Month: November 2015

At the Cato Institute Monetary Policy Conference, Part 3

At the Cato Institute Monetary Policy Conference, Part 3

Photo Credit: joiseyshowaa
Photo Credit: joiseyshowaa

Press conference w/Bullard: embargoed until end of talk. ?[everything is a paraphrase here, and I can’t get everything down, as with everything at this conference]

Neo-Fisherian ideas are interesting and worthy of further talking about, but don’t take them too seriously.

The longer you are at a zero bound — the neo-Fisherian effects get larger.

Q: new monetary consensus of a?low nominal world. ?Won’t the abnormal become normal?

B: ECB and Japan still doing QE. ?We are now?trying to normalize.

Q: Balance sheet. edging up rates?

B: liftoff, then review the balance sheet. ?Gradualism will be the normal policy, more shallow than 1994 or 2006. ?Won’t have credibility on gradualism until the second move. ?More on gradualism — not a constant slope, but state-dependent.

Q: [Bloomberg] ?Why go gradually?

B: He has higher dots. ?Forecasts lower unemployment. ?Need to see how things evolve.

Q: Wan’t it difficult for the Fed to veer from prior policy moves?

B: You have to retain your options, and move accordingly. ?Labor markets could tighten considerably.

Q: [Dow Jones] Any concern that you will have unanticipated effects on the ECB and World?

B: No. Those are priced in anyway.

Q: keeping the markets calm?

B: we won’t give a total roadmap, we can’t. ?It won’t be like 1994. ?We will communicate more.

Q: Chorus of criticism from the GOP?

B: Fed has been in the middle of the action since the crisis. ?Adds to a healthy debate on priorities for monetary policy. ?What should we have has targets…

Q: Is the FOMC shifting its official inflation measure? ?Dallas Fed Trimmed Mean?

B: Trimmed mean is better statistically. ?Target should be overall inflation.

Now it is time for Lacker

Jury is still out on how we handled on 2008-9. ?Not surprised on the political furor.

Q: What will happen when FOMC raises rates?

L: should be smooth. ?News will be in the announcement. ?Shouldn’t be a surprise.

Q: ??

L: My dots are above median. Should be a flatter cycle.

Q: Regarding his paper, if the price level is all that matters, why not have the 2% more prominent?

L: Can’t reject the possibility that chance is keeping inflation low, and a slow-moving component. ?Communications are pretty clear now.

Q [marketwatch] FOMC behind curve?

L: We might be, we might not.

Q: Possible that Fed won’t be gradual?

L: Possible. ?Consider inflation 2003-2004 to 2007, we got behind on inflation.

 

Q: any reform ideas you might support?

L: IOER given to Board, should go to the FOMC.

Q: should a Taylor rule be mandated?

L: wouldn’t mandate it, we even consider them, and maybe we should discuss why we differ from them.

Q: your view on the balance sheet?

L wind down quickly, if possible.

Q: my question on whether globalization and technology affecting the ?labor share and thus monetary policy?

L: models could take account of that if they wanted to — depends what you think the goals of policy are. ?If inflation only, a focus on employment might have an effect, or we could end up pursuing pushing for unemployment that we can’t achieve.

At the Cato Institute Monetary Policy Conference, Part 2

At the Cato Institute Monetary Policy Conference, Part 2

4566937_617015b3fe_z

PANEL 1: WHAT MONETARY POLICY CAN AND CAN?T DO

Moderator: Jon Hilsenrath
Chief Economics Correspondent, Wall Street Journal

Jeffrey M. Lacker
President and CEO, Federal Reserve Bank of Richmond

George S. Tavlas
Member, Monetary Policy Council, Bank of Greece

Manuel S?nchez
Deputy Governor, Bank of Mexico

Panel starts with Hilsenrath introducing?Manuel S?nchez. ?Argues that monetary policy should have modest objectives. ?Takes a conventional view that some inflation is good, that monetary policy is powerful and can deal with macroeconomic problems. ?Favors the lender of last resort powers of the Central Bank a la Bagehot.

Monetary policy can best serve markets by not being distracted from the main goals — low inflation and macroeconomic stability. ?If monetary policy gets too many goals, it will not achieve its important goals, and may not truly achieve much useful at all. ?After all, look at the loose policy prior to the Great Depression, and possibly loose policy prior to the recent financial crisis.

Current policy may be creating financial imbalances now, and lack of incentive for governments to get their own houses in order.

Emerging economies have their own issues with monetary policy, with many cutting rates (DM: competitive devaluation). ?Now many emerging economy central reverse those moves, amid rising risks.

Now?George S. Tavlas — should monetary policy be based on rules vs discretion? ?Taylor Rule makes monetary policy transparent and predictable. ?Failure to follow the Taylor Rule 2003-6 led to the financial crisis. ?Bernanke argues for freedom.

Asks what would Milton Friedman would do now? ?Depends on which Milton Friedman you talk about, as he was a Keynesian (1946) and became a monetarist. ?W/Schwartz in 1948, started writing their book on monetary policy. ?Their arguments stemmed from the long run effect, versus a short run effect which could be highly variable. ?Argued that the collapse of monetary aggregates in 1929-32 led to the Great Depression, and that a simple rule could prevent stupid policymakers.

Friedman felt that feedback policy rules?injected too much judgment and discretion, and model risk.

Yet they would be better than raw discretion. ?Arthur Burns, teacher of Friedman in the 50s, former Fed Chair, gave into political pressure. ?Tavlas thinks that the performance of monetary policy in 90s would favorably dispose Friedman to a Taylor rule.

Cites what Bernanke said to Friedman at his 90th birthday. ?Odd comment on how a rule at U Chicago led to Friedman’s marriage to Rose.

Now?Jeffrey M. Lacker,?President and CEO, Federal Reserve Bank of Richmond. ?Argues that monetary policy is undiminished in its ability to affect the price level in the long term. ?Ability to affect real variables is limited and transitory.

Argues on a popular view of resource use a la the Phillips curve — that overuse of resources leads to inflation.

Argues that the zero lower bound does not constrain policy now, but that short rates should rise now. ?The existing inflation rates may be overly low for random reasons.

Doesn’t think that the increase in the Fed’s balance sheet has any long-term effect on the economy.

Argues for limited goals for monetary policy.

Q&A 1 — Hilsenrath: talk about monetary policy inflation targets. Gold standard, NGDP, etc., should there be a discussion for a new target on monetary policy?

Lacker — present target works well. ?Absent a rule a la Taylor other rules will not work well. ?Gold standard does not work well, and does not provide price stability.

Hilsenrath — Asset inflation?

Lacker — that should not be a goal for monetary policy.

Tavlas — gold standard had adjustment methods that worked pre-1914. ?Unemployment was not a consideration. Union power in the 20s pushed for employment as a factor in monetary policy, and wages would no longer adjust lower.

Argues that when rates were?raised to deal with an incipient asset bubble — great depression. ?Eventually said that the CPI was a fine goal.

Sanchez also agrees with a CPI goal. ?Says it is difficult to spot bubbles, and they may be due to fiscal policies.

Q2 — Mike Mork, ?asks?about the drop in velocity of M2. ?Why?

Lacker doesn’t know. ?(Nice honest answer.) ?Increase in currency abroad?

Q3 — Lacker says that non-economists are a good influence on the FOMC and a diversity of views.

Q4 — Hilsenrath — Is there a monoculture of views among Ph.D. economists at the Fed.

Lacker — Economists disagree with each other.

Q5 — Josh Crum — what do you do with people bypassing banks in the future?

Lacker — not sure how what the Fed can or should do on that issue. ?Has a lot of thoughts, but not so many conclusions. ?Mentions repos and money market funds, and the need for maturity transformation.

Q6 — Hilsenrath — should the ECB do more QE?

Tavlas — ECB thinks they can’t affect real variables, but can affect price inflation.

Hilsenrath — but is it working?

Tavlas — takes time for monetary policy to work. ?Should eventually work.

Q7 — David Malpass — will the Fed raising rates be stimulative?

Lacker can’t see stimulus. ?Can’t see how credit demand would increase even if supply does.

Q8 — Hilsenrath asks how Fed’s moves may affect Mexican monetary policy

Sanchez — Fed creates volatility,?with rising rates peso may devalue, and inflation may rise in Mexico, but we will adjust to conditions as the Mexican economy changes. ?They will takes foreign monetary policy into account as it affects inflation.

He thinks they have been lucky so far.

Hilsenrath — how does the global slowdown affect your policy?

Sanchez — can’t avoid taking the Fed into account, they are just too big.

At the Cato Institute Monetary Policy Conference, Part 1

At the Cato Institute Monetary Policy Conference, Part 1

Photo Credit: Xerones
Photo Credit: Xerones || A passing comment on Monetary Policy — Zero

Got here late. Traffic and parking in DC have gotten worse since I used to work here eight years ago.

Missed James Dorn of the CATO Institute, and now James Bullard, President and CEO, Federal Reserve Bank of St. Louis is talking.

He’s arguing that monetary policy has been too loose for too long, though a zero percent policy was needed for a time. ?Cites this paper here. ?Gives a confusing neo-Fisherian model — simple models don’t do justice to a complex economy. ?Argues that low rates lead to low price inflation. ?(Personally, all of this neglects demographics, and the relative propensity of monetary policy to funnel marginal money into asset or goods markets.)

Monetary policy near the zero bound creates its own demand for abnormal policy tools. ?Thinks that economy is pretty normal now, and there is no need for excess stimulus now. ?Thinks that current policy will lead to bad results if maintained.

Q&A — Selgin of Cato — Says Fisher would spin in his grave, that public natively facilitates Fed policy, which is not natural.

Fisher argues that you have to have an equilibrium concept in economics. ?How than to explain low rates and low inflation.

Q2 — Politics and the Fed — what does he think of GOP candidate comments?

Says that Fed can?work with them.

On to the next panel.

 

On Lump Sum Distributions

On Lump Sum Distributions

Photo Credit: Refracted Moments?
Photo Credit: Refracted Moments?

In general, people don’t do well with amounts of money significantly larger than they are used to handling. ?The most obvious example of that is people who win lotteries. ?The money typically gets wasted — bad purchases, bad investments.

Thus I would encourage you to be very careful with any large distributions of money that you might receive. ?Examples include:

  • Life insurance settlements
  • Disability insurance settlements
  • Structured settlements arising from winning a court case over a tort against you.
  • Lotteries
  • Pension lump sums
  • Inheritances
  • Big paydays, if you are one of the rare ones in a high-paying short career like entertainment or sports

There are three problems with lump sums — receiving them, investing them, and rate of their use for consumption. ?Let me take these topics in the order that they should occur.

Receiving a Lump Sum

Let’s start with the cases where you have?a stream of payments coming where a third party comes to you and says that you can get all of the money now. ?I am speaking of structured settlements and inheritances where trusts have been structured to dole out the money slowly. ?There is one simple bit of advice here: don’t do it. ?Take the payments over time. ?None of the third parties offering to give you cash now are giving you a good deal, so avoid them.

Then there are the cases where an insurance company is making the payments from a disability claim, a structured settlement, a lottery, a pension buyout, or an annuity that someone bought for you on your life. ?The insurance company will be more fair than any third party, because they aren’t usually looking to make an obscene gain, just a big one, because it reduces their risk, and cleans up their balance sheet, so they can do more business. ?One simple bit of advice here: still don’t do it. ?You can do better by taking payments, and building up money for larger purchases. ?Be patient.

People do best when they receive money little by little. ?When they get money materially faster than the speed at which they have previously earned money, they tend to waste it. ?It is almost always better not to take a lump sum if you have the option to do otherwise.

The last set of situations is when the party that owes the set of payments?offers you a lump sum. ?It could be a life insurance company, a defined-benefit pension plan, a lottery, or some option uncommonly granted by another payor. ?I would still tell you not to do it, but the issue of getting cheated is reduced here for a variety of reasons.

The defined benefit plan has rates set by law at which it can cash you out, so they can’t hurt you badly. ?That said, you will likely not earn enough off of your investments with safety to equal the stream you are giving up. ?The lottery is often similarly constrained, but do your homework, and see what you are giving up.

One place to take the lump sum is with life insurance companies off of a death benefit. ?The rates at which they offer to pay an annuity to you are frequently not competitive, so take the lump sum and invest it wisely.

Economically, the key question to ask on a lump sum versus a stream of payments is what you would have to earn to replicate the stream of payments. ?Most of the time, the stream is worth more than the lump sum, so don’t take the lump sum.

The second question is more important. ?Can you be disciplined and not waste the lump sum? ?Ask those close to you what your money habits are like, if you don’t know for sure. ?Ask them to be brutally honest.

Investing the Lump Sum

Again, one nice thing about taking payments, is that you don’t have to invest the lump sum. ?If you do take the lump sum:

  • First, pay off high interest rate debts.
  • Second, avoid buying big things and calling them investments. ?Don’t buy a big house when you don’t need a big one.
  • Third, don’t invest in any of your relatives’ or friends’ business ventures. ?Tell them you try to keep personal affection and money separate. ?It avoids hurt feelings.
  • Fourth, look at the time horizon of your real needs. ?Plan for retirement, college, etc. ?Invest accordingly — get a trustworthy adviser who will help you. ?Trustworthiness is the most important factor here, with competence a close second.
  • Fifth, don’t so it yourself, unless you have developed the skill to do it previously. ?If you want to do it yourself, you will have to gauge whether the various markets are rich or cheap in order to decide where to invest. ?For some general, non-tailored advice, you can look at articles in my asset allocation category. ?As an aside, don’t invest in anything unusual unless you are an expert.

Receiving Spending?Money from Your Investment Fund

The first thing is to decide on a spending rule: many use a rule that says you can take 4% of the assets from the fund. ?My rule is a little more complex, but will keep you safer, and adapt to changing conditions: as a percentage of assets, take 1% more than the yield on the 10-year Treasury Note, or 7% if less. ?At present, that percentage would be 2.21% + 1% = 3.21%.

Whatever rule you use, be disciplined about your spending. ?Don’t bend your spending rule for any trivial reasons. ?Size your budget to reflect your income from your investment fund and all of your other income sources.

Conclusion

Remember that most people who get a lump sum end up wasting a lot of it. ?The only thing that can keep you from a similar fate would be discipline. ?If you don’t have discipline, don’t take a lump sum. ?Take the payments over time. ?That will give you the maximum benefit from what is a very valuable asset.

Don’t be a Miser in Retirement (Or Ever)

Don’t be a Miser in Retirement (Or Ever)

Picture Credit: Tom Simpson || As Aristotle might say, the middle way is best
Picture Credit: Tom Simpson || As Aristotle might say, the middle way is best

My last article,?One Dozen Thoughts on Dealing with Risk in Investing for Retirement, was a mashup of two of my older articles Managing Money for Retirement and From Stream to Shining Stream. ?I wrote as a submission to a Society of Actuaries request for essays on the topic of?Post Retirement Needs And Risk Committee Managing Retirement In Light Of Diverse Risks. ?I added more material, chopped out some of the weaker stuff, and tried to rewrite it to have a consistent tone, etc. ?As Susan Weiner, our go-to person on investment writing says, “The best writing is rewriting.” ?Given some of the responses I got, the article was well received. ?Hopefully the folks at the SOA will like it as well, but it will probably be the least technical essay they receive. ?It also still has some typos. ?Oops. ?So it goes.

There was one comment on the article that I would like to highlight. ?Here it is:

The other thing to watch for with retirement spending is not spending enough of your investments, especially in early retirement. Many studies have shown that actual spending in retirement decreases by around 50% from age 55 to age 80. One study in Germany showed that people?s wealth actually started increasing again in their 70?s as their pension incomes exceeded their lifestyle costs, with the resultant increase in savings.

People need to think about this in how they structure their retirement spending. It may make complete sense for someone with a $1 million portfolio and a standard government pension to spend $800,000 of that $1 million by age 80, leaving a $200,000 cushion for the lower cost part of their lives as most of their day-to-day living expenses will be covered by their pension.

People need to spend their money when they are active and mobile and able to enjoy it. I think the financial press needs to talk about this more, so people are not scared into not spending their money until it is too late.

The author of the?book that I most recently reviewed, Carlos Sera,?gave one of his sayings on page 97 of his book:

“There is a fine line between over-saving and under-living.”

That particular story dealt with a couple that had been especially frugal, and after not earning all that much, at retirement had $6 million. ?They had a traditional marriage, and the husband handled the money entirely. ?He worked until 72, retired due to incapacity, and on the day of his retirement, he handed his wife a check for $3 million.

She thought it was a joke, so for fun she tried to cash the check. ?To her surprise, the check cleared. ?Then came the bigger surprise — her amazement gave way to anger! ?All the years of self-denial, and they were this well-off! ?There were so many things she denied herself along the way, and now both of them were too old to truly enjoy their riches.

There’s more to the story… the point the author goes for is mostly abut how husbands and wives should learn to cooperate on the shared tasks of household economic management, so that both are on the same page, and they can be agreed on goals and methods.

I agree with that, and would add that the best approach on spending versus saving is what I would call a conservative version of the “middle way.” ?Make sure that you are provident, but balance that with contentment and a happy enjoyment of what you have. ?Life is meant to be lived.

Yes, it is good to be prudent and frugal, but not to the point where you amass a lot of assets and never enjoy them.

[Now for those not crazy about Christianity, you can skip to the end.]

In Ecclesiastes 5:13-20, Solomon says [NKJV]:

There is a severe evil which I have seen under the sun: riches kept for their owner to his hurt. ?But those riches perish through misfortune; when he begets a son, there is nothing in his hand. ?As he came from his mother’s womb, naked shall he return, to go as he came; And he shall take nothing from his labor which he may carry away in his hand. ?And this also is a severe evil? just exactly as he came, so shall he go. And what profit has he who has labored for the wind? ?All his days he also eats in darkness, And he has much sorrow and sickness and anger.

Here is what I have seen: It is good and fitting for one to eat and drink, and to enjoy the good of all his labor in which he toils under the sun all the days of his life which God gives him; for it is his heritage. ?As for every man to whom God has given riches and wealth, and given him power to eat of it, to receive his heritage and rejoice in his labor?this is the gift of God. ??For he will not dwell unduly on the days of his life, because God keeps him busy with the joy of his heart.

Ecclesiastes 4:8 and 6:1-3 say similar things, and are cited by the Larger Catechism in question 142, where it says:

What are the sins forbidden in the eighth commandment?

The sins forbidden in the eighth commandment, besides the neglect of the duties required, are, theft, robbery, man-stealing, and receiving any thing that is stolen; fraudulent dealing; false weights and measures; removing landmarks; injustice and unfaithfulness in contracts between man and man, or in matters of trust; oppression; extortion; usury; bribery; vexatious lawsuits; unjust inclosures and depopulations; engrossing commodities to enhance the price, unlawful callings, and all other unjust or sinful ways of taking or withholding from our neighbor what belongs to him, or of enriching ourselves; covetousness; inordinate prizing and affecting worldly goods; distrustful and distracting cares and studies in getting, keeping, and using them; envying at the prosperity of others; as likewise idleness, prodigality, wasteful gaming; and all others ways whereby we do unduly prejudice our own outward estate, and defrauding ourselves of the due use and comfort of that estate which God hath given us. [Emphasis mine]

Along with questions 140 and 141, they summarize most of what the Bible teaches on ethics in economics. ?My emphasis is the last phrase “defrauding ourselves of the due use and comfort of that estate which God hath given us.”

This may be a surprise to some, but (among other things) God wants us to enjoy life. ?That is not the highest goal, but God commends it through the voice of Solomon in Ecclesiastes multiple times.

Now, not everyone in Christianity thinks this way. ?John Wesley famously said, “Earn all you can. ?Save all you can. ?Give all you can.” ?This is admirable as far as it goes, and Wesley’s life reflected it. ?He was very industrious, frugal, provident and generous. ?But in the middle of his life, he did not purchase?and enjoy some blessings, in an effort to give more to the poor.

Why? ?Black tea was relatively expensive back then, and the lower classes were spending too much of their money on the relative luxury of tea. ?Wesley liked tea a lot, but gave it up for two reasons: to set a good example to the poor, and have more money to give to aid the poor. ?(He also abstained from alcohol, fasted several days a week, and ate cheaply when he did eat.) ?That said, occasionally bothered him that some of the money he gave to the poor got spent by them on tea. ?Oh well. ?With something that is not in itself a sin, it was probably better to let people spend their money as they saw fir, and not discourage them by arguing that tea was a wasteful luxury.

I would amend Wesley and?say it this way, “Earn a?competent amount. ?Save a good portion of it. ?Give to poorer brothers who are ailing, despite doing their best. ?After that, enjoy the blessings God has given you.”

There is a reason why God is portrayed in the Parable of the Lost Son as a generous man who throws a party when his younger son repents of riotous living, while the older son (representing the Pharisees) is portrayed as a miser. ?God is generous, while many religious people get proud of what they have achieved, seemingly apart from God, and resent those who get gifts, while they themselves work. ?This is parallel to salvation, which cannot be purchased no matter how hard we work, but must be received as a gift from Jesus, who did all the work for those who would receive the gift of salvation. ?Echoing that, C. S. Lewis in The Screwtape Letters portrays God as jolly when “the patient” gets a girlfriend, while the demon Screwtape boasts of the grand austerity of Hell.

Closing this section, I would simply say take care of all your other obligations to God, but if God has given you something legitimate to enjoy, then enjoy it, and don’t feel guilty. ?Rather, take the opportunity to thank and praise God for the blessings he brings.

Conclusion

Assets and money are tools. ?They are valuable, but they are a means to an end. ?Use them to enjoy life, while being prudent as you do so.

Theme: Overlay by Kaira