now. Core services 3.2% from 3.1%; core goods -0.5% from -0.6%.
- Core goods should start to gradually rise here because the dollar has remained flat for a while.
- also worth pointing out, reflecting on presidential race: protectionism is inflationary. Unwinding the globalization dividend=bad.
- Take apparel. Globalizing production lowered prices for 15 years 1994-2009.
- Drilling down. Primary rents were 3.78% from 3.77%, no big deal. OER 3.31% from 3.26%, Lodging away from home 3.31% from 1.57%.
- Lodging away from home was partly to blame for last month’s miss low. Retraced all of that this month.
- Motor vehicles was a drag, decelerating further to -0.95% from -0.75%.
- Medical Care: Drugs 4.67% from 3.77%. Professional svcs 3.35% from 2.86%. Hospitals 5.81% from 4.41%. Insurance 9.13% vs 7.78%
- Insert obvious comment about effect of ACA here.
- y/y med care highest since spike end of 2007.
- CPI Medical – professional services highest since 2008.
- On the good news side, CPI for Tuition declined to 2.53% from 2.67%. So there’s that.
- Bottom line: can’t put lipstick on a pig and make it pretty. This is an ugly CPI report. It wasn’t one-offs.
- I STILL think the Fed doesn’t raise rates next week. But this does make it a bit harder at the margin.
- Core ex-housing was 1.52%. It was higher than that for one month earlier this year (Feb), but otherwise not since 2013.
- Is this a good place to mention again you can (if you’re an accredited investor!) own a piece of an inflation-focused investment mgr?
- Reminder: my book about the current situation “What’s Wrong With Money?“
- Especially with the dovish makeup of the committee. See no evil.
- Last post before I work on the summary post to http://mikeashton.wordpress.com . My estimate for median (out later) is 0.23%, 2.61% y/y.
- (For those keeping score at home…that would be another new high in median CPI).
As I noted, this is an ugly report. The sticky components, the ones that have momentum, continue to push inexorably higher (in the case of housing), or aggressively higher (in the case of medical care). The rise in medical care is especially disturbing. While core was being elevated mainly by shelter, it was easier to dismiss. “Yes, it’s a heavily-weighted component but it’s just one component and home-owners don’t actually pay OER out of pocket.” But medical care accelerating (especially a broad-based rise in medical care inflation), makes the inflation case harder to ignore. It is also really hard to argue – since there is a clearly-identifiable cause, and a strong economic case for why medical care prices are rising faster – that medical care inflation is resulting from some seasonal quirk or one-off (like the sequester, which temporarily pushed medical inflation down).
What makes this even more amazing is that inflation markets are priced for core and headline inflation to compound at 1.5%-1.75% for basically the next decade. That’s simply not going to happen, and the chance of not only a miss but a big miss is nonzero. I continue to be flabbergasted at the low prices of TIPS relative to nominal bonds. Sure, a real return of 0% isn’t exciting…but your nominal bonds are almost certainly going to do worse over the next decade. I can’t imagine why anyone owns nominal bonds at these levels when inflation-linked bonds are an option.
Now, about the Fed.
This report helps the hawks on the Committee. But there aren’t many of them, and the central power structure at the Federal Reserve and at pretty much every other central bank around the world is very, very dovish. Arguably, the Fed has never been led by a more dovish Chairman. I have long believed that Yellen will need to be dragged kicking and screaming to a rate hike. Recent growth data show what appears to be a downshift in growth in an expansion that is already pretty long in the tooth, so her position is strong…unless she cares about inflation. There is no evidence that Yellen cares very much about inflation. I think the Fed believes inflation is low; if it’s rising, it isn’t going to rise very far because “expectations are anchored,” and if it does rise very far they can easily push it lower later. I think they are wrong on all three counts, but I haven’t recently held a voting position on the Committee. Or, actually, ever. Ergo, a Fed hike in my view remains very unlikely, even with this data.
Looking forward, Core and Median inflation look set to continue to rise. PCE will continue to drag along behind them, but there is no question inflation is rising at this point unless everything except PCE is wrong. In the US, core inflation has not been above 3% for twenty years. That is going to change in 2017. And that is not good news for stocks or bonds.
Reforming Priors and Re-Forming Europe
By now, you have probably heard that the sun did not set on the British Empire as a result of BrExit. Here is one chart from Tuesday’s Daily Shot letter – and see that letter for others.
This is not at all shocking. While in the long-term it is possible (though I think unlikely) that Germany and other major European trading partners may choose to reduce the business they do with the UK – business which is bilateral, by the way – the immediate short-term impact of a lower pound sterling was much easier to read. In the immediate aftermath of the vote, I made the bold prediction that “Britain Survived the Blitz and Will Survive Brexit,” and then later that week in a post called “Twits and Brits” I made the fairly out-of-consensus prediction that “For what it’s worth, I think that thanks to the weakening of sterling Brexit is likely to be mildly stimulative to the UK economy, as well as somewhat inflationary, and slightly contractionary and disinflationary to the rest of the world.”
Oh, I should also point out that in early July I asked the question whether UK property price declines were rational, or overdone and concluded that “I don’t believe the current drop in listed UK property funds is a rational response to correcting bubble pricing, and it’s probably a good opportunity for cool-headed investors…and, more to the point, cool-headed investors who aren’t expecting to liquidate investments overnight.” What has happened since? See the chart below (Source: Daily Shot).
I only mention these items in back-patting fashion because (a) I am proud that I responded thoughtfully, rather than hysterically like many analysts, to the Brexit surprise, and (b) I want to promote my credibility when I make the following observation:
Good news for the UK is bad news for the Eurozone. Not for growth or inflation in the Eurozone, but for its very survival.
The audacity of Britain in leaving the EU was shocking to the establishment, but everyone carefully predicted disaster for the ancient empire. They did this not because the economics said it would be that way – as I pointed out, the economics pointed the other way – but because it was in the interest of the common-currency project that there be huge costs to breaking the covenant. The “marriage” of the countries in the Eurozone was difficult and painful, and the ongoing relationship has been difficult on some of the members. If “divorce” is easy – and even worse, if it is beneficial, then the marriage will not last. The experience of the UK so far – not only doing okay, but actually doing well – cannot be escaping notice in Athens or Rome (or Madrid or Lisbon…or Paris).
Now, that doesn’t mean the Euro is doomed to fail next week. But it means that in the next crisis, whether that is Greece redux or Italy or some other ground zero, the Eurozone bosses in Brussels will be lacking a major threat to use to force the recalcitrant nation to accept painful austerity. Remember that it was the threat of a generational depression that helped get Greece into line. How is Greece doing? The chart below (source: Bloomberg) shows that nation’s unemployment rate.
Admittedly it is not a statistically-valid sample, although to be sure it is a sample that matches the a priori arguments of those who suggested that Greece should leave the Euro: the country that exited the EU is doing fine, and better-than-expected, while the country that remained in the Eurozone is actually mired in a depression. Hmmm. So tell me again why my poor country needs to accept austerity to remain in the Eurozone?
So much about policy depends on one’s priors. If your prior expectation is that leaving the Eurozone is likely to be a disaster, then both sides in the negotiation are likely to reach agreement on a relatively smaller inducement to stay than if the prior expectation is that leaving the Eurozone might be a positive event for the leaver. The events to date should cause these priors to shift when the next crisis happens.
Speaking of priors, and changing countries: Friday’s employment report did not seem, to me, to be outside of the range of outcomes that would cause policymaker priors to change. That is, if the Fed Chairman was planning to raise rates later this month, prior to seeing the Employment report, then I wouldn’t expect the report was weak enough to change that course of action. Conversely, if the Chairman (as I believe) was not planning to hike rates, then it doesn’t seem to me that the report was strong enough to change that course of action.
Markets have decreased the implied probability of such a rate hike, compared to what it was before the report. That’s just Mr. Market’s bipolar nature. The 6-month moving average of payrolls was 189k last month; it is 175k now. The 12-month average is exactly unchanged at 204k. There’s nothing here that is out of the ordinary. But if your attitude was that rates should rise because they need to be returned to neutral, then a 151k monthly Non-Farm Payrolls shouldn’t affect that decision. And if your attitude was that the economy might be weakening, and can’t sustain a rate hike, the number doesn’t change your attitude either. So, while Mr. Market has changed the implied probability, I seriously doubt Dr. Yellen wavered at all.
The problem is that we don’t know what Dr. Yellen (and let’s be clear, hers is the only vote which matters) was thinking prior to the number. We don’t know her priors. But, unless the data appreciably strengthens or weakens between now and September 21st, we will know her priors after we see the results from the meeting. My guess continues to be that the Chairman’s operating assumption is that low rates do more good than harm, and that therefore a hike in rates is unlikely until inflation (already above the Fed’s target, and rising) gets quite a bit more above the Fed’s target, or market interest rates signal restlessness with the Fed’s course.
Need a Jedi to Blow Up the R-Star
I haven’t written an article for a couple of weeks. This is not entirely unusual: I have written this commentary, in some form, since about 1996 and there are occasional breaks in the series. It happens for several reasons. Sometimes it is simple ennui, as writing an analysis/opinion article for twenty years can occasionally get boring especially when markets are listless as they frequently are in August. Other times, it is because work – the real work, the stuff we get paid for – is too consuming and I have not time or energy left to write a few hundred words of readable prose. Maybe that’s part of the reason here, since the number of inflation-investing-related inquiries has definitely increased recently, along with some new client flows (and not to mention that we are raising capital for Enduring Investments through a 506(c) offering – you can find details on Crowdfunder or contact me through our website). Finally, in recent years as the ability to track the number of clicks/eyeballs on my writing has improved, I’ve simply written less during those times…such as August…when I know that not many people will read the writing.
But this time is a little different. While some of those excuses apply in some measure, I’ve actually skipped writing over the last two weeks because there is too much to say. (Fortunately, I said some of it on two Bloomberg TV appearances, which you can see here and here.)
Well, my list of notes is not going to go away on its own so I am going to have to tackle some of them or throw them away. Unfortunately, a lot of them have to do with the inane nattering coming out of Federal Reserve mouthpieces. Let’s start today with the publication that gathered a lot of ink a couple of weeks ago: San Francisco Fed President John Williams’ FRBSF Economic Letter called “Monetary Policy in a Low R-star World.”
The conclusion that Williams reached was sensational, especially since it resonates with the “low return world” meme. Williams concluded that “The time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural real rate of interest.” This article was grating from the first paragraph, where Williams casts the Federal Reserve as the explorer/hero:
“As nature abhors a vacuum, so monetary policy abhors stasis. Instead of being a rigid set of precepts, it follows the adage, that which survives is that which is most adaptive to change… In the wake of the global financial crisis, monetary policy has continued to evolve… As we move forward, economic conditions require that central banks and governments throughout the world carefully reexamine their policy frameworks and consider further adjustments in terms of monetary policy strategy—both in its own right and as it relates to other policy arenas—to successfully navigate these new seas.”
One might give the Federal Reserve more credit if subsequent evolutions of policy prescriptions were not getting progressively worse rather than better. Constructive change first requires critical evaluation of the shortcomings of current policy, doesn’t it?
Williams carries on to argue that the natural rate of interest (R-star) is lower now than it has been in the past. Now, Fed watchers should note that if true, this implies that current monetary policy is not as loose as has been believed. This is a useful conclusion for the Fed, since it would explain – within their existing model framework – why exceptionally low rates have not triggered better growth; it also would allow the Fed to raise rates more slowly than otherwise. I’ve pointed out before the frustrating tendency of groupthinking economists to attribute persistent poor model predictions to calibration issues rather than specification issues. This is exactly what Williams is doing. He’s saying “there’s nothing wrong with our model! If we had simply known that the natural rate was lower, we would have understood that we weren’t as stimulative as we thought.” Possible, but it might also be that the whole model sucks, and that the monetarists are right when they say that monetary policy doesn’t move real variables very well. That’s a hypothesis that at least bears examining, but I haven’t seen any fancy Fed papers on it.
What is really remarkable is that the rest of the paper is largely circular, and yet no one seems to mind. Williams attributes the current low r-star to several factors, including “a more general global savings glut.” Note that his estimates of r-star take a sharp turn lower in 2008-9 (see chart below, source FRBSF Economic Letter, figure 1).
Wow, I wonder what could have caused an increase in the global savings glut starting in 2008? Could it be because the world’s central banks persistently added far more liquidity than was needed for the proper functioning of the economy, leading to huge excess reserves – aka a savings glut?
So, according to Williams, the neutral interest rate is lower at least in part because…central banks added a lot of liquidity. Kind of circular, ain’t it?
Since according to Williams this fact explains “uncomfortably low inflation and growth despite very low interest rates,” it must mean he is bravely taking responsibility – since, after all, quantitative easing caused the global savings glut which, in his construct, caused low growth and inflation. Except that I don’t think that’s what he wants us to conclude.
This isn’t research – it’s a recognition that what they did didn’t work, so they are backfilling to try and find an excuse for why their theories are still good. To the Fed, it is just that something happened they didn’t realize and take account of. Williams wants to be able to claim “see, we didn’t get growth because we weren’t as stimulative as we thought we were,” because then they can use their old theories to explain how moving rates around is really important…even though it didn’t work this time. But the problem is that low rates don’t cause growth. The model is wrong. And no amount of calibration can fix a mis-specified model.
