tag:blogger.com,1999:blog-8897997766931633186.post7659550460438965474..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: More Criticisms of Index Futures ConvertibilityBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-8897997766931633186.post-79746140553992682512010-12-25T10:51:19.084-05:002010-12-25T10:51:19.084-05:00If you put hedgers (which I mentioned in "Sum...If you put hedgers (which I mentioned in "Sumner and DeLong" entry comment) into the picture, I suppose there would be constant selling pressure, because hedgers would like to hedge against downside risk. Maybe there are hedgers who want to hedge against NGDP overshooting, but I suppose they are very few, if any.<br />I also wonder what happens if we introduce option trading for NGDP futures. Perhaps it won't change the basic scheme, but I expect that it would add the liquidity to the futures market.himaginaryhttps://www.blogger.com/profile/03409531853330541896noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-57896998368986883352010-12-25T09:59:31.198-05:002010-12-25T09:59:31.198-05:00You say your critics (from the Fed chairman down t...You say your critics (from the Fed chairman down to random idiots like me) "claim that if Sumner's system works, then there will be no incentive for anyone to trade the contracts. If the CPI remains on target, the contracts mature without any payments being made." And your response is that "In truth, the actual trades of the contracts depend on the dispersion of market expectations about the value of the targeted macroeconomic variable. Those who expect the variable to be above target buy ..." <br /><br />Well, yes. Those who actually buy/sell will be those who expect the variable to be above/below target, i.e. they think they know that the Fed will fail <em>in a particular direction</em>. And you describe this "dispersion of market expectations" as if it were an exogenous variable. <br /><br />In other asset markets, I believe the dispersion of market expectations is substantially exogenous, e.g. the value of a stock coming from anticipated future revenue. And if enough people's expectations are exogenous then you've broken the circularity -- Yay! My question is, who are these people? Who are Smith, Jones, Davis and Brown? For myself, I would edit the critic-claim very slightly: if Sumner's system works, then there will be no <em>rational</em> incentive to trade the contracts as described, because the Fed's <em>final</em> effort to target the target variable will be as likely to wind up slightly high as slightly low. So at least some of the people who keep the stock market going, learning fundamentals about specific industries and corporations, will learn that this market doesn't pay. Call them the Buffetts, and Buffett wanna-bes. They're gone. (Unless the system doesn't work.) Then we have technical analysts who will watch the market go up and down and try to outguess each other -- they don't actually have opinions about whether NGDP will be high or low in the end, so I see no reason for them to converge on an answer. They might stay in, but they don't help the system work. Imagine a financial columnist getting a column out of predicting the over-under, encouraging investors...I don't see it. Do you? Or maybe something else altogether. Something to make me believe in Smith, Jones, Davis and Brown, each of whom "expects" a specific final high/low outcome even though he knows that if everybody agreed with him then the final outcome would be low/high, and in that sense they are betting only on each others' psychology. <br /> This bothers me mainly because I'm afraid that arguments about the specific form of the market may keep NGDP-level-targeting from happening, and you've certainly sold me on the basic idea here. I want it to happen. I'd personally be happy with a policy that worked only on the Fed incentives; give them each a Christmas bonus every year, equal to 10x their salaries if they've hit the target, 0 if they're more than 2% from it, linear-interpolation in between. Or something like that. There's no circularity there.<br /> If we need a market to aggregate information about needed further stimulus, then we want incentives for rational investors to collect information about current Fed policy. We can do that; if you believe that $100 billion is the Right Answer for the Fed to provide as stimulus to reach 5% growth, and I believe that it should be $200 billion, but both of us believe (as we will, after the system works well for a while) that the Fed will do approximately the right thing, then we can buy/sell contracts on the net stimulus amount (and there will be regulations keeping the Fed board from involvement with this market.) This also would break the circularity. Some circles are good, especially on Christmas morning... my daughters are here, two of my sons will arrive in a few minutes, we'll see the other (and his wife and kids) this afternoon -- Merry Christmas, and may the details of <em>some</em> targeting regime work out convincingly.Tom Myershttps://www.blogger.com/profile/10458758635832596931noreply@blogger.com