Response to WSJ Comments…”What’s Money?”

Thank you for your interest in my letter highlighting how determinants of inflation can be better understood.  To clarify, two types of money exist ‘state money’ produced by the Fed and ‘bank money’ created by the private sector.  Bank money drives growth. Today, bank money includes the service value of traditional commercial bank products such as deposits as well as shadow banking services such as commercial paper, money market funds, and repurchase agreements. In fact, what constitutes money may change over time as new financial products are introduced.

So, it is essential that the Fed, economists, and market participants measure and monitor both state and bank money.  CFS Divisia accomplishes this feat by identifying assets that serve as money.  Importantly, not all of these monetary assets provide equal amounts of service as money to the economy.

Bill Barnett uses the example of measuring the service value of transportation.  Would a pair of roller skates and a locomotive provide equal value to the economy?  No.  So, CFS Divisia derives weights that vary over time.

For the theory, history and math behind CFS Divisia, please see Bill’s book Getting It Wrong

For a practical application of CFS Divisia see

WSJ: What’s Money?

The Wall Street Journal weekend edition printed my letter highlighting how determinants of inflation can be better understood.

CFS Divisia money growth warned about rising inflation and clearly explained why it was low coincident with QE.

To be clear, CFS Divisia money monitors the output of the financial system and its role in the monetary transmission mechanism.  It is an essential barometer of the economy, whether one is a market practitioner, Keynesian, or monetarist.

Read the full letter – It May Make the World Go Round, but What’s Money

New! Hyperinflation Book by CFS…

Despite the recent slip in inflation, many ponder a future of unexpectedly higher or more volatile inflation in the wake of extraordinary monetary measures over the last six years. While the Center for Financial Stability (CFS) is clearly NOT anticipating a return to runaway inflation, analysis of hyperinflation reveals lessons worth active study for public officials, investors, and the interested public.

CFS is delighted to release “Studies in Hyperinflation & Stabilization” by Professor Gail Makinen with a foreward by Thomas J. Sargent, co-recipient of the 2011 Nobel Prize in Economics.

Hyperinflation imposes heavy economic costs and undermines political and social stability – especially in emerging and frontier markets. Similarly, study of the evolution and stabilization of hyperinflation offers lessons to strengthen monetary and financial stability in advanced economies (For specific lessons)

Despite fears over the last few years regarding a surprise increase of inflation, CFS has warned against these concerns – based on the results of our Divisia monetary and financial data developed under the leadership of Professor William A. Barnett.

Best wishes into the holiday season and 2015.

Lawrence Goodman

Is Inflation Targeting Still Relevant?

In his paper titled “Inflation Targeting: A Monetary Police Regime Whose Time Has Come and Gone,” David Beckworth calls on the Fed to advance beyond inflation targeting.


Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system. Its arrival coincided with a rise in macroeconomic stability for numerous countries, and this led many observers to conclude that it is the best way to do monetary policy. Some studies show, however, that inflation targeting got lucky. It is a monetary regime that has a hard time dealing with large supply shocks, and its arrival occurred during a period when they were small. Since this time, supply shocks have become larger, and inflation targeting has struggled to cope with them. Moreover, the recent crisis suggests it has also a tough time dealing with large demand shocks, and it may even contribute to financial instability. Inflation targeting, therefore, is not a robust monetary-policy regime, and it needs to be replaced.


David Beckworth is a former international economist at the US Department of
the Treasury and the author of Boom and Bust Banking: The Causes and Cures of the Great Recession. His research focuses on monetary policy. Currently he is an assistant professor at Western Kentucky University.

Read the paper at

CFS Money Measures Highlight Shift in Fed Stance

Today we release CFS monetary and financial measures for June 2013. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.2% in June 2013 on a year-over-year basis.

CFS monetary data provide particular insights regarding a shift in Federal Reserve policy and future policy moves. For special analysis, please contact LeAnn Yee at

For Monetary and Financial Data Release:

Comments on TIPS Article in the WSJ

This morning, Min Zeng and Carolyn Cui from the WSJ wrote a terrific piece For Treasury, a Question of Fundamentals / Department Seeks Answers for Inflation-Protected Securities.

I would add that two factors are operative in pushing real yields (TIPS) higher:

First, investors are re-balancing their portfolios from bonds to stocks on the heels of tapering comments.  A Fed less active in purchasing Treasury obligations at some future date reduces the constant bid for all Treasuries – TIPS included.

Second, the TIPS market was mispriced with negative yields.  Inflation is positive at present…and will likely remain substantially above zero for the foreseeable future.  June CPI inflation reached 1.8% on a year-over-year basis up from 1.4% the previous month,

The bottom line is Fed purchases have distorted pricing in the Treasury market.  Changes on the margin prompt swift shifts in pricing and yields.

Comments on Dudley Interview with Bloomberg’s McKee

Bloomberg’s Mike McKee conducted an interesting interview with FRBNY President Bill Dudley.

When asked about concern surrounding the potential for a spike in interest rates, President Dudley offered two points (at about the 8 1/4 minute mark).  I take issue with each.

(1) President Dudley noted that “people are talking about this [a spike in interest rates] all the time.”  Based on his experience, when events are anticipated, “things don’t happen.”

My sense is that this is an overly simplistic view.  Three illustrative examples immediately spring to mind.

NASDAQ:  Although many market participants were “talking about” a correction in tech stocks for months before the collapse beginning in April 2000, this did not “prevent” the Nasdaq from falling by 78%.

ARGENTINA:  The Argentine peso collapse in 2002 was the most telegraphed crisis in the history of recent financial crises.  Although anticipated, the peso plunged by 73% versus the USD and the economy sunk by 16% in real terms.

CARRY TRADE AND BANK OF JAPAN:  In late 2005 and early 2006, market participants were “talking about” the impact of Bank of Japan’s exit from its Zero Interest Rate Policy (ZIRP) scheduled for March 2006.  It was widely discussed and anticipated.  Nonetheless, the Nikkei peaked at the end of March 2006 and plunged by 19% into June.  Similarly, the exit from ZIRP triggered a correction in emerging market currencies – despite the fact that everyone was talking about it.

The bottom line is that expectations do not preclude events from occurring.  What could be argued is that when events are anticipated, the potential damage is reduced, since economic agents are forewarned and can protect themselves.  This assumes, however, that the agents know the “correct” response to such signals.

(2) President Dudley noted that the risk of a spike in interest rates is diminished as the Fed holds many of the “long duration assets” on its balance sheet, resulting in less risk for the private sector.

This is false for many reasons – as it both focuses on flows versus stocks and misses the linkage between public and private debt markets.

Many interest rates in the private sector are based on their spread to Treasury yields.  So any move higher in Treasury rates will immediately impact private credit markets.  Similarly, the stock of Treasury debt dwarfs flows.  So, if private market participants (either domestic or foreign) get nervous, their resultant selling paper will drive yields sharply higher still.

Going forward, the optimal path for the Fed is to more precisely hone its communication and be less dismissive of realistic risks.

Bill Poole on the Budget

Former St. Louis Fed President William Poole wrote an extremely thoughtful and provocative opinion piece in WSJ this morning – A Primer for Understanding Obama’s Budget.  The piece finds fault in the budgeting process across generations and party lines.

Sadly, there is no independent entity to report a reasonable baseline for benchmarking.  It is simply too costly.

So…perhaps…it is time for the Federal government to get the math right.