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China’s Lost Decade: Communist Ideology Meets Japan’s Economic Fate | The Market Monetarist
China’s strategy of increasing debt issuance to stimulate the economy mirrors Japan’s reliance on public spending and debt during its “Lost Decade.” In response to a faltering economy, the Japanese government repeatedly increased public investment, hoping to jumpstart growth through infrastructure projects and other short-term measures. While these efforts provided a temporary boost, they ultimately…
1980s Danish Fiscal Wisdom: Expansionary Contraction as a Model for US Economic Revival | The Market Monetarist
On Twitter/X, Bob Elliott has been sharing his observations about American consumer behavior. Elliott, a seasoned investor and businessman, points out a paradoxical economic scenario: despite low mortgage rates and increased household wealth, both consumers and businesses are exhibiting remarkable restraint in borrowing and spending. Elliott noted: "So far the expansion hasn't required increased household…
Agent-Based Experimental Economics: A New Era for Understanding Market Dynamics | The Market Monetarist
AI-Powered Synthesis of Austrian and Chicago ideas Like many free-market economists, I began my early studies deeply influenced by the Austrian School, but over time I shifted toward the Chicago School, particularly when it comes to microeconomic theory. These days, I consider myself primarily aligned with Chicago Price Theory on microeconomic matters, while my views…
Listen Up: NotebookLM Converts Minecraft AI Economics Post to Podcast | The Market Monetarist
I have asked NotebookLM to create a podcast on my blog post "AI Agents in Minecraft: Vernon Smith-Style Experimental Economics on Steroids". I think it's pretty good - have a listen here: If you want to know more about my work on AI and data, then have a look at the website of PAICE — the AI…
AI Agents in Minecraft: Vernon Smith-Style Experimental Economics on Steroids | The Market Monetarist
From Vernon Smith to AI Agents: A Quantum Leap in Experimental Economics These days I spend most of my time talking and advising on the use of AI. I do this in my consultancy Paice that I have co-founded with my business partner Christian Heiner Schmidt. I therefore also spend a lot of time "playing"…
Eastern Giants Stumble: China and Russia Face ’90s-Style Economic Reckoning | The Market Monetarist
China and Russia Face Mounting Pressures as US Economy Remains Resilient Historical Parallels and Potential Consequences Yesterday we got the US ISM numbers, which surprised somewhat on the downside, which has caused recession fears in the US to rise again. The market is now again increasingly seeing a chance that the Federal Reserve will cut…
Between a Rock and a Yuan: China’s Tough Choice on Currency and Deflation | The Market Monetarist
The graph below in different variations have been making its rounds on social media in recent days. It is somewhat odd that it took so long for the number to get the any attention as the numbers this relateds to have been out for a couple of weeks. But frankly speaking I didn’t notice it…
4m-RUIN: The most simple recession indicator in the world | The Market Monetarist
On Friday, the headlines were flashing: "Sahm rule triggered". The reason was that with the US unemployment numbers for July coming out at 4.3%, the 3-month moving average was now 0.5 percentage points higher than its 12-month low. The Sahm rule has historically been a strong coinciding indicator for recessions in the US - hence…
Powell’s Reading List: Sahm’s Rule, Mankiw’s Guesses, and Dornbusch’s Echo from the Past ‘I Told You So’ | The Market Monetarist
On Friday we got the U.S. labour market report for July. Employment growth and wage growth continue to decelerate, and most notably, the unemployment rate rose to 4.3% in July, up from 4.1% in June. This increase has triggered a "recession alarm" — at least if one subscribes to the so-called Sahm Rule. Understanding the…
Eeny, Meeny, Miny, Mankiw: The Surprisingly Accurate Way to Guess Fed Policy | The Market Monetarist
The Taylor rule is the celebrity of monetary policy rules, frequently touted as the go-to framework for central banks, especially the Federal Reserve. Its simplicity is its charm: set interest rates based on how far inflation deviates from the target and how much the economy is straying from its potential output. However, let's not kid…
How Well Do Large Language Models Reason About Macroeconomics? | The Market Monetarist
I think it is pretty clear to everybody who follows this blog and follows me on social media that I am deeply fascinated by AI and how we can use, for example, Large Language Models in economic research—and I am eager to spread the gospel. Today, I spent a couple of hours building a simple…
A Summer Surprise: A rather massive positive supply shock? | The Market Monetarist
Here are two sets of high-frequency US economic data: first, the daily US "inflation" numbers as measured by Truflation.com and the Weekly Economic Index (Lewis-Mertens-Stock), which is a very good weekly indicator of US real GDP growth. What are we seeing? Inflation is sharply down... ... and (proxy) real GDP growth is sharply up. This…
The Yield Curve as a Policy Instrument: Decoding the Fed’s Implicit NGDP Targeting for the US Economy | The Market Monetarist
Yesterday, in my post "Fed's hidden strategy: Implementing new dual NGDP targets", I introduced a weekly NGDP growth proxy for the United States and proposed a medium-term NGDP target rule. Today, I want to push this analysis further by exploring how the US yield curve might be functioning as a policy instrument in the Federal…
Fed’s hidden strategy: Implementing new dual NGDP targets | The Market Monetarist
Traditionally, central banks have focused on inflation targeting, but NGDP level targeting provides a more comprehensive picture by encompassing both inflation and real GDP growth over time. However, real-time data on NGDP is not readily available. This challenge led me to develop a proxy for weekly NGDP growth. In January 2024, I introduced this approach…
The Effectiveness of Real Rate Rules: An Analysis Using 10-Year Yields and Inflation Expectations | The Market Monetarist
Abstract This blog post examines the effectiveness of real rate rules in stabilizing inflation expectations using quarterly data from 10-year Treasury yields and inflation data from 1988 to 2024. We estimate the relationship between inflation deviations from the target and the expected average deviation of future inflation, following the methodology outlined in "Robust Real Rate…
PAICE: My unexpected journey from Finance to AI | The Market Monetarist
Over the past year, I have increasingly dedicated my time to speaking, writing, and advising on the use of data, analytics, and artificial intelligence (AI). This includes workshops, lectures, and direct consultation with clients on introducing and using AI. Initially, this wasn't an active decision but rather driven by demand. My phone has been ringing…
“An economist, a basketball player, and a Muslim woman walk into a bar” – Understanding Statistical Discrimination in Large Language Models | The Market Monetarist
In my AI/ChatGPT workshops, I often ask ChatGPT to create an image of "an economist and a Muslim woman" to illustrate how AI "thinks." Artificial intelligence, in its broadest sense, is fundamentally about pattern recognition or prediction. In economic theory, we talk about "statistical discrimination," which occurs when a person is discriminated against based on…
Macro Musings podcast: AI and its Impact on Monetary Policy and Economics | The Market Monetarist
As AI technology continues to progress, its effects may forever change the world of economics and economic policymaking. I recently had the pleasure of joining David Beckworth on the Macro Musings podcast to discuss these transformative changes. Here's a summary of our conversation and my thoughts on the matter. Listen to the podcast here. My…
China Bear, AI Bull: Reflections on the Future of the Global Economy | The Market Monetarist
In my recent interview with Steven Budgen on the Achieving Alpha Podcast (see the podcast below), we delved into some pressing economic issues, particularly focusing on China's economic trajectory and its implications for the global economy. Here are my key insights and reflections from that discussion, as well as references to my 2014 blog post,…
Large Language Models can beat analysts, but can they beat the market? | The Market Monetarist
I have had a look at a new interesting paper - "Financial Statement Analysis with Large Language Models" - where the authors investigates whether an Large Language Model (LLM) can predict earnings as effectively as human analysts. Summary of the Study In the study, researchers Alex G. Kim, Maximilian Muhn, and Valeri V. Nikolaev from…
How the AI revolution and backward-looking central banks could trigger aggregate demand and interest rate overshooting: some model simulations | The Market Monetarist
I have been thinking about the impact on the economy of an increase in productivity y*, for example, due to the AI revolution, and I assume that it takes time for the central bank to realize that the increase in y* has also increased the natural real interest rate r*. I have tried to model…
Talking to David Lin: Why the West Will Thrive – US Power and China’s Slowdown | The Market Monetarist
What should you spend the next 37 minutes on? You should listen to me talk about why I remain so optimistic about the West, and especially why I am convinced that the USA will continue to be the world's largest economy – and yes, why the status of the dollar as the global reserve currency…
Talking yen, yuan and AI with Nik Bhatia | The Market Monetarist
Tonight, I had a discussion with Nik Bhatia, who had invited me to participate in his podcast 'The Bitcoin Layer' to share my views on the continued weakening of the Japanese yen, and why I believe that the Chinese renminbi will follow the same weakening trend that the Japanese yen has experienced over the past…
Yen and Yuan: Dual decline driven by demographic dilemmas and the need to fight deflation | The Market Monetarist
This morning, the Japanese yen has weakened to 160 against the dollar. This is the weakest level for the Japanese currency since 1990. Depending on how close or far one is from the screen, the movements in the yen might seem dramatic. However, the truth is that in real terms—considering relative purchasing power parity (PPP)—the…
From Merchants to Quants: The Digital Revolution in Retail* | The Market Monetarist
The 1990s and early 2000s witnessed a remarkable technological transformation in financial markets, ultimately leading to significant advancements in transparency and efficiency on a global scale. This era saw a shift towards electronic trading, with terms like "Quants" and "Algo trading" becoming increasingly prevalent. Today, it's estimated that over 90% of global currency trading is…
What I said about the inflation outlook a year ago and what actually happened | The Market Monetarist
Facebook has just reminded me of what I was doing on this day a year ago - I was giving a presentation at a seminar in Copenhagen organized by Danske Bank for some of the bank's professional clients, as you can see in the picture below. A lot has changed in the world since then,…
An Inflation Pressure Index for the US economy | The Market Monetarist
The American inflationary pressure is falling rapidly. When discussing inflation, there is often a debate about which price index is the correct one to follow. So I thought – why not use them all? Thus, I have constructed what I have called an Inflation Pressure Index (IPI), in which I have examined a range of…
We feared it would be a return to the 70s, but it might be the return of the booming 90s | The Market Monetarist
In my recent post "2024: The Productivity Boom is Coming" I delved into the fascinating trajectory of our current economic landscape, one that defies the gloomy expectations of a 1970s-style stagnation and instead hints at a revival reminiscent of the booming 1990s. This reflection stems from a detailed observation of recent trends and a hopeful…
Unleashing the Creative Spark: AI, Entrepreneurs, and the Future of Content | The Market Monetarist
It is clear that with the opportunities created by artificial intelligence, the volume of content - articles, images, films, audio, etc. - on the internet generated by AI is exploding. This gives rise to a paradox, namely that, for example, ChatGPT or Midjourney require content - text and images - to be trained on, and…
Why Soaring Rates Have Failed to Kill US Growth | The Market Monetarist
Why hasn't American growth slowed down more when interest rates have been jacked up? The graph below, which I have created with a little help from data from the Federal Reserve St. Louis' FRED database, and which I have processed through ChatGPT 4.0, illustrates what has happened. In 2020-21, the USA implemented massive monetary and…
Did Jay Powell just deliver a near-perfect soft landing? Get the surprising answer from a new weekly NGDP indicator. | The Market Monetarist
We hear it all the time – are we heading for a recession (a hard landing) or a soft landing in the US economy? The question, of course, is what a soft landing is. A way to answer this question is to determine whether the Federal Reserve conducts monetary policy in such a way that…
2024: The Productivity Boom is Coming | The Market Monetarist
When I was a younger economist, I harboured more apprehensions about the world approaching its demise - or at least the global economy. Yet, paradoxically, as I've aged, my perspective has shifted to increasingly acknowledge the gradual improvement of our world over time. This blog post is a testament to that sentiment, underlining the need…
China’s New Economic Narrative: No Room for Pessimism | The Market Monetarist
In an unprecedented move that echoes through the financial world, China has tightened its grip on economic discourse, effectively outlawing negative narratives surrounding its economy. This development came to light in reports circulated by Bloomberg among others on Friday.According to a memo from the Chinese Ministry of State Security: "To maintain economic security, we must…
AI-Powered Insights into Monetary Policy: Unraveling the Fed’s Latest Moves | The Market Monetarist
In the ever-evolving dance of monetary policy, the Federal Reserve's latest meeting has struck a new chord, setting in motion a fascinating interplay of market forces and policy expectations. As an economist deeply engaged in the intricate mechanics of monetary and market dynamics, I find this unfolding scenario a compelling narrative, rich in lessons and…
Estimating and Evaluating a Fed Policy Rule with ChatGPT | The Market Monetarist
Estimating and Evaluating a Fed Policy Rule with ChatGPT* In a collaborative effort with the AI model ChatGPT, I've embarked on an analytical exploration of the Federal Reserve's monetary policy decisions over the years. Leveraging a model inspired by Greg Mankiw's approach, we've incorporated key economic indicators, including the 10-year government bond yields, to provide…
Where is inflation going? | The Market Monetarist
A couple of weeks ago I was invited to do a talk on the topic "Where is inflation going?" at a webinar organised by the Institute of International Monetary Research (IIMR) at University of Buckingham.Hosted by IIMR Director Damian Pudner in collaboration with the Vinson Centre for the Public Understanding of Economics and Entrepreneurship at…
New book: “The Free Enterprise Welfare State: A History of Denmark’s Unique Economic Model” | The Market Monetarist
When I follow the political debate in North America I am often struck by how little Canadians and Americans know about Europe - and it is particularly frustrating when certain European countries are used as Socialist Bernie Sanders often has done to say that my native Denmark (and the other Scandinavian countries) are "socialist". In…
Are interest rates moving up or down? – a long-term view | The Market Monetarist
I have been interviewed for the podcast "Rig på Viden". Despite the Danish name of the podcast the podcast is in English and is about my research at part of the research project "Nordic Finance & the Good Society" at Copenhagen Business School. In the podcast I talk about the main drivers of interest rates…
This is why inflation is ALWAYS and EVERYWHERE a monetary phenomenon | The Market Monetarist
Milton Friedman, the American Nobel Prize laureate in economics, famously stated, "Inflation is always and everywhere a monetary phenomenon." In this blog post, I'll try to show why Milton Friedman was right, and why he is still right, using some simple math. But first, the entire Friedman quote: "Inflation is always and everywhere a monetary…
From excessively easy to excessive tight US monetary policy | The Market Monetarist
The Federal Reserve has released the monthly figures for US monetary growth in February. As we can see, the weekly figures (and for the components of M2) show that M2 fell further in February. And that is before the recent bank turmoil. So, the US monetary policy has effectively gone from being extremely inflationary to…