Cardiff Garcia on Economics Journalism, Safe Assets, and Inflation

Cardiff Garcia is the US editor of the immensely popular Financial Times blog, "Alphaville." There he leads a team of writers who cover everything from the US monetary policy to China's capital flows, to Bitcoin, to the Eurozone crisis. He is also the co‑host of the FT podcast series, "Alpha Chat" and "Alphachatterbox." Cardiff formally worked for JP Morgan and Dow Jones financial Newswire. Cardiff joins David to discuss the world of economics journalism, the 2008 crisis, and current monetary policy, both in the United States and abroad. He also shares his thoughts on the demand for so-called “safe assets” in a time of crisis and the difficulties of inflation-targeting.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Welcome to the show, Cardiff.

Cardiff Garcia: Thanks, David.

Beckworth: First, tell us how you got into journalism, into macro blogging. What was your journey?

Garcia: It was a bit of a circuitous path, as I think many journalists have in their backgrounds. I think the first inkling that I thought I might want to be a journalist actually happened while I was still at J.P. Morgan.

I was working for the private bank. We were covering high net worth clients in Latin America, and specifically Mexico, Southern Cone. I didn't really like our clients very much. I didn't like that part of the business, but I did like covering markets.

While I was there, I ran a proprietary newsletter for other analysts in my final year. I thought, "God, this reading and writing thing seems like a lot of fun. I should be doing more of that." Went to journalism school, I am somewhat ashamed to admit.

It was a lot of fun. After that, I went traveling for about a year, partly to get out of New York for a little while, and partly to freelance a bit. The project that I had in mind when I left was to do a story about Muay Thai fighters in Bangkok.

Muay Thai is a martial art I did in New York. I thought, "Great. I'll go to a gym in Bangkok. I'll train alongside these guys, see what it's like. I won't fight or anything. I'm just a recreational guy. I'll do a story about it, and I'll come back in three months."

I ended up actually being gone for more than a year because I just threw my stuff in storage, and I backpacked around until I was finally broke. I had finally spent all of my banking money. Then I had to get serious about being a journalist.

When I got back, I spent some time freelancing for a little while. Because I had the finance background, I found it easier and a little bit more natural to just get a job writing about finance and economics.

The truth was that I was a bit out of shape. My mind was out of shape. It had been a while since I had really delved deeply into what was happening. Of course, that was 2007, when so many exciting things were starting to happen.

I freelanced for a bit. I finally got a job as a reporter for "Dow Jones," and specifically for a newspaper based in London called "Financial News" that covers financial institutions. I was actually writing for them out of their New York bureau throughout the early stages of the crisis, essentially.

While I was there, I recognized how amazing the coverage on blogs was. I was stunned that in a couple of cases, the blogosphere was writing about topics that would only later enter mainstream conversations and conversations among policymakers.

Maybe the one that always springs to mind was the argument about whether or not the government should eventually nationalize the banks as part of their bailouts.

Beckworth: I remember that.

Garcia: It was astonishing to me that in 2008 this was a conversation that was being had throughout the blogosphere, and it was so interesting and so conversational and interactive.

Only later only, I think, in the early months of 2009 when things really started to get bad that this conversation was being had seriously, in other words, by policymakers.

I mean, you'd heard little bits and bops here and there, but in the blogosphere, you could get such a rich understanding of the issue. I thought that was something where, if I'm going to be a finance or an economics writer, that's where I should be. That was exciting to me.

I started blogging later on at Nobody was really paying attention, but eventually, some of my posts were spotted by a blogger named Felix Salmon, who's a very well‑known finance and economics writer now.

Fortuitously, a year later...I was still at Financial News, and then I left to freelance for a while. In those early stages of 2010, "Alphaville" started looking for a writer. Felix and Heidi Moore, who I used to work for, and a couple of other people recommended me to Paul Murphy, who is the editor and founder of Alphaville.

Paul and I had a beer. That was my interview.  In the middle of 2010, I was hired by Alphaville, and I've been there since. Done a lot of things. Alphaville itself has changed a lot since.

That is more or less the path I took to FT Alphaville.

Beckworth: Now you're the editor on the US side.

Garcia: I am the US editor of FT Alphaville, but that doesn't involve what it sounds like it involves. The editor title was just a recognition that I'd been there for a little while, and also a recognition that I wanted to try some other things besides just blogging.

The podcast, obviously, is one thing. Helping out a lot with planning events was another thing, because that's been a natural evolution for a lot of journalistic organizations that are looking to do other things.

We've had a couple of pub quizzes in New York. The team has put together, and this is mostly being led out of London, two camp Alphavilles in London, and we want to do a camp Alphaville in New York this year.

Which is essentially a macroeconomics and finance festival of sorts. Something where you combine the usual dense conversations in wonkiness, but you make it a little bit of fun for the people who go there.

I wouldn't read too much into the editorship title. It doesn't mean I'm the Grand Poobah of anything. It just means that I have a multifaceted set of duties, which are all a lot of fun and that have branched out from just writing.

Beckworth: OK. You're still a contributor, too. I've been following your work. I didn't realize it's 2010, but 2010's when you got there.

Garcia: Yup.

Beckworth: What is it like in the day of a life of a blogger at FT Alphaville? Are you in the office together? Do you shoot the bull together? Do you talk shop? What happens?

Garcia: We're spaced out throughout the world, by the way, so there's a couple of us in New York, Matt Klein and me. There's a few of us in London. For a while my colleague, Izabella Kaminska, was in Geneva. She's now in London. David Keohane is in Mumbai.

Beckworth: Wow.

Garcia: Before we've had people in Tokyo and Australia. We keep in touch through a slack conversation. It's just a running thing. You don't have to respond every time somebody addresses you. If you're off writing or doing something else, that's cool, but we trade a lot of ideas there. There are no kind of house opinions.

Everybody's allowed to disagree including formally when we write, and we do that sometimes. We bounce ideas off each other, but the entire philosophy that Alphaville has always embraced and I certainly hope will always embrace is that every writer is allowed to gravitate towards those topics that really fascinate him or her, that really interest them.

Then you just write the hell out of it. There are no quotas. You don't have to write a certain amount of posts each day. You don't have to hit a word count. There are no word limits, things like that.

Beckworth: Interesting.

Garcia: The formal restrictions don't exist there. We can do whatever we want, but the trade‑off is you have to come up with your own ideas. There's very little hand‑holding, and you're expected to do good work, interesting work, and stuff that tries to push the envelope of what's there.

Beckworth: I was going to ask this later but since we're on this topic, what if there's a young, aspiring blogger, writer, journalist out there who wants to go down the path you have and end up at a FT Alphaville‑type setting? What would you recommend they do at this point in their life?

Garcia: I guess I would start by just challenging the premise of the question. In other words, it's not necessarily a good idea, especially in journalism, to start out by thinking, "I want this kind of job at this kind of place." I saw this about a decade ago, especially when I was in journalism school.

A lot of people saying, "I want to one day write for 'The New Yorker'" or "I want one day write for 'The Economist,'" things like that. That is probably a bad idea partly because journalism changes so quickly. Instead, focus on the kinds of tasks you like doing or that you think you might like doing.

If you love writing about economics, then by all means throw yourself into it and start writing about economics. Don't worry about the place where you're going to do it or the format.

Just find a way to do it the way you like to do it. Same thing with all the other things that we do now. Before you and I were just writers. We were just blogging. Now we're both podcasting.

These kinds of things are always going to happen, especially in journalism where the business model hasn't really worked itself out yet.  Nobody's really found it. I guess the two pieces of advice are don't worry too much about the specific kind of place because the kind of place that you think matters now might not even exist in 10 years.

Worry more about the platform. The second thing is do what Scott Adams recommends. Scott Adams is the "Dilbert" comic. Right?

Beckworth: Right.

Garcia: I read his recent self‑help book not long ago. I sometimes read self‑help books, not because I think that I'm going to find anything especially useful there because they make me feel better about myself.

Garcia: They get me motivated and excited. It's therapeutic. I ignore what's actually inside it most of the time. His book was an exception because in part it's based on behavioral research and some other things. His recommendation is that you should build a talent stack, don't worry about being the best at any one thing.

Try to find a bunch of different things that you could be good at, and then find a way to combine all of those into an interesting package. That's what's going to make yourself useful. To apply that to myself, I'm not an economist. I don't have formal economic training except for 101 when I was in college, and I couldn't read any kind of an econometric paper. I wouldn't be able to understand it, but I know some about it.

I know some things about economics. I know which economists to turn to for certain things, and I try to, over time, learn how to spot different patterns that are useful and interesting in the real world.

I'm not the most articulate person in the world, but I speak OK, and I try to get better and better over time at having presence, and being able to speak in public. These things come with time, as well.

Then, I'm not going to win a Pulitzer Prize in any kind of writing genre, but little by little, you start getting better at turning one coherent phrase after another. Then, over time, you put that together and it's a package of skills, and talents, and things you've developed that are interesting to a company.

That, to me, seems like the best approach in general for life not just in journalism, and not just specific to what I do, but in general.

Beckworth: I look forward to your book on living a good life.


Beckworth: That's useful. There's people out there who've reached out to me before. People want to know, "What should I do? What path should I go?" I'm not a journalist, but that's great advice.

Disagreements Persist Among Economists

Beckworth: Let's switch gears and talk about the economy. You do know a lot. You said 101's all you had, but you know a lot more than that.

Anyone who's read your work knows you have a good command of some very technical issues. I want to talk about the crisis. I want to ask you, as a journalist, was it disappointing, during the crisis and afterwards, to see all the disagreement among economists?

There was some pretty intense fights. Paul Krugman versus John Cochrane, Mark Thoma versus Stephen Williamson.

Garcia: John Taylor versus everybody.

Beckworth: Yes. Market Monetarists, myself, versus MMTers. Two questions. Was it disappointing, or was it enlightening? Did we learn anything from these exchanges? Are we any better because we had these debates?

Garcia: I think so. Was it disappointing? No, because I didn't know enough beforehand to be disappointed. It was intellectually interesting, and it was maybe a little bit frustrating to see.

If you're coming to this material anew, as a lot of people were, people who haven't studied economics formally, they might think, "God, these people don't know anything. If all the biggest names seem to disagree about how to react to the single most salient economic event of our lifetimes, what have they been doing all this time?"

That was interesting. Are we better off for having had the debates? I do think so. My own king of narrative about economists in the crisis is that they've been stumbling towards accuracy.

They probably all would have preferred to have leapt towards accuracy, or glided towards it, or gotten there smoothly, but I think all of these debates are necessary. In having the debates, you also find out where the points of friction are.

Once you've identified those, you can see exactly how relevant they are, and you can also see if they really are points of friction. Probably the best example I can give was the really shockingly contentious debate over how to fill a demand shortfall.

The monetarists mostly said, "The central bank can do this if it's committed enough. It has the power, and in fact, the fiscal guys can't do it unless the central bank is on board, because there will be the monetary offset. They won't get there."

"You need the expectation of what's going to happen later, and how the central bank is going to react to certain economic events in order to guide the recovery back to a stronger footing."

The fiscalists essentially said, "Well, listen. We lowered interest rates to zero, and now it's game over. Now we need to crank up the fiscal mechanisms, and we need to spur demand that way."

Maybe the post that I'm still proudest of was one that essentially tried to give a taxonomy of all those different points of view. You were in there.

Beckworth: I remember that.

Garcia: And to show that, "Look, there are probably some ideas that combine the preferences of both camps, and in fact, the parts where you think you disagree, you probably don't." There are ideas where, if anything, they might be able to minimize disagreements.

Most of the guys who said that fiscal policy needs to lead the charge weren't opposed to looser monetary policy. They usually favored it, and they favored it being even looser than it was back then, they just didn't think it would work.

To the monetarists, my contention was, "Look. I agree. Let's try your way. This is definitely something worth pursuing." I didn't back then, and I still don't, think that central banks are doing all they could.

"Let's have a fiscal mechanism in place as a backup." That was a proud moment for me, because I thought that was something that might be able to transcend the debate.

I was wrong about that. Everyone went back to arguing about it quite a bit.  Maybe my hopes were a little too high.

I think it helped, and I also think that the debate itself was totally useful. It was so interesting for somebody who's not an economist to watch, but it also was important for me to see exactly how everybody substantiated their arguments.

Anyways, I consider that progress. I'm not pessimistic as far as our ability to advance what we know. Those disagreements will always be there, but I'm an optimist about that. We can get a better understanding of how to respond to crises, and how to manage the cycle.

Beckworth: My own understanding has grown, I think, because of these debates. We talk about some of the things we've learned during the crisis.

The Safe Asset Problem

Beckworth: I was going to talk about this, we'll do it now, the safe asset problem. If you'd asked me in 2008, maybe even early in 2009, "What's the proper measure of money," I might have said "N2," which is really just retail money assets.

But after reading Gary Gordon's work, and thinking more about this, I realize there's institutional money assets. That's where the bank run was. That's where you saw this big collapse in the money supply.

Garcia: You could write a paper about it.

Beckworth: I did. I did. But it's amazing how little...I thought I knew a lot more than I did. Going into the crisis, it was humbling in some manners, and there was a lot to learn.

These debates with the people on the fiscal side, I think I've softened my edges a little bit. We can talk about that later.

Let's talk about some of these big issues back then. I just mentioned the safe asset problem. The idea behind the safe asset problem is there's not enough safe assets. There's this huge crisis.

Risk premiums went up. Everyone wants to hold onto safety. They want treasuries. They want safe assets. Of course, there's a collapse in what we thought were safe assets. Maybe they never really were, but we thought they were for a while.

Do you think we've ever really solved the safe asset problem, or are we still struggling with it?

Garcia: That is a great question. I think you have to split the story into two parts. There's the acute crisis phase, which in the US obviously lasted from roughly 2008 to maybe 2010, right around there. I would actually say it kept going for...

Then, in Europe, you had this succession of sovereign debt crises that came a little bit later on that were related to what happened in the U.S., but also had some components that were uniquely theirs.

The acute shortage was alleviated, and that it was alleviated through a combination of things, you know. The Fed and the Treasury obviously came together, in the case of the Fed, lowered interest rates to zero.

They started backstopping loans to some financial institutions, the Treasury did something similar, and of course you had the stimulus package which involved tax cuts and spending and all those things.

It also involved no small amount of increasing treasury supply as well, which is the flip side of that. The hard part comes afterwards. There's still a chronic imbalance there between the demand for and supply of safe assets. This gets to be a hard problem partly because, on this at least, I've become less hopeful that we will be able to quantify its impact on the real economy.

I was kind of like you before. I thought, "Our understanding of money has changed, it's not just the retail money that matters now, it's this institutional money. We need a good way to measure that, because how else will we know if the central bank has done enough if we can't measure what it's done?"

The problem is that I think, number one, the data on that's hard, number two, our understanding of the actual dynamic isn't perfect yet, it's not complete, and number three, there's this kind of danger that you're going to arrive at this tautological understanding of what's happened.

I'll give you an example. Not long ago, I came across the paper by Ricardo Caballero and Emmanuel Farhi. Their argument is essentially that there is still an imbalance, there is still a shortage of safe assets, because real interest rates are still in secular decline. Then you start to say, "Why are real interest rates in secular decline?" Because there's a shortage of safe assets.

In other words, as an explanatory understanding of what's happening in the economy, I'm not sure that we can be very precise, but it's still an incredibly useful framework for understanding the economy itself. If economists think about what they do in terms of models, I tend to think about economics in terms of story telling.

I don't mean it dismissively, I mean it admiringly. These stories are useful. We need to understand what's happening, but if we try to be too precise you can be led astray into thinking that if we just make some certain precise tweaks then that will fix everything.

I think these forces are big, amorphous and a little bit harder to understand than that. It's a good story to tell. It's one that, by the way, combines aspects of fiscal and monetary policy into explaining the role of central banks and fiscal policymakers and how those things are so closely intertwined in a way that I don't think we previously understood. It's helpful in that regard.

I'm not sure that we're at the stage yet where we can say the official sector has recreated privately‑provided safe assets to the tune of X trillion dollars, the private sector has now created new assets to the tune of Y trillion dollars, combine those two things and it looks like monetary and fiscal policy have done enough to spur recovery.

I don't think we're there yet. It might be some time before we are, if we ever get there.

Beckworth: I think I agree with you. One of the reasons I'm an advocate of nominal GDP targeting is that we can't measure money. What is appropriate money? What is money? We think we know what institutional money assets are, but as you said, it's tough to measure. Over time, new measurements, new forms of money will emerge.

In terms of quantity, I think it's a very tough task ahead of us. The thing I look at is the yield on treasuries. Today, the 10‑year yield is 1.7 percent. That to me screams that there's this insatiable appetite for treasuries and we're not supplying enough.

One way to solve it would be to supply more treasuries, which is a political non‑starter, I think. The other would be we get more optimistic about the future, and we don't want to hold as many treasuries.

Garcia: Yeah, you attack it from the other side. Both things count.

Beckworth: That doesn't seem to be the case. We've got China about to blow up, we don't know what's going to happen there. US seems to be slowing down a little bit I'm not sure what's going to happen this year, we'll talk about that in a minute as well and then a third alternative which I think is what central banks are groping toward as well, "Let's do negative interest rates."

Maybe the safe asset has depressed the market clearing rate to such a degree that we've got to resort to negative interest rates. That was brought up recently by the former president of Minneapolis Fed, that negative interest rates are kind of the plan B, as opposed to having enough safe assets provided in the first place.

My sense is that there probably isn't enough safe assets. I wish the private sector could provide more, I wish we could get the kind of growth that would make us more comfortable and more whatever it is, but I don't see it happening. I mentioned earlier I'm a little softer on the edges of fiscal policy. I have become a little more sympathetic to the fiscal theory of the price level.

All my listeners out there know I'm still a monetary guy, don't freak out.  In my mind, in fact I'm writing a paper on it with a colleague from Western, we kind of rebranded as...It's still a monetary theory, but it recognizes the importance of the consolidated balance sheet of the federal government.

Garcia: Also, let's remember that in so many cases these forces aren't mutually exclusive. That actually is an element that did surprise me about all of these debates that economists were having. We obviously already talked about the best way to fill a demand shortfall, but actually these conversations tend to go past each other in a lot of other ways too.

Right now there's kind of a debate out there about whether or not the prevailing forces are a supply‑side stagnation versus a demand‑side secular stagnation. I haven't seen that many people say, "Maybe the supply‑side stagnation does apply to some parts of the economy, and we also have a chronic shortfall in demand that's caused by other things."

This to me actually seems quite possible, and yet when you see a lot of economists comment on this, it's like, "No, this is the thing we need to worry about." You can worry about both things and you can acknowledge a certain amount of uncertainty.

If there's anything that we should have learned from the crisis it's that our understanding of these big forces can be upturned quite quickly and really quite dramatically. Be open to all of it before you criticize somebody for missing something. Acknowledge the possibility that you might be missing something too.

That to me has been a little bit more surprising than the simple fact that economists have disagreed. It's the unwillingness to countenance other ideas.

Beckworth: Lack of humility on our parts. We're known for that as economists.

Garcia: When I say economists, I actually also include the entire umbrella of economic commentators. I'm guilty of this too, and I'm trying to be better about it.

There's a big group of people out there that I think are also somewhat influential in this debate. Hopefully those of us on Alphaville, the guys at Real Time Economics and other places who I include when I describe economists that should be more careful. People who talk about the economy, the economics‑commentating game.

Beckworth: You mentioned a few minutes ago about how we fill demand shortfalls, and both fiscal and monetary policy could play a role. I want to be more specific. Let's talk about QE.

Quantitative easing, the Fed's large‑scale asset purchase program. What have we learned about that? Does it make a difference? Does it put a floor under the economy? Did it really buoy growth or are we skeptical that it did much?

What We’ve Learned from Quantitative Easing

Garcia: I'm not. I think it's generally a force for good. What have we learned about it? That's a tough question to answer, because frankly, we just left it behind not long ago. I think it's really hard to measure the impact of these things.

I've read some of the competing papers, some of which say that it didn't help at all. Some say that it actively was harmful. That's these neo‑Fisherian guys. I don't believe that for a second. Some say that it did help right away, it was useful, and you could see it in terms of the immediate response in inflation expectations, and some people saying that it helps but with a really long lag.

I look across these things and I think this is really hard to tell. When that happens, when there's this level of disagreement, I usually fall back on a different kind of maneuver than just blindly accepting one or the other paper or playing a game of, "My guy's right, your guy's wrong."

I first start by looking for the plausible mechanisms involved. In other words, don't point to these fancy equations that you've done. I'm not saying that they're useless, I'm just saying I might not be able to understand them.

Tell me in the real world how it works. I can buy a story that says that QE works by taking duration risk out of the market, by the portfolio rebalancing effect, by the expectations effect I can buy it. They might not be right or wrong, but I can buy it.

I don't quite buy the argument that QE is a deflationary pressure because I don't see how, in the real world, that would happen. I could be totally missing something, but I'm still waiting for somebody to show me how that would work. I don't think the neo‑Fisherian guys...

Garcia: They haven't done it, right. As far as what we've learned, I think we've learned if anything that the widespread skepticism of it suggests that the central bank didn't do a good enough job of explaining it, number one, so there's probably a communications problem there.

Number two, it's probably not a first best mechanism because it is still another way in which central banks try to influence the decisions of private actors, of the banks, the financial institutions, companies that borrow money and all these things, but can't actually affect those decisions directly.

It is a kind of workaround, whereas something like NGDP targeting backed by a fiscal mechanism is something that directly affects what people do, what people have and what they can spend. That's one thing.

Another thing is that there are still a lot of unknowns about QE that we're probably not going to solve any time soon. One is its impact on financial markets, and I don't discount this possibility. It's essentially a safe asset swap. You take bonds out and you essentially credit the banks with reserves. Those reserves can't be rehypothecated to the same extent that the bonds can.

That probably does have at least some effect. It might not be big, but it probably has some effect on the lending paths that get carved through the shadow banking system.

Another one is that it might at least at first lead to a little bit more inequality because it affects asset prices. The people who have assets tend to be richer than the people who don't have assets. That's just a straightforward thing. I have some reason to doubt that bit of skepticism, in part because of some findings by the economist Edward Wolff.

What he said essentially is that because the middle class was so highly levered to house prices, the recovery in house prices has affected them proportionally a lot more than it would affect rich people who have a couple of houses, but they tend to be mostly paid off, and they're just not highly levered.

Rich people, of course, have more assets in terms of equities and things like that to which they're still probably not all that levered. There's a closer to a one‑to‑one relationship there. For the middle class which was damaged in such a devastating fashion by the financial crisis, that's going to increase their wealth proportionally.

Again, this isn't a palliative fix or anything. Proportionally, it's going to affect them a little bit more, so I'm not sure about the inequality argument. That, the idea that it sends money into emerging markets, that then when it gets taken out of emerging markets at the end of QE there's this big whiplash effect, I get it and I think these are all, again, plausible stories.

Do they overcome, or are they enough to overwhelm the benefits of QE? I really don't think so. I myself thought that the Fed stopped doing QE too early, just like I thought they raised rates too early. I think when people talk about the Fed's arsenal, maybe doing more wouldn't work, but we don't know, because they didn't do more, and they could have.

Beckworth: I think one of the challenges when someone does critique QE I have my own critiques of it is you've got to know the counterfactual. What would have happened in the absence of QE? Just some of the tools were tried.

I do own view is they put a floor on the economy. In the absence of that, things would have been a lot worse. Even in the case where there's inequality because of QE, I will take a little inequality as opposed to unemployment in 10 percent again, or something greater than that.

You have to pick between two bad choices, but pick the one that's the least bad. That might be the one we had.

Garcia: That one had to drive you especially guys nuts, right? You know, it's the idea that you just don't know what would have happened in its absence. It's like the curse of economists. I guess of social scientist in general, but especially the economists, macro economists in particular.

Beckworth: But I think it's a good point, because we just don't know. I think I have a vision of what would have happened, but I can't prove it unequivocally. My own view has kind of evolved. I've been a cheerleader as you know for QE. I like to have it done in a more predictable, rules‑based manner. I like it to be more data‑dependent, not timed.

QE2 was we're going to finish up in, was it 2010? I think that was a horrible idea.

Garcia: They started, I think it might have started in 2010 and then...

Beckworth: 2011.

Garcia: ...and then twisted in 2011.

Beckworth: Yeah. But QE...I thought QE3 was even better because it was based upon certain outcomes. But even then, all these were very ad hoc. They changed. The full guidance was kind of make up as you go along, so I think they could have done a better job.

But my big skepticism looking back is that at the end of the day, I think the Fed doesn't want more than the one and a half to two percent inflation generally, no matter what it does. I wrote this in your blog this past week, but I may be wrong.

Some have argued we have low inflation because the Fed is just not powerful enough. I think after seven years of averaging one and a half percent core PCE inflation this is a revealed preference the Fed may not even be doing this consciously, but they're content. They're not going to try harder because they've got to prove their inflation fighting credibility.

But if it is the case that the Fed's happy with this, and it's a big debatable point, but if that's the case, then I think QE generated what it was going to generate, which is this slow, sluggish growth. In other words, they never could have done something really radical, because they never wanted to get past one and a half...then Bernanke made a call.

One of the Senators sent him a letter, "Why don't you try three percent inflation?" He was, "No, no, no, we can't. We don't want to jeopardize our inflation fighting credibility. It would be too radical of a change."

In my view, we needed probably three, four percent inflation soon after the crisis to get total spending back on path. It'd be temporary. We still have long‑term inflation to be anchored, but that, in my mind I guess, that was never going to happen.

I guess my point is this. QE, given the Fed's commitment to low inflation, was never going to do that much, and I think that's a problem everywhere in the world. What do you think about that argument?

Garcia: Yeah, you could well be right. It's hard to know what's in the mind of a central banker. They've at least made the right noises about two percent being a kind of an average rather than being a ceiling. Now it's being kind of a target around which it can fluctuate and they would tolerate it.

We'd hold no because they didn't get there, but there was a recent paper by Olivier Blanchard that I think you can maybe connect to this a little bit. I think his basic point was that inflation expectations were so well anchored that it became really hard to de‑sticky those expectations, and so in the aftermath of the crisis, we should have had some fairly powerful deflation.

We didn't. We had very low but positive inflation. I remember in 2010 I came across an IMF paper that found that this had actually applied to a lot of other economies as well. In other words that when you had these crises, inflation would certainly drop. There was strong disinflationary trends, but then they would start to kind of even out close to zero without necessarily dipping into deflation.

Blanchard's point was that it might have stopped the Fed from being more aggressive in the early phase of the crisis because they didn't see the deflation. In other words, if the Fed had seen that inflation had fallen to ‑1.5 percent or whatever, they might have expanded their balance sheet early on to the place where we are now, three point something trillion dollars.

Whereas before, they didn' you said, this ad hoc manner where they had Q1. That wasn't enough so a little later we had Q2. Then wait a minute, that didn't work, let's try this twisting and then we have Q3 like this. Imagine if instead, the Fed right away had said, "Man, we're going to expand our balance sheet right now to $4 trillion and get this over with."

Maybe they thought they couldn't, because inflation was still positive and they thought, "Well, God, if we expand the balance sheet to $4 trillion now, we're going to have 10 percent inflation because if it's at 1 percent now despite how terrible the economy is, imagine what will happen later."

But it turns out that because those expectations are so well anchored, they weren't as aggressive then, and it might also mean that we might be kind of missing something about how aggressive they are now. In other words, we don't know the point at which those expectations become unanchored.

It also means that as we're learning, we had more running room than we thought. We could have been more aggressive, and we just haven't got back to two percent. Then because of what happened with oil, headline inflation has been hovering between zero and one percent for a while.

I think it's just too bad. In other words, my main criticism of the Fed, acknowledging some of the great things they did in the aftermath or during the immediate stages of the crisis was that they didn't do all the stuff at once, instead sort of doing it over time and very gradually. I think that's really too bad.

Beckworth: Looking back, it seems you make a case spent all this political capital on these experiments, QE1, QE2, QE3. This is Monday morning quarterbacking. Why not just go back and use it all up in one fell swoop and be done with it? But of course that's easy for us to say. 2016...

Garcia: Of course it is. I'm glad I wasn't sitting at that conference table when they were discussing this. That's a tough job.

The Fed’s Inflation Target

Beckworth: Absolutely. Since we're on this topic of inflation, I've written on this, and I think someone, maybe you've written on it too, I've acknowledged to a writer at "The Economist" as well, Matt Yglesias, do you think the Fed has an asymmetric inflation target?

You've kind of touched on this, but do you think that they are...again, if you look at core PCE inflation, it seems to be they're treating two percent as a ceiling, as opposed to a target average you hit a little above two percent or below, and on average it should be two percent. On average it's closer to between one and two. What do you think is going on there?

Garcia: Unfortunately, I think that is something that we can reasonably assume to be the case. That it is an asymmetric target. That it is closer to a ceiling, again without being able to read minds. But I think we've gotten to the point now where we'd actually have to see inflation be above two percent, and maybe even considerably above two percent for a sustained period of time, maybe a year or two or whatever to overturn that assumption.

Right now I think that's a fair thing to guess. That's too bad, and I think it means that we are slowing down the recovery before we really have to. I think there's an exception to that, by the way, which is that I do think that if we were to get an unexpectedly sharp recovery in oil and commodities prices, and if those are the things that were primarily responsible for driving headline inflation above two percent for a while. I think they would be willing to look away from that.

In other words, if core inflation is flat throughout that period, they'd probably say, "Yeah, it's fine," and in fact we saw something like that I believe it was in 2010 or 11 or maybe in 2012, but right around there, we saw it. We saw headline inflation go above two percent for a little while. I think it even got close to three percent.

They didn't do anything. Partly because the labor market was still in such bad shape, and also partly because it was sort of obvious that there were these weird fluctuations in commodities and in food prices and things like that. That would probably go back to being below two percent pretty quickly.

I will add one more thing about oil, which I think goes against prevailing wisdom of what's happened now. I think that what happened in the oil market essentially prevented the Fed from tightening a year before it actually did end up tightening.

If you look at where inflation was back then, which is I think it was about 1.5 percent, not 2 percent. But you look at where the labor market was back then, I think it's fair to guess that the Fed would have been pretty close to tightening a year earlier.

Because think about this, the labor market was at pretty close to the Fed's estimate of full employment when they ended up tightening, and yet inflation was off by like 1.7 percentage points. Remember, the Fed's goal is headline inflation, and it uses core as a guide, but its goal is to control headline inflation.

It was missing by a ton on inflation, but the labor market was pretty close to its estimate of full employment. A year earlier, you would have had both inflation and the labor market pretty close to the goal. In other words, not close enough to think.

Well, that's fine. We don't have to think about this anymore, but close enough I think that the Fed would have decided, "Well, now is an appropriate time to raise interest rates. At least the first time to try."

I actually think that the big decline in oil I'm totally speculating here, I do that sometimes I'm guessing I think that the big decline in oil probably gave us an extra year of interest rates at zero percent. Maybe that had an impact on the labor market last year, and maybe not. These things are tough to disentangle.

But I think it had a positive effect, so all these people saying, "Well, the decline in oil was too fast, too soon, it's turned the conventional wisdom on its head." I think all that is actually kind of nonsense. I think that's just sort of an immediate panic reaction. I don't buy it.

But the better story I think is that what happened in oil markets, do you think was largely driven by these innovations that have been made by the frackers? I think that gave us a whole extra year of interest rates zero, and I'm grateful for that.

Beckworth: So you don't...have you seen Bernanke's post where he speculates or he estimates how much of the decline in oil since 2014, when it starts to go down sharply, is due to supply versus demand?

Garcia: OK. Did he say it's demand?

Beckworth: About half of that, yeah.

Garcia: OK.

Beckworth: He says 40 to 45 percent, and based on James Hamilton had something similar. I actually did my own little calculation.

Garcia: And you also thought it was mostly demand.

Beckworth: About the same number. I got 50 percent.

Garcia: Hey, that's pretty good though, yes?

Beckworth: I think you can't debate that the supply of's undeniable that oil's been surging. The question is, has the global economy slowed down some and put a drag on the prices as well?

Garcia: Oh, probably yeah. But by the way, half...if you take the decline, where did oil peak? At north of 110, 115, down to 30. If half of that drop is from supply side factors, that's impressive. But I think there's a more subtle story happening here than just oil is in a glut, and that's what caused it to decline.

It's actually the ability of frackers to come online quickly when prices return that has kept the price of oil depressed.

Beckworth: The anticipation.

Garcia: Right, because if you think about it, it would be one thing if oil were still an extractive market everywhere, where it required huge upfront costs to get it out of the ground every single time. Then you have a big price decline and all these guys go out of business. All the producers go out of business, and to crank the machinery up again would be really expensive.

Fracking is a little different. The phrase that I saw I forget who initially was responsible for it was that it's closer to a manufacturing business model, and he referred to it as manufrackturing, which is that when the prices make sense, you can just get things moving again.

I think the combination of higher actual supply in real time, and then the acknowledgement that these productivity gains have been made in the production of oil and oil products, I think is largely responsible for the decline. Of course there are some demand side things happening here too. You can't deny that. It would be silly to ignore that. I think that is in general a positive story.

Beckworth: Absolutely. We like positive supply shocks, there's no doubt about that. What you're saying though just to recap is the understanding that these frackers can instantly or quickly come back online, which means prices will remain depressed, and just the anticipation of that is helping keep them almost permanently lower to some extent.

Garcia: Yeah. I would I guess go to the second derivative of that, and it's not that it will keep them depressed in absolute terms, but if there was going to be a recovery, then maybe the slope of the recovery will be a little bit more shallow.

Beckworth: Okay. One more thing on the demand side of oil's decline. Let's just say it's 50 percent, which maybe...

Garcia: Sure, I can buy that.

Beckworth: Maybe it's not, but let's just say it's 50 percent. I see an irony in this because the Fed has been of the reasons it's been saying that it doesn't want to act is it looks at inflation, inflation's low. Why don't you do something? All because it's oil. Oil is a transitory thing, it's going to at some point, oil is going to pull back. It's going to go back up.

If half of that decline, the transitory factors were due to weak global demand, they're barking at the wrong tree here, right? That should be cause for concern. If oil is low because of the demand, not supply, then they should be even more worried about it, as opposed to, "Well, we can lay off, not do anything until it returns to normal path."

Garcia: Yeah, it's a signal, in other words. It's also just I think for the recognition that when you look at inflation, you shouldn't just look at the headline or the core number. You should also look at its individual components. How much is oil versus housing? Things of that nature. I think this stuff is complicated. This stuff is hard to understand.

Beckworth: Doesn't this raise questions about how robust inflation targeting is? I'm going with these supply shocks. You mentioned the Fed did not move in 2011, but we know who did. The ECB.

Garcia:  They moved the wrong way.

Beckworth: They did. They reading of it is they saw the same signals the Fed did, but the Fed realized it's more commodity based. The ECB is like, "We're going to jack up rates," in the second stage of that crisis.

To me, in real time, it's hard to know. I guess I want to be fair to the Fed, to the ECB. In real time, it's hard to discern what's causing it. Is it demand? Is it supply? To me, that should beg the question maybe inflation targeting isn't the most robust way to do monetary policy. I want to be...because everyone knows my views on that already.

Garcia:  The role of the...I really, genuinely I'm not sure what plausible justification Trichet could give now for having raised interest rates in 2011. There were other things happening in Europe that I think were just setting the stage for a more protracted downturn there.

I think Europe at this point is closing in on a lost decade, absolutely. Another part of what was happening then that should have influenced monetary policy was that over the last few years, you had some countries in the Eurozone who were running big current account surpluses. Then you had the countries in the periphery who before their own crisis had current account deficits.

Those countries in the periphery, rather than spending money to juice demand or rather than having a central bank that was doing enough to juice demand, essentially became more competitive by letting demand fall off a cliff and then letting their wages collapse and the prices of other things collapse.

Of course you had a situation where they were brought back up into a current account balance that was roughly flat. You had countries that had been doing fine, and especially Germany, running current account surpluses, and kept its surplus. Then you had the countries before, that were running current account deficits that stopped importing stuff because demand had fallen apart getting into a current account balance.

The Eurozone as a whole was then running a huge surplus. That puts a lot of upward pressure on the Euro at precisely the time when what you want is a weaker Euro, and it wasn't offset by central bank action where you ended up with what was long protracted recessions, long protracted downturns in some of these countries.

It's really too bad, although I think it seems like Mario Draghi has just about succeeded in stemming the worst of that and in moving them back toward something that resembles recovery. But as far as Europe goes, I've sort of got the opposite view I guess as I do with the US. With Europe, I'm kind of near term hopeful and long term pessimistic, because the design flaw is there. Fiscal and monetary union just don't quite work.

Beckworth: I finished a paper up, it'll be out soon, focusing on the Eurozone. It looks at the role that the ECB played. But I think...I point out the fact that the ECB rose rates in 2008, the Fed didn't, it rose rates in 2011, and it signaled one of the tightening, but they played a huge role.

But I think you can step back and more fundamentally say, "Look, the real cause of the crisis was this is a flaw in the design in the currency union itself." It's almost inevitable a crisis was going to break out when you got countries like Germany and Greece on the same currency, and you don't have that flexibility that they had before.

Garcia: Yeah, that's a tough story. By the way, do you want to acknowledge that the institutional and political constrains on the ECB, and to some extent I think on the Bank of Japan, are a little bit trickier and more severe than even the ones on the Fed?

Beckworth: Absolutely.

Garcia: To be fair, I think Draghi has probably done all he can within those constraints. I've actually been quite impressed by him. He's also for a while he was like the one high profile policy maker arguing that demand recovery is what was needed, and that it wasn't all structural reform. He's a big believer in structural reforms, but at least he was singing the right tune on demand.

Beckworth: You already answered the next question I was going to have, and that's long‑term future of the eurozone. Do you foresee at some point it breaks up, or maybe you have two currencies within the EU project?

Garcia: I don't know, partly because the fact that we've still got a eurozone to this point is impressive to me.

Beckworth: Yeah. It is.

Garcia: I'm really loathed to make any hardened predictions on that. I do think that it's inevitable that we will at least come across a situation, that's similar to the one that we had a few years ago. I don't know any way around it.

I know that a lot of people think that having a closer banking union, that having reactive mechanisms that kick in a little bit more quickly would be helpful as well, and maybe those would be enough. Let me put it this way, I think we'll eventually find out

Beckworth: I have a lot more I could talk about on business cycle step, but I do want to switch gears the last few minutes we have together. You've done a lot of work on future of growth, secular stagnation, future of innovation. Robert Gordon just had a book that came out, Larry Summers has been talking about secular stagnation.

There's several issues here. I guess one is, are we truly in a secular stagnant environment? Have we lost innovation? Productivity numbers seem to indicate that but it could be poor measurement, or maybe it could be the real thing. Coda has argued, others than beside him, that we would actually have more productivity growth or the man gap filled. This endogenous...I'm throwing several things at you here.

Garcia: I think I know what you're getting at though. In the paper that Larry Summers wrote that re‑popularized the idea of secular stagnation, which I think he wrote at the end of 2013 or 2014. I can't remember. There was a line or two in there in which he referred to a reverse Say's Law, Say's Law being the idea that supply fully generates its own demand.

What Summers was saying was that a shortfall in demand, leads to a weakening of potential supply. In other words if you don't fill the demand shortfall now, nobody's going to invest enough money for the kinds of innovations and projects that you need for longer term growth.

My colleague Martin Wolf in a recent...I don't know if it was in a recent column, or if he just told it to me when I interviewed him myself for our podcast, said that he would take it one step further. A demand shortfall leads to reduced potential supply, but that reduced potential supply also feeds back into a demand shortfall because that's what investment is.

In other words more investment plugs the gap. In addition to creating potential supply it plugs the immediate demand shortfall. It's this self‑fulfilling circle, and it's a real problem.

I don't know if anybody has studied this systematically. I'm not sure how you would do that, but that is a compelling thesis. This is one of the reasons why I think in a crisis you try whatever has a high probability of working. If fiscal and monetary policy aren't as coordinated as they would be in a helicopter drop, then I think you need to use both.

You need to fire at the thing with both barrels. There might be some problems with that left over, but the distortions caused by the try‑everything approach are probably easier to deal with than mass unemployment, a huge demand shortfall, shrinking potential supply that's going to be hard to increase again later. Do what you can on both sides.

The thesis that Gordon advances in his book is a different one. I haven't actually read the book, but I feel like I've read  so many different arguments about the book that I can at least comment a little bit on it. In terms of the impact of innovation and things of that nature I think we always just extrapolate from the recent past.

I think Gordon's still doing that, which is the problem that I have with the idea that we're stuck in this for another quarter century or whatever it is that he thinks we're stuck with. If you had seen in 1996 some of the papers that were coming out about productivity, people were citing the same kind of solo paradox, that you can see productivity growth everywhere except...

Beckworth: Not in the numbers.

Garcia: the measurements. Right. Except in the numbers. The computer age everywhere except in the productivity statistics, something like that. Anyways, you would have seen a lot of people commenting on that.

You would have seen a lot of people saying, "Well, yeah. This computer‑age thing looks promising, but actually it's probably not that big a deal." What happened after that? Well, we had eight or nine years of really high productivity growth.

What's funny is that if you read the papers in 2004, there's one by the New York Fed, and there's even by  Robert Gordon himself I think in 2003 or 2004 extrapolating from that and saying that, "Well, actually some of these productivity gains are here to stay" right before productivity fell off a cliff.

Beckworth:  Interesting.

Garcia: In the short run we tend to extrapolate from the very recent past, and I think that's always dangerous. Here's the way that I think about this though. There was a great debate at the last AEA meetings about Gordon's book. I'm simplifying here, but there were two camps essentially. One saying, "Well, hang on a minute. Institutions help.

"If institutions can help, than we shouldn't be so pessimistic about the possibility that we can spur innovation. We just have to make the right institutional changes, whether that's fiscal investment, whether or not that's concessional financing or whatever, industrial policy.

I don't know what you want to call it, or getting rid of a lot of barriers to innovation whether that's taxes or regulatory burdens, whatever. You can make changes. You can do something about it.

The other camp saying, "Well, actually this is a more mysterious process, that it's not necessarily an institutional thing. Even if institutions help it takes a little while for these gains to materialize. We don't actually know exactly how long it's gonna to take. Maybe I'm right about this, and we are gonna have a weird thing."

To me the second one just proves the first in a way which is to say that, if it is a mysterious process, then why be pessimistic? You don't know  actually. We're probably not going to lose the knowledge we have. Productivity might be stagnant, but I don't think we're going to become less productive in most sectors.

At some point I think you could see the gains accelerating. My real over‑arching take on all of this is to say that we actually have a very limited sample size of experiments to deal with here. We're only going back to the Industrial Revolution, which some people think sounds like a long time because it's 200‑and‑something years whereas to me that's nothing.

Humans have been recognizably human for 50,000 years. It's not clear to me that we know that much about it. I don't think we have a great theory yet, and I think most economists would admit this, about total factor productivity, which is I think the best measurement we have to represent innovation, that part of productivity growth.

Anyways, massive radical uncertainty about this topic. That's not just me. That's also what I think everybody else should embrace.

Beckworth: You are though a technical optimist. I sense from your writings you think things are getting better in terms of smart car technology and automation. I am, too.

Garcia: In general.

Beckworth: In general, in general. Right, right.

Beckworth: Well, on that note we're out of time. Cardiff, it's been a pleasure having you on the show. Thanks so much for coming to join us. Our guest today has been Cardiff Garcia of the "Financial Times." Thank you.

Garcia: My pleasure. This was awesome.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.