Do I See a Patch of Blue?

It’s June, and I’m in Washington DC; the sky is blue, and the temperature outside is in the low 70s. Oh, and stock markets around the world are soaring. This is as good as it gets.

With Europe on the brink of the abyss, and all the gloom and doom of the past month, is there really cause for optimism? I don’t know, but Scott Sumner got all excited yesterday about signs that people are finally starting to get it, especially this piece by Matthew O’Brien posted on the Atlantic website.  Optimism seems to be catching, at least on the stock market.

There does seem to be a growing understanding that the conventional way of thinking about how monetary policy works – increasing the quantity of money causes interest rates to fall, inducing increased spending by business and households – is misleading, especially when interest rates are already close to zero. Instead, the way to think about the money supply is that the monetary authority ties its creation of money to a price or spending target. But for monetary policy to work in this way, the monetary authority has to announce, or at least make clear, that its policy is subordinate to the target it is aiming at, so that the public can revise its expectations accordingly. When the public’s expectations change in the appropriate direction, the battle is more than half won; the rest is a mopping up operation.

Also worthy of mention (a huge understatement BTW) are three recent posts by the precocious Evan Soltas (on monetary policy in Switzerland here and here and on monetary policy in Israel) which beautifully illustrate points that Scott and others have been making with little effect (on policy) since 2009. The voices crying out for a different approach to monetary policy are no longer lonely, and no longer in the wilderness. (And while handing out plaudits, I’ll just mention my own post about Switzerland back in September).

And here’s what one story (“Dow Surges on Stimulus Expectations”) says about the world-wide rise in stock markets today:

U.S. stocks were soaring Wednesday morning as investors rushed in from the sidelines on hopes the Federal Reserve could soon signal it’s open to additional stimulus measures.

The Dow Jones Industrial Average was rising 178 points, or 1.5%, at 12,306. The move puts the blue-chip index back in positive territory for the year.

The S&P 500 was up 20 points, or 1.6%, at 1305. The Nasdaq was surging 50 points, or 1.8%, at 2828.

All 30 Dow components were in positive territory, with Bank of America(BAC_), JPMorgan Chase(JPM_) and Hewlett-Packard(HPQ_) leading the gains.

Within the S&P 500, 95% of components were on the rise.

Gainers were outpacing decliners by a 7-to-1 ratio on the New York Stock Exchange and 4-to-1 on the Nasdaq. The leading sectors were basic materials, capital goods and energy.

The European Central Bank said Wednesday that it was keeping its benchmark interest rate at 1%. However, the markets continued to look for clues that the central bank would show an openness to lowering rates by July in the face of growing signs of recession on the continent and Spain’s troubled banking system.

“There is a necessity for them to show their cards when conditions turn urgent,” said Geoffrey Yu, analyst at UBS.

After the meeting, ECB President Mario Draghi indicated that short-term liquidity measures would continue but withheld clues on more aggressive plans to tackle the debt crisis.

“Today, we have decided to continue conducting our main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until … January,” Draghi said at a press briefing.

Federal Reserve Chairman Ben Bernanke testifies before Congress on Thursday, and it will be his first opportunity to comment on the weak jobs report last Friday. Given that the benchmark interest rate in the U.S. is already at a record low, the market will look for clues that the central bank could embark on a third round of quantitative easing.

The FTSE in London was rising 1.9% and the DAX in Germany was gaining 1.6%.

Maybe things really are darkest just before the dawn. We may be in for a long hot summer in Washington, but today I will enjoy the good weather and blue sky while it lasts. I sure hope Bernanke doesn’t spoil it all tomorrow.

7 Responses to “Do I See a Patch of Blue?”


  1. 1 Dustin June 6, 2012 at 11:03 am

    Sorry, but I can assure you that Bernanke will spoil it tomorrow.

    Just watch.

  2. 2 bubblesandbusts June 6, 2012 at 11:08 am

    The stock market may be rising on hopes of monetary stimulus, but that is not unlike similar actions over the past few years. Despite the exuberant US stock market, global stock markets and credit markets have not been as positive during the past couple years. Further, GDP (real or nominal) has generally not met the hopes of most analysts, investors and economists.

    Things may be looking up for monetary proponents but I don’t think the stock market is a good indicator.

  3. 3 Left Outside June 6, 2012 at 4:28 pm

    We’re doomed, I find your faith touching. Although I’m sceptical of how important “credibility” is, I don’t think any of our current crop of central bankers can signal the change in attitude necessary for a real turn around. Things might not get worse, but only if we’re lucky.

  4. 4 Becky Hargrove June 6, 2012 at 4:43 pm

    Oh goodness, left outside says we’re doomed but I wanted to share a ‘blue sky’ thought with you just the same. I have aways found your Hawtrey backdrop comforting because he reminds me so much of John Baugh, who founded Sysco Corporation. (the food giant) I worked there in the seventies and he was one of the more intelligent and kind people I’ve had the good fortune to work with.

  5. 5 David Glasner June 7, 2012 at 8:44 pm

    Dustin, I’m not sure what he said or meant. But I never am. The markets were obviously not overly impressed.

    bubblesandbusts, My analysis of the data shows that there is a strong positive relationship between expected inflation as estimated by the TIPS spread and the S&P 500. That relationship, not implied by theory in normal times, and not observed in normal times, has been consistently observed in the data since early 2008.

    Left Outside, I was not expressing faith, just trying to keep hope alive.

    Becky, I googled him and found his picture. You’re right; there is a bit of a resemblance, but he doesn’t look as English as R. G. does. Was John related to the legendary Sammy Baugh, the great quarterback of the Washington Redskins from the late 1930s to the early 1950s?

  6. 6 Becky Hargrove June 8, 2012 at 9:09 am

    David,
    I have a feeling those two are related as they came from the same exact area, and were close in age. However there is a mention of Sammy’s parents and two siblings, in John Baugh’s links I have only found mention of his family after marriage.

  7. 7 Tas von Gleichen June 9, 2012 at 8:43 am

    Well the money has to go somewhere. Most of it has been going into the stock market. Corporations are swimming in cash, and are not willing to spend some of it. I would love to see this companies hiring especially graduates.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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