One of those days. A few tidbits rather than another full-fledged analysis/rant:

Still lazy. Also, can dish it out, but can’t take it. Sad.

Crazy right-wingers are threatening to blow up the economy if they don’t get what they want, but let’s focus on the important stuff: Obama is a big meanie, and condescending too, for pointing this out.

But the conservative worldview is robust because of its imperviousness to evidence. Indeed. Although I’d point out that the VSP obsession with deficits has proved equally impervious.

Decisions, decisions. Refusing to expand Medicaid would impose huge suffering on lots of poor people, and kill some of them; for people like Jan Brewer, that’s a plus. But it would also hurt the profits of big health-industry corporations. What’s a conservative to do?

Tomorrow will be another busy day, so probably not much blogging.

Having a low-energy morning. So, if you’re finding some of the blogospheric discussion puzzling right now, a brief guide.

Just about everyone has been characterizing Obama’s press conference with “My offer to you is this: nothing.” It’s from here:

Meanwhile, if you find the titles of my monetary posts odd, here’s where they come from.

Hey, my blogging is almost always clear, with notably rare exceptions. And I am aware of all internet traditions.

Steve Randy Waldman replies reasonably to my post about the currency domination of the monetary base. But I think we’re still having a failure to communicate.

What Waldman is now saying is that in the future the Fed will manage monetary policy by varying the interest rate it pays on reserves rather than the size of the conventionally measured monetary base. That’s possible, although I don’t quite see why. But in his original post he argued that under such a regime “Cash and (short-term) government debt will continue to be near-perfect substitutes”.

Well, no — not if by “cash” you mean, or at least include, currency — which is the great bulk of the monetary base in normal times.

But this could come across as word games. I think the way to get at the substance is to ask the question that set this discussion off: what happens if the US government issues a trillion-dollar coin to pay its bills?

Everyone sensible (a group containing nobody on the political right) agrees that right now it makes no difference: financing the government by selling T-bills with zero yield, and financing it by making a deposit at the Fed, which either adds to the monetary base or sells some of its zero-yield assets, has, um, zero implication for anything except some peoples’ blood pressure.

But what happens if and when the economy recovers, and market interest rates rise off the floor?

There are several possibilities:

1. The Treasury redeems the coin, which it does by borrowing a trillion dollars.

2. The coin stays at the Fed, but the Fed sterilizes any impact on the economy, either by (a) selling off assets or (b) raising the interest rate it pays on bank reserves

3. The Fed simply expands the monetary base to match the value of the coin, an expansion that mainly ends up in the form of currency, without taking offsetting measures to sterilize the effect.

What Waldman is saying is that he believes that the actual outcome would be 2(b). And I think he’s implying that there’s really no difference between 2(b) and 3.

But that’s not right either in economic or in fiscal terms. Option 3 would be inflationary; on the other hand, it would not lead to any increase in government debt. Option 2(b) would not be inflationary — but it would affect the federal budget. Why? Because the Fed’s additional interest payments would reduce the amount it can remit to the Treasury.

In fact, the effects of option 2(b) would be identical, both for the economy and for the federal government’s cash flow, to option 1. Either way, the budget deficit would be enlarged by the payment of interest on $1 trillion of borrowing. In that sense, the Treasury will have redeemed the coin, for practical purposes, even if it never redeems the coin.

The bottom line, as I see it, is that the Fed’s new policy of paying interest on reserves makes much less difference than some people think. Short-term debt and currency are still not at all the same thing, and this is what matters.

Well, almost all, at least in normal times.

Via Mark Thoma, I see that Steve Randy Waldman believes that the distinction between monetary base — the stuff only the central bank can create — and short-term debt in general has disappeared, not just for the moment, but permanently. It’s a point of view I hear fairly often, along with the view that in fact there never was a difference. But it’s a view based, I think, on a slip of the tongue.

What do I mean by that? That people saying these things — you can see it clearly in Waldman’s post — slide much too easily into identifying monetary base with bank reserves. And since bank reserves now pay interest, well, aren’t they just debt?

But bank reserves are just one component of the monetary base — and in normal times, a trivial component. Here (pdf) is a useful table:

Before the crisis, only about 5 percent of the monetary base consisted of bank reserves. The rest was basically currency.

This meant that the simple textbook description of how an open-market operation increases the money supply — a bank lends out 1-r of its new reserves (with r the reserve ratio), which return to the banking system, leading to another round of lending, and eventually the money supply rises by 1/r times the injection — is deeply misleading. What actually limits the growth in the money supply is the fact that a substantial part of each round of lending leaks out of the banking system, getting added to hoards of green paper bearing the faces of dead presidents.

And dead presidents, as you may have noticed, don’t pay interest.

Now, under current conditions that doesn’t matter; dead presidents don’t pay interest, but neither do T-bills, so short term debt and currency form an aggregate (a Hicksian composite commodity, for the serious nerds out there), whose composition doesn’t matter. But interest rates won’t always be zero, and at that point the size of the monetary base — dead presidents plus a sliver of bank reserves that can be converted into dead presidents at will — will matter again.

It’s true that the Fed could sterilize the impact of a rise in the monetary base by raising the interest rate it pays on reserves, thereby keeping that base from turning into currency. But that’s just another form of borrowing; it doesn’t change the result that under non-liquidity trap conditions, printing money and issuing debt are not, in fact, the same thing.

Ed Kilgore is deeply annoyed, as he should be, at the “No Labels” people promulgating the notion that all we need to do to solve our problems is transcend our petty partisanship. As he points out, even their diagnosis of what our problems are — specifically, that budget uncertainty is keeping our economy depressed — is something that, as it happens, neither Democrats nor Republicans accept.

But Kilgore goes too easy on these guys. It’s not just that partisans of all stripes would disagree with their diagnosis; there is not a shred of evidence supporting their claims. Where is the evidence that fear of future deficits — as opposed to fear of political chaos over the debt ceiling and all that — is depressing business spending? Where, indeed, is the evidence that out there in the real world of economic decision-making, long-term deficits worry anyone at all? How do you reconcile claims that it’s all about the fiscal outlook with record-low borrowing costs?

The truth is that this is all a self-indulgent fantasy. Very Serious People love to pontificate about the budget, because it makes them sound, well, Very Serious; and so naturally they really like a doctrine which makes everything going wrong a byproduct of the political system’s failure to heed their Very Serious advice. But there is, as I said, no evidence to support that comforting belief, and in fact all the evidence points instead to a Keynesian story about inadequate demand.

What leads to this self-indulgence? In large part it is what Jon Chait calls the “repetitive drone of elite sentiment”, in which the usual suspects pat each other and themselves on the back, with never a skeptical question. Erskine Bowles and Alan Simpson will not appear on a Sunday talk show and get asked why the fiscal crisis they keep predicting hasn’t materialized. David Walker won’t be asked why, if the great danger is that at some point in the future we may be forced to cut benefits, it’s so important that we commit now to … cutting future benefits.

In ordinary life, believing what makes you feel comfortable, never mind reality, is widely understood to be a failing. In the world of Very Serious pontification, the practice is so deeply embedded that people don’t even know that they’re doing it.

A bit of a backup, utility post, for those trying to keep track of these things.

Read more…

Or, actually, *with* George. Yes, I’m Stephanopoulizing again. Off in a few minutes to do some web stuff for ABC, followed by This Week.

Meanwhile, I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP.

Truth or famous last words? I guess we’ll find out.

If I’d spent the past five years living in a monastery or something, I would take the Treasury Department’s declaration that the coin option is out as a sign that there’s some other plan ready to go. Maybe 14th Amendment, maybe moral obligation coupons or some other form of scrip, something.

And maybe there is a plan.

But as we all know, the last debt ceiling confrontation crept up on the White House because Obama refused to believe that Republicans would actually threaten to provoke default. Is the WH being realistic this time, or does it still rely on the sanity of crazies?

The thing is, the coin option sounds silly, but it clearly obeys the letter of the law. As far as I can tell, none of the other options — other than outright surrender — has the same virtue. Failing to pay debt service would be a breach of contract. Paying contractors, and maybe Social Security recipients, in scrip would violate the law, which says that they should be paid — not given IOUs. Deciding that the president has the right to ignore the debt limit after all would avoid these legal breaches at the expense of another breach.

And default in any of these senses would risk a huge collapse of confidence.

So is there a plan, or will it just be another case of tough talk followed by a tail-between-the-legs retreat?

As I said, if we didn’t have some history here I might be confident that the administration knows what it’s doing. But we do have that history, and you have to fear the worst.

Whatever else you can say about the new turn in Japanese policy, it’s offering a great demonstration of the peculiarities of zero-lower-bound economics. (JGBs meet the ZLB, OK!)

The key point here is that Japanese short-term rates are hard up against zero. Long-term rates aren’t, but they’re still constrained: the long rate is, to a first approximation, the average of expected future short rates; short rates can go up but not down; so the long rate is kept some ways above zero, no matter how bad the current economy, by this one-way option. Long rates are also, as part of this process, fairly sticky, responding only slightly to changes in economic fundamentals. (Serious econowonks may recognize the affinity with the old target zones literature).

As a result, Japanese long rates have dropped much less than rates in other advanced countries:

And now that Japanese policy makers have, at least for now, managed to persuade markets that deflation will give rise to mild inflation, this has not been reflected at all in a rise in nominal interest rates; instead, it’s all a fall in real rates. In the figure below, from here, the orange line is the nominal rate on 10-year Japanese bonds; the green line the rate on inflation-indexed bonds; and the red line the implied forecast of inflation:

It’s actually quite beautiful, if you have an economist’s warped aesthetic sense. And it’s also very good news for Japan.

Oh, dear. Jon Stewart took on the platinum coin, and made a hash of it — he faceplanted, as Ryan Cooper says.

What went wrong? Jon Chait says that he flunked econ, but that’s just part of it. He also flunked law, politics, and just plain professional.

So, yeah, as Chait says, Stewart seems weirdly unaware that there’s more to fiscal policy than balancing the budget. But in this case he also seems unaware that the president can’t just decide unilaterally to spend 40 percent less; he’s constitutionally obliged to spend what the law tells him to spend. True, he’s also constitutionally prohibited from borrowing more if Congress says he can’t — which is a contradiction. But that’s the whole point of the discussion.

And it makes no sense at all to talk about any of this without the context of extortion and confrontation.

Above all, however, what went wrong here is a lack of professionalism on the part of Stewart and his staff. Yes, it’s a comedy show — but the jokes are supposed to be (and usually are) knowing jokes, which are funny and powerful precisely because the Daily Show people have done their homework and understand the real issues better than the alleged leaders spouting nonsense. In this case, however, it’s obvious that nobody at TDS spent even a few minutes researching the topic. It was just yuk-yuk-yuk they’re talking about a trillion-dollar con hahaha.

Hey, if we want this kind of intellectual laziness, we can just tune in to Fox.

Update: Some people are asking why I don’t go on TDS to explain. Um, first I have to be invited — which hasn’t happened since, I think, 2005.

Shinzo Abe has taken Japan off in a surprisingly Keynesian direction. Noah Smith points out, again, that he’s probably doing it for disreputable reasons, mainly old-fashioned LDP pork-barrel (katsu barrel? tofu barrel?) politics. But this may not matter.

Noah also raises a different point: does Japan really need a big boost? He points to the low measured unemployment rate; after a couple of decades of watching Japanese unemployment numbers, I don’t think that tells us much. But there is a case to be made that Japan’s economy is in better shape than most people believe. Overall GDP growth since the crisis has been roughly comparable to the euro area, but with far worse demography:

In fact, given that Japan’s working-age population is actually shrinking, there’s a reasonable argument to the effect that Japan is closer to potential output than the US.

But if Japan is doing relatively well in cyclical terms, it’s still far from clear that macroeconomic caution is appropriate. After all, Japan has a much longer-term monetary issue: persistent deflation, which among other things has meant that Japanese real interest rates have been well above those in the United States even though nominal rates are low. (I wrote about that here.)

What Japan needs, then, is to boot itself out of its deflationary trap; and a situation where there isn’t too much economic slack is actually a very good time to do that.

And here’s an important point that has gone remarkably unreported, except on a few financial blogs: something dramatic does seem to be happening on the expected inflation front. Here’s the 5-year breakeven, the spread between indexed and non-indexed bonds:

The big move actually came before Abe took office, maybe reflecting the sense that the political environment had changed and that the Bank of Japan’s freedom to impose monetary orthodoxy was about to end. Whatever caused it, this is a remarkable change — it’s the kind of upward move in inflation expectations advocates of radical monetary policy in the US can only dream of. And coupled with a fiscal boost, it could mean that Japan’s long deflationary era is finally coming to an end.

So while I very much dislike what Abe stands for on cultural issues, and take very seriously Noah Smith’s warning that he may be basically about patronage politics, none of that matters on the macro front; it sure looks as if Japan is, for whatever reason, doing the kinds of things an economy still stuck in the Lesser Depression should be doing.

Ah. Charles Plosser of the Philadelphia Fed is against the platinum coin, which he says “doesn’t solve any real problem” and would hurt our credibility.

Actually, it solves a very real problem: attempted extortion by the GOP. And on the credibility front, who better to lecture us on such matters than a man who has been predicting an inflationary explosion for five years?

This is a favorite theme of Brad DeLong’s, and rightly so. It’s not especially remarkable that the inflation hawks got it wrong: to err is human (and, as a T-shirt I saw on St. Croix said, to arrr is pirate). What is remarkable is the total absence of either self-reflection or accountability. When you get things this wrong, you’re supposed to ask yourself why, and whether your framework of analysis needs updating. And if you should happen to lack the capacity for self-reflection, there should be some external sanction too; people who get it wrong, keep getting it wrong, and show no sign of learning should pay a price in polite society.

But this doesn’t seem to happen to those who got everything wrong about the macroeconomics of a depressed economy; they remain respectable, and even get praised for their consistency. Of course, it’s not just macro: it remains true, for example, that for the most part you’re not considered serious about national security unless you were wrong about Iraq.

Anyway, what’s Plosser saying now, aside from dissing the platinum coin? Why, he’s warning that the Fed’s current efforts will cause inflation.

Still listening to this band a lot:

Senate Democrats give Obama full backing in any unilateral action he might take on the debt ceiling. Reports say that Harry Reid is still partial to the 14th amendment; but there’s also the coin and the coupons.

Just to be clear, there’s no need for the administration to commit to a solution now, or even to admit that it has one in mind. You still want the pressure on the GOP to turn away from this cliff. But you also want to be careful not to rule anything out, partly so that the GOP understands that it may face a grand fizzle, partly because it may be necessary to do something to avert default.

So the appropriate response of senior officials, if asked about the coin and all that, is to say “Hey, look, isn’t that a crack in the ceiling? And how about that game last night?” Keep it ambiguous; but meanwhile, secretly, get that coin ready — preferably, as Felix Gilman says, smithed by dwarves in the deep places of the earth.

I taped a long talk with Bill Moyers yesterday. Here’s the link. It should also be aired on most PBS stations this weekend; listings at the Moyers site.