Monetary Policy

[Mustonen]

Quit being a douche.

Of course this is politics adjacent. No reason it has to be asshattery though. When the discussion is debating facts and theories and the actual merits of policies rather than what some representative, who only pretends to be qualified on the matter, thinks/does/proposes it doesn’t have to get buried in PA. Accordingly I have spoken, and so it should be.

[MultiVerse]

Monetarism is failed theory.

“The problem is that no one knows what money is. To economists, money comes in many forms and many gradations - from currency, to Treasury bills and common stock, to savings bonds and credit cards - and no one can isolate the true money supply money that economists want to track.”

Also. It’s basic tenets have never proven correct. Velocity is volatile:

“Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).”

“Monetarist theory views velocity as generally stable" <-- Not true in any way shape or form according to market monetary theory (as opposed to the debates in 50s and 60s). Market monetarists think the Fed should stop trying to manage the economy and instead aim for steady nominal GDP growth. From that perspective nobody should care about what happens with velocity.

Even if you hark back to the old Keynesian vs Milton Freedman debates about velocity, implicit in the views of monetarist of the era was the idea stable GDP growth (not stable velocity per se) should be the Fed's overarching goal.

Monetarism should not be confused with MMT (Modern Monetary Theory). MMTers downplay the risks associated with inflation because they believe central banks don't create inflation when they increase the money supply even when interest rates are high. Whereas monetarism is more concerned with the interest rate / inflation rate gap in both directions relative to GDP growth.

[J. Barron DeJong]

So, when do we get around to actually discussing the Monterey Police?

[old goat]

Well, there’s a whole other thread to discuss crypto, but there is a lot of overlap between people who think a gold standard would be good and think Bitcoin is good.

Gold standard handcuffs policy makers. Good if you’re concerned about the policy makers being irresponsible, but now your monetary policy is decided by the whims of the gold market, and you have no ability to adjust your money to address current economic conditions, which is not always so good:

Attachment 424925

https://delong.typepad.com/delong_lo...epression.html

ETA: A gold standard may prevent hyper-inflation, but it doesn’t achieve ‘stable’ inflation. Can have high/low inflation/deflation with a gold standard.

"You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold." William Jennings Bryan 1896

[MagnificentUnicorn]

Happy to discuss here. Feel free to reread the thread where there were a number of comments on how the Fed is apolitical. It's a dumb statement and one that is easily disproven.

To answer your questions above, assuming you're serious. Yes, presidents appoint Fed chairs they think will manage the country's monetary policy in a manner they agree with to achieve the goals of the Fed. What that means is different for each president, but ultimately congress needs to approve. Please, easily disprove this as you have stated.



What do you think the Fed's reaction function is likely going to be going forward?

A Wilco fan? Thanks for proving my point

[mattig]

"Influencing elections and presidential popularity? Serving the interests of those who appointed them? Both of those contentions are so easily disproved with the past decade's events."

Those are the things I said were easily disproven. I suppose the most recent and most compelling evidence is the extent to which Trump lambasted Powell's persistent rate hikes (and then the "not big enough" rate cuts in 2019) despite Powell being a Trump appointee. Powell's Fed continued to hike into late 2018 despite a growing chorus of "global growth concerns."

Leading indicators had fallen from 7 year highs of 1.0 down to 0.0 in the 13 months ending Nov 2018. That same month saw the 12 month average nonfarm payroll print hit its lowest mark since 2012. Additionally core inflation had already been backing down from 2.4% highs for several months, the dollar had gradually worked its way back up to a pre-Trump range, and European economic data was painting an even bleaker picture. Along with 2015, many of us who write on markets considered late 2018 to be a bit of a "stealth recession." Point being: it would have been very easy for the Fed to pause the rate hike campaign a meeting or two earlier, but they continued to hike through the December meeting. The guy who appointed Powell was not happy.

8/20/18 RTRS: " NOT THRILLED" WITH POWELL RAISING RATES - TRUMP
11/27/18 RTRS - TRUMP SAYS HE IS "NOT EVEN A LITTLE BIT HAPPY" WITH FED CHAIR POWELL -WASHINGTON POST INTERVIEW
12/22/18 RTRS - TRUMP CONSIDERING UNPRECEDENTED MOVE OF FIRING FED CHAIR POWELL

Leading indicators never made it above 0.3 in early 2019 and 12-mo avg NFP was at another new long-term low by June. The Fed easily could have cut rates based on the state of econ data and inflation in the Spring, but the first cut didn't arrive until the end of July.


Throughout these months, Powell took tactful jabs at Trump's trade policies as a key source of economic uncertainty. Even after the Fed began cutting rates, it was too little too late as far as Trump was concerned:

7/31/19 - RTRS- TRUMP SAYS FED CHIEF POWELL `LET US DOWN' WITH SIZE OF RATE CUT
8/21/19 - RTRS - TRUMP SAYS U.S. WILL HAVE BIG ECONOMIC GROWTH IF POWELL 'DOES THE RIGHT THING' AND MAKES BIG INTEREST RATE CUT
8/23/19 - RTRS RTRS - TRUMP ASKS WHO IS BIGGER ENEMY, FED CHAIR POWELL OR CHINA'S XI

After 3 rate cuts, the Fed leveled off when econ would have allowed for additional cuts, had the Fed been so inclined. By all accounts, the timeline and headlines above seem to suggest a Fed Chair that didn't give two shits about the interests of the man who appointed him. That was no surprise to market participants as Powell was always seen as Yellen 2.0 and just a way for Trump to leave his own mark without rocking the boat.

But lest ye think that Powell was secretly anti-Trump and no afraid to show it with MoPo, cue covid and the unprecedented brutality of policy easing in March 2020. I thought I'd seen quite the spectacle in 2008 with QE1, 2012 with QE3, 2014/15 with ECB QE, and 2016-2017 with the epic delay in balance sheet normalization, but March 2020 made everything else look pitiful by comparison. The juxtaposition of the excess hawkishness and dovishness during Trump's term and before the 2020 election make it very difficult for anyone to reasonably claim that Powell gave any thought to influencing political outcomes or serving Trump's interests before the Fed's mandate.

One important caveat: Any sitting president should always be interested in economic expansion and stability. A strong, stable economy that's growing (but not at an unsustainable pace) with modest, level inflation and ample job availability is probably the best evidence any 1st term president could submit for re-election. Incidentally, that exact laundry list of things is the Fed's job description. So by default, the Fed would always be serving the interests of the president in that sense. They just won't necessarily be going about it in the manner preferred by the president--not that the president is typically qualified to have much of an opinion on such things.

Final, personal, subjective thoughts on the Fed's apolitical nature: the more time one spends listening to Fed speeches and especially to Fed Chair congressional testimonies, the more apparent it becomes that Fed board members are playing chess while politicians play checkers. One is aware of the fact that congress approves the Fed board based on the diplomacy of certain interactions, but also aware that Fed board members view politicians as uneducated children who can't possibly understand the intricacies (and impossibilities, at times) of the Fed's mandate. I realize I'm not offering specifics here, which is why I've labeled this last little bit as "subjective," but I'm confident that anyone who has legitimately watched every single press conference and congressional testimony since the Bernanke days will agree. In fact, I'll put it like this: I've never even given any thought to whether the Fed Chair gave two shits what politicians had to say except in clerical matters. When it comes to implementing policy to achieve the mandate, the Fed does what it thinks is best, and because its success is also good for politicians and everyone else, politicians don't ever really need to be at odds with the Fed unless they A) think they're smarter or B) think Fed policies are having an unintentional disparate impact.

[Adolf Allerbush]

A Wilco fan? Thanks for proving my point

haha. well played.

"Influencing elections and presidential popularity? Serving the interests of those who appointed them? Both of those contentions are so easily disproved with the past decade's events."

Those are the things I said were easily disproven. I suppose the most recent and most compelling evidence is the extent to which Trump lambasted Powell's persistent rate hikes (and then the "not big enough" rate cuts in 2019) despite Powell being a Trump appointee. Powell's Fed continued to hike into late 2018 despite a growing chorus of "global growth concerns."

Leading indicators had fallen from 7 year highs of 1.0 down to 0.0 in the 13 months ending Nov 2018. That same month saw the 12 month average nonfarm payroll print hit its lowest mark since 2012. Additionally core inflation had already been backing down from 2.4% highs for several months, the dollar had gradually worked its way back up to a pre-Trump range, and European economic data was painting an even bleaker picture. Along with 2015, many of us who write on markets considered late 2018 to be a bit of a "stealth recession." Point being: it would have been very easy for the Fed to pause the rate hike campaign a meeting or two earlier, but they continued to hike through the December meeting. The guy who appointed Powell was not happy.

8/20/18 RTRS: " NOT THRILLED" WITH POWELL RAISING RATES - TRUMP
11/27/18 RTRS - TRUMP SAYS HE IS "NOT EVEN A LITTLE BIT HAPPY" WITH FED CHAIR POWELL -WASHINGTON POST INTERVIEW
12/22/18 RTRS - TRUMP CONSIDERING UNPRECEDENTED MOVE OF FIRING FED CHAIR POWELL

Leading indicators never made it above 0.3 in early 2019 and 12-mo avg NFP was at another new long-term low by June. The Fed easily could have cut rates based on the state of econ data and inflation in the Spring, but the first cut didn't arrive until the end of July.

Throughout these months, Powell took tactful jabs at Trump's trade policies as a key source of economic uncertainty. Even after the Fed began cutting rates, it was too little too late as far as Trump was concerned:

7/31/19 - RTRS- TRUMP SAYS FED CHIEF POWELL `LET US DOWN' WITH SIZE OF RATE CUT
8/21/19 - RTRS - TRUMP SAYS U.S. WILL HAVE BIG ECONOMIC GROWTH IF POWELL 'DOES THE RIGHT THING' AND MAKES BIG INTEREST RATE CUT
8/23/19 - RTRS RTRS - TRUMP ASKS WHO IS BIGGER ENEMY, FED CHAIR POWELL OR CHINA'S XI

After 3 rate cuts, the Fed leveled off when econ would have allowed for additional cuts, had the Fed been so inclined. By all accounts, the timeline and headlines above seem to suggest a Fed Chair that didn't give two shits about the interests of the man who appointed him. That was no surprise to market participants as Powell was always seen as Yellen 2.0 and just a way for Trump to leave his own mark without rocking the boat.

But lest ye think that Powell was secretly anti-Trump and no afraid to show it with MoPo, cue covid and the unprecedented brutality of policy easing in March 2020. I thought I'd seen quite the spectacle in 2008 with QE1, 2012 with QE3, 2014/15 with ECB QE, and 2016-2017 with the epic delay in balance sheet normalization, but March 2020 made everything else look pitiful by comparison. The juxtaposition of the excess hawkishness and dovishness during Trump's term and before the 2020 election make it very difficult for anyone to reasonably claim that Powell gave any thought to influencing political outcomes or serving Trump's interests before the Fed's mandate.

One important caveat: Any sitting president should always be interested in economic expansion and stability. A strong, stable economy that's growing (but not at an unsustainable pace) with modest, level inflation and ample job availability is probably the best evidence any 1st term president could submit for re-election. Incidentally, that exact laundry list of things is the Fed's job description. So by default, the Fed would always be serving the interests of the president in that sense. They just won't necessarily be going about it in the manner preferred by the president--not that the president is typically qualified to have much of an opinion on such things.

Final, personal, subjective thoughts on the Fed's apolitical nature: the more time one spends listening to Fed speeches and especially to Fed Chair congressional testimonies, the more apparent it becomes that Fed board members are playing chess while politicians play checkers. One is aware of the fact that congress approves the Fed board based on the diplomacy of certain interactions, but also aware that Fed board members view politicians as uneducated children who can't possibly understand the intricacies (and impossibilities, at times) of the Fed's mandate. I realize I'm not offering specifics here, which is why I've labeled this last little bit as "subjective," but I'm confident that anyone who has legitimately watched every single press conference and congressional testimony since the Bernanke days will agree. In fact, I'll put it like this: I've never even given any thought to whether the Fed Chair gave two shits what politicians had to say except in clerical matters. When it comes to implementing policy to achieve the mandate, the Fed does what it thinks is best, and because its success is also good for politicians and everyone else, politicians don't ever really need to be at odds with the Fed unless they A) think they're smarter or B) think Fed policies are having an unintentional disparate impact.

Great post, thanks. You see Trump's behavior/criticisms of the Fed as the Fed being apolitical...I see Trump, and other POTUS, using the Fed as a punching bag when it suits them and then also not giving credit where credit is due when times are good. Biden has been more or less silent on the Fed, basically saying "here's the keys, you guys drive"...which is what should be done IMV. All that said, the fact that some POTUS use the Fed as a punching bag shows there is a political element at play here. Your point is taken and I agree...so hopefully you understand my POV.

Onward...curious what you're thoughts are for future moves by the Fed.

MagU, more of uncle tupelo guy?

[mattig]

That brings us to the next major topic that has created several fascinating turns of events in MoPo over the past few years: the notion of disparate impact. There was a bit of a sea-change under Yellen where the Fed first began vocally questioning the fallout from previous policy decisions.

10/17/14 RTRS- FED'S YELLEN SAYS GREATLY CONCERNED BY EXTENT AND GROWTH OF U.S. INEQUALITY
12/3/15 RTRS - FED'S YELLEN SAYS TREND TO RISING INCOME INEQUALITY IS VERY DISTURBING
1/18/17 RTRS - FED'S YELLEN SAYS TOOLS FED HAS TO ADDRESS DISTURBING TRENDS OF INEQUALITY ARE LIMITED


Given the fact that the wealthiest, savviest Americans are in the best position to take advantage of the Fed's largesse, it makes a lot of sense for the Fed to question its impact on those with lower incomes, those who aren't invested in markets, and those who work in fields most at risk of job cuts during down cycles. The Fed began reviewing its inflation framework in 2019 (though it had clearly been thinking about it for longer), and ultimately approved it in 2020.

https://www.federalreserve.gov/newse...y20200827a.htm

In short, the conclusion was that the Fed would move to a "symmetric" inflation target, basically meaning the longer inflation had been below target, the longer it could stay above target. Whereas anything over 2.0% was bad before, now 2.0-2.5 could be a GOOD thing if it was offsetting recent sub 2.0 inflation. Moreover, the Fed left itself room to leave accommodation in place in spite of strong labor market metrics to a much greater extent than it had room to remain hawkish amid poor labor market metrics. Inequality/disparate impact was key to this decision. In a nutshell, the Fed was saying if they leave accommodation in place as long as possible, it has the maximum chance of reaching the socioeconomic groups that have historically benefited least from Fed policy, and that when those groups benefit, it's better for everyone.

The Fed commissioned and considered numerous research efforts as a part of the review. Here's the one most responsible for the trickle-down thesis:

https://www.federalreserve.gov/econr...y-strategy.htm , specifically: "We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups."

Justifications aside, the Fed had just pressed GO on a brave new policy that would result in it leaving accommodation in place far longer than it otherwise would in the past. That was put to the test in 2021. I, along with much of my circle, was HIGHLY critical of just how aggressive the Fed continued to be in the MBS market. Spreads were at all-time tights and property valuations were already soaring at an unprecedented pace--all against a backdrop that showed little promise of improved inventory conditions. I've been a vocal defender of the Fed at times and a staunch critic. 2021 was the maddest I've ever been. I knew they were setting the housing/mortgage market up for an even bigger fall when the other shoe dropped and now here we are. It's not like this will be anything like the mortgage meltdown, but it didn't need to be as abrupt as it already has been for mortgage market activity and home price volatility.

The Fed realized their new framework resulted in a policy error by late 2021. They quickly took steps to remedy that, and they ratcheted up the intensity in a serious but measured pace into the end of 2021. The Minutes from the December Fed meeting released in the first week of January revealed an even greater will to jerk the reins (specifically, they referenced balance sheet run-off beginning only a few months after the first rate hike whereas it took nearly 4 YEARS after the December 2013 rate hike). Markets were in no way prepared for such a hawkish pivot from the Fed and it showed in the quick dash to the exits by both stocks and bonds.



Things may have calmed down in a less alarming way had it not been for the Ukraine invasion. We'll never really know. But because of it, the Fed ended up looking even dumber and they were forced to be even more hawkish in the ensuing months. During that time, the Fed's reaction function really hasn't changed. Once 75bp hikes were on the table, those became the baseline--at least until the policy rate got moderately above neutral.

"Neutral" is a conceptual level for Fed Funds that keeps inflation and jobs at the desired equilibrium. The Fed guesses it's about 2.25-2.5%. That's where the FFR (Fed Funds Rate) is now after the July meeting. The Fed is in broad agreement the FFR needs to go above neutral for a bit and stay there. Here are the bullet points that I see defining the Fed's reaction function as it tries to navigate that goal:

1. The Fed would like to get to where it's going on the FFR quickly and then stay there for as long as conditions allow. In other words, they don't want to hike slowly or run the risk of needing to cut too quickly. This is why the market got a bit excited in July. Weaker economic data and the notion of rate hike deceleration raised false hopes about a premature pivot back toward lower rates. Indeed, one month ago, Fed Funds Futures (FFF) suggested the first rate cut would be seen by mid-2023. That gap has since closed and there are currently no liquid FFF contracts showing the first cut.

2. The Fed can't be seen NOT being hawkish right now due to still-high inflation and July's stellar labor market data--not to mention a general rebound in several other economic reports in recent weeks.

3. The Fed DOES NOT care about causing any economic pain it views as a necessary byproduct in its fight against inflation. I can't emphasize this one enough. The stock market didn't seem to get that message when Powell delivered it clearly on July 27th. Powell didn't say anything materially different in Jackson Hole this past week, but stocks nonetheless seemed surprised. Bonds did not.



(note, the blue line would be spiking if bonds were as freaked as stocks by Jackson Hole. The counterpoint is that the investors fleeing stocks could have sought safer havens in bonds, thus preventing some of that spike. Either way, an ultra hawkish Powell was no surprise, and I'd been arguing for weeks that we were seeing bond yields move higher in anticipation of just such a Powell speech).

4. The Fed is looking for several months of lower inflation. Not just headline inflation, but importantly: CORE SERVICES INFLATION. This means promising inflation headlines aren't necessarily promising if the details aren't ideal. The reports that came out in July were good examples as they largely reflected a sharp drop in fuel prices.

5. The Fed would LOVE (finally) to see home price growth get crushed. Home price growth has been one of the biggest contributors to inflation, both in practical terms and due to OER (the owners-equivalent rent calculation that drives a third of core inflation). This is a stark contrast from the Bernanke days where the Fed always had a bit of a soft spot for the mortgage market.

6. The Fed is downright in favor of the unemployment rate going up. It views the labor market as "too tight" right now, and that tightness poses a risk or at least a headwind to combatting inflation.

7. The Fed firmly believes that long run economic outcomes are far superior in a scenario where it can tamp down inflation quickly, regardless of the short-term damage done to the economy.

8. ALL of the above having been said, the Fed will be the first to admit that its policies are extraordinarily blunt instruments when it comes to its goals. It will be the first to tell you that the supply side of the equation has accounted and continues to account for a small majority of the inflation problem, and that fixing the inflation problem will therefore rely on supply side constraints continuing to ease. The Fed is merely doing what it can on the demand side of the equation (and I'd argue it has certainly accelerated a very necessary regime change in the housing market, despite some stuff you may hear about Fed policies taking 8-12 months before ever being seen in the data).

Bottom line: the coming months are critical in determining the direction of the next trend in financial markets. If inflation continues to moderate and if we finally see some consistent softening in economic data, June's high rates will be the highest we'll see for quite some time (talking about longer-term rates like mortgages, not the FFR). Generally speaking, that sort of shift from the Fed tends to be good for stocks as well, but I'm not a stock guy and I don't do predictions. In any event, stocks would need to balance the friendlier Fed against the organic economic damage resulting from tight Fed policies and exorbitant prices colliding with labor market weakness.

[mattig]

One other supplemental chart of Fed Funds Futures (FFF). The numbers on the side mean 100 minus that number = the expected Fed Funds Rate after the meeting in question.

i.e. when the green line was up at 96, it meant markets saw the FFR at 4.0% by June 2023. When it dropped to 97, markets saw FFR at 3.0%.

NOTE, at that time when June 2023 was at 97 (3.0%) it was LOWER than Dec 2022, which was around a quarter of a point higher. That meant markets saw a quarter point rate cut at some point in 2023.

Now notice the gap is closed, and although it's not charted in this chart, even the September 2023 contract is now above Dec 2022. That's really as far out as any liquid trading is going in FFF.

Attachment 425001

[byates1]

^ bringing the heat. Nice. I'm impressed. Just a general know nothing here.

Seems to me in the current rat race usa, people are money. That's it.

Consume, borrow, repay. Life long money creation. Money is created when people.gst loans. Brand new money. The people paying are money.

Need 200 grand? That'll be 30 years at 4%. Total loan-400 grand. Every homeowner, car payment, hiloc. Genius.

Mindless consumption en masse. Enjoy.

[byates1]

What about this student loan forgiveness? Was that ever money? Does it just vanish? Get added to the endless trillions in federal debt?

Its all fairy dust.

[mattig]

haha. well played.



Great post, thanks. You see Trump's behavior/criticisms of the Fed as the Fed being apolitical...I see Trump, and other POTUS, using the Fed as a punching bag when it suits them and then also not giving credit where credit is due when times are good. Biden has been more or less silent on the Fed, basically saying "here's the keys, you guys drive"...which is what should be done IMV. All that said, the fact that some POTUS use the Fed as a punching bag shows there is a political element at play here. Your point is taken and I agree...so hopefully you understand my POV.

Onward...curious what you're thoughts are for future moves by the Fed.

MagU, more of uncle tupelo guy?

Heh, yeah, well presidents do indeed tend to be political. If I thought the question was "is the Fed a political punching bag?" I wouldn't have had anything to say other than "fo sho."

As for future moves, most of that is addressed in the 2nd big post, but as far as specifics go:

A reasonable hike scenario for the next 3 meetings is 50, 50, 25, assuming no huge change in econ data or inflation.

Hot data in the upcoming 2 weeks easily could bump the next hike to 75bps.

Balance sheet normalization is on autopilot now and unless something breaks, that should continue for at least a year. Normalization would end with a reinstatement of reinvestments assuming the SOMA portfolio gets "low enough" for the Fed.

Best case scenario for the next downturn, the Fed starts cutting like it did in 2019 without needing to mess with the balance sheet.

September could be somewhat interesting as the reinvestment caps hit levels that will completely wipe out reinvestments, but they're fairly small already, so it may not be too traumatic. Just something that could cause some volatility starting September 1st. None of this paragraph needs to make sense, fwiw. If it ends up causing drama, I'll circle back and explain wtf that all meant. Simple version is that Fed bond buying gets just a bit smaller on September 1st.

Bottom line on everything ahead for the Fed: data dependent, not afraid of some economic weakness until inflation falls into line, and needs to see several consecutive months of consistent new developments before reacting to them.

[Core Shot]

Mattig you clearly are inside baseball.
Enjoying the insight.

But how can we handle the treasury debt if rates are increased that much?
Hell we can’t pay what we owe and we keep adding more trillions every time the useless politicians convene.

I always thought a big part of inflation was to make our debt more affordable.
And yet we keep piling on. Yeah. That’s all politics. Unfortunately.

What’s the long term game in your mind? E.G. is the end of USD going to happen? We’ve dominated the world for a long time. Can we continue the charade? Or are we headed to a global digital currency once USD implodes?

[mattig]

Mattig you clearly are inside baseball.
Enjoying the insight.

But how can we handle the treasury debt if rates are increased that much?
Hell we can’t pay what we owe and we keep adding more trillions every time the useless politicians convene.

I always thought a big part of inflation was to make our debt more affordable.
And yet we keep piling on. Yeah. That’s all politics. Unfortunately.

What’s the long term game in your mind? E.G. is the end of USD going to happen? We’ve dominated the world for a long time. Can we continue the charade? Or are we headed to a global digital currency once USD implodes?

Treasury yields have already priced in the expected path of Fed rate hikes. Case in point, 2yr notes are just under 3.5%. They'll fall sharply as the next downturn begins, whenever that might be.

I'm not sure what "we can't pay what we owe" means. Of course we can.

Inflation doesn't exist to affect the buying demand for our debt. Inflation exists because, in a modest dose, it's the best lubricant of economic growth, and a necessary measure of insulation against some of the nastier outcomes during economic downturns. I'm sure there are other reasons whereby inflation is a byproduct of inefficiencies and greed, but I won't pretend to be an expert in monetary theory. It seems to me the interconnected worlds of finance, markets, government spending, retail commerce, labor/wages, and monetary policy are likely too grand in scale and complexity for one theory or theorist to pretend to have a perfect solution. Shitty run-on sentence there, but you get the idea. Shit's complex. Laypeople like to regurgitate talking points without much appreciation for all the other talking points. Some experts think they got it figured out without appreciating there are things they don't know. Other experts who realize how wrong they might be are just doing the best they can with what they got. I put most of the Federal Reserve in the third group. Several of their staff economists are my clients. They're always trying to learn and improve. They always entertain the possibility that they're wrong on some level and that policy reaction functions need to be adjusted or completely re-worked.

As for the fate of the dollar. Great question, maybe. I fished with a guy from a fishing forum in 2012 who bet me his boat that the dollar would collapse under Obama within 2 years. It stayed stable for the next 22 months, then exploded in value as the European Central Bank figured out how to sneak quantitative easing past the Germans (long, epic story--underappreciated by American market mavens at the time and probably still). He had been banned from the forum for about a year before our bet was up and I never was able to get a call or email back about collecting my new boat.

Point is, a lot of people are really passionate about the dollar collapsing, and they have been for a long time. That collapse is a separate issue from the dollar being the world's reserve currency. The latter is a change that is more possible at some point in the future (maybe distant future). The collapse of the dollar seems like a longshot, best I can tell. Losing reserve currency status would definitely change how the government spends and creates money, but not in some post-apocalyptic nightmarish way.

The whole damn thing: fiat currencies, inflation, MoPo, persistent deficits, etc. is a big experiment. Since 2009, the aggressive employment of quantitative easing and--in Europe--negative policy rates constitute major new variables in that experiment. We're all just hoping not to blow up the lab.

OK, time to start the day job for the week. Replies may be pithy and sparse until Sunday.

[Mustonen]

Appreciate the commentary, mattig. Eclectic group here, and fun to talk to people who actually know stuff who don’t have to worry overmuch about who they represent. I suppose that’s why I keep coming back.

That and to talk shit.

[Core Shot]

Shit's complex. Laypeople like to regurgitate talking points without much appreciation for all the other talking points. Some experts think they got it figured out without appreciating there are things they don't know. Other experts who realize how wrong they might be are just doing the best they can with what they got. I put most of the Federal Reserve in the third group.
=======

Fair point. I’m in the self educated laypeople group. Lol.

Curious why broader economic theory and hero’s aren’t in your purview.

What’s the look back at Greenspan? At the time I thought he was doing great.
But the froth post Covid makes him look like a miser. Covid might be a black swan. They actually did good for a while but m amazed it took so long to correct when labor and equity and real estate were frothy as fuck.

[Percy Rideout]

Oh really professor? Who appoints the head of the FED? Who appoints the board of governors? How did the FED come into existence? Yeah, zero politics involved.

Like I said, let's discuss it here, but to act like politics are not involved is pretty ridiculous.

Stop pushing away our resident expert, jabroni.

[LongShortLong]

I guess this goes here instead of the student loan thread

BBC says deficit spending is free money. Fire up the presses. Brrrrrrrrrrrrrrrr.
https://www.bbc.com/reel/video/p08jb...-deficit-myth-

Seems detached from reality and history. Though perhaps they are just over-simplifying a complex theory and minimizing the influence of inflation. MMT didn't exist the last time I had an econ class.

[Core Shot]

I guess this goes here instead of the student loan thread

BBC says deficit spending is free money. Fire up the presses. Brrrrrrrrrrrrrrrr.
https://www.bbc.com/reel/video/p08jb...-deficit-myth-

Seems detached from reality and history. Though perhaps they are just over-simplifying a complex theory and minimizing the influence of inflation. MMT didn't exist the last time I had an econ class.

Holy shit that was painful to watch.
With enough cute graphics and more sports ball and bread and circus everything will be fine.

I do agree with some of what had been stated in this thread about cushioning recession and modulating economic ups and downs.

But deficits do matter. Without any spending controls our drunken legislature will keep drinking. If you keep printing.

[mattig]

Shit's complex. Laypeople like to regurgitate talking points without much appreciation for all the other talking points. Some experts think they got it figured out without appreciating there are things they don't know. Other experts who realize how wrong they might be are just doing the best they can with what they got. I put most of the Federal Reserve in the third group.
=======

Fair point. I’m in the self educated laypeople group. Lol.

Curious why broader economic theory and hero’s aren’t in your purview.

What’s the look back at Greenspan? At the time I thought he was doing great.
But the froth post Covid makes him look like a miser. Covid might be a black swan. They actually did good for a while but m amazed it took so long to correct when labor and equity and real estate were frothy as fuck.

Because people who actually work in our around markets tend to focus and specialize. I'm no guru (there are no gurus). I just follow Fed-speak very closely since I started following Fed-speak in 2008. Even then, it was with an even more specific focus on the mortgage rate impact.

The 2008 thing is a big reason I can't comment on Greenspan the same way I can on Bernanke, Yellen, and Powell. I can read up on Greenspan and regurgitate what others have said (and have had to do that on limited occasions), but it would be presumptuous of me to pretend like I knew him as well as I know his successors.

The covid response will be studied for a long time. I know they thought they were doing the right thing at the time, but I imagine if a remotely similar episode occurs in the future, they'll be more careful about their effect on the housing market.

One thing about judging what was right vs wrong, good vs bad in past policy decisions is that we don't have the luxury of comparing the past to an alternate reality where the Fed did something different. Maybe we can criticize something they did, but maybe another thing would have been worse for a reason we wouldn't have predicted.

Last but not least, deficits... Deficits are a trip to think about. Too complicated for me. Seems really bad when you think about it from a personal finance standpoint, but slightly less bad from a sovereign standpoint. There too, one big experiment. We certainly spend more than we need to and less efficiently than we could. As to the endgame, we'll find out when we get there and I hope I never witness it.

Please forgive any typos and/or clunky syntax. On my phone.

[J. Barron DeJong]

Holy shit that was painful to watch.
With enough cute graphics and more sports ball and bread and circus everything will be fine.

I do agree with some of what had been stated in this thread about cushioning recession and modulating economic ups and downs.

But deficits do matter. Without any spending controls our drunken legislature will keep drinking. If you keep printing.

Yeah, MMT gets some basic facts right, but then jumps to some crazy conclusions.

Like, she’s right that a governments budget shouldn’t be thought of the same as a household budget, and the goal shouldn’t be to get the debt to zero.

And she’s right that a country that prints it’s own currency can’t ‘run out’ of money, they can always print more.

But the jump to ‘deficits don’t matter’ or ‘we don’t actually need to tax, just add it to the debt’ doesn’t follow (at least not when the economy isn’t in a recession, there’s ‘full employment’, and the central bank rates aren’t at 0%)

[byates1]

Does nic Carter have a sound handle on what's going on? Sounds like it.

[J. Barron DeJong]

Does nic Carter have a sound handle on what's going on? Sounds like it.

“Franc Thoughts on Bond Vigilantes

NOVEMBER 23, 2012 12:48 PM November 23, 2012 12:48 pm 118

Suzy Khimm writes about the contrast between what financial industry honchos say worries them and what financial markets seem to be saying. The honchos declare that failure to reach a Grand Bargain would

spark a damaging loss of confidence in the U.S. government’s fiscal prospects, a run on Treasury bonds, and a spike in interest rates.

But the bond markets are saying what me worry, with long-term rates at near-record lows.
What Khimm doesn’t note, however, is that the problem with bond vigilante scare tactics runs even deeper than that — because it’s actually quite hard to tell a story in which a loss of confidence in U.S. bonds hurts the real economy. Why wouldn’t it just drive down the dollar, and thereby have an expansionary effect?
Yes, I know, Greece — but Greece doesn’t have its own currency. What’s the model under which a country that does have its own currency and borrows in that currency can experience a slump due to an attack by bond vigilantes? Or failing that, where are the historical examples?
The closest I can come to anything resembling the danger supposedly lurking for America is the tale of France in the 1920s, which emerged from World War I burdened by large debt, and which did in fact face an attack by speculators as a result. Yet the French story does not, if you look at it closely, offer any support to the deficit scare talk we keep hearing.
So, France did indeed have a big debt problem. Here’s debt as a percentage of GDP, from the IMF debt database:
Photo
Credit
How did France achieve that big drop in debt after 1925? Basically by inflating it away.
And markets sort of saw that coming. This study (pdf) by the Bank of France show medium-term interest rates (black line) rising substantially for much of the 1920s, before dropping off sharply:
Photo
Credit
It’s important to note, however, that France wasn’t a depressed economy in the 1920s, and therefore didn’t look much like America today:
Photo
Credit
Meanwhile, the really big effect was a sharp depreciation of the franc, which made France highly competitive and strengthened the economy:
Photo
Credit
But what about the brief but nasty slump in 1927? That wasn’t caused by spiking interest rates; it was, instead, caused by fiscal austerity, by the measures taken to stabilize the franc.
So even when we look at the closest thing I can find to the scenario the deficit scolds want us to fear, it doesn’t play out at all as described.
It’s quite remarkable: our policy discourse remains largely dominated by fears of an event that the fear-mongers can’t explain in theory, and for which they can offer no historical examples in practice.

https://archive.nytimes.com/krugman....nd-vigilantes/

(Unfortunately the referenced article that’s linked from this one had a link to a pdf of his economic model that has succumbed to link rot.)

[J. Barron DeJong]

Great news! Found a link with more detail!

Paul Krugman:

Bond Vigilantes and the Power of Three: The popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece… is incoherent…. Think of a simplified world in which there are three kinds of assets: short-term securities, long-term government bonds, and foreign assets…. Individual investors can shuffle their portfolios…. [T]here are three prices… short-term interest rates, long-term interest rates, and the exchange rate. At any given time, however, one of these is fixed, leaving it up to the other two to do the adjusting. Which two? That depends on the monetary regime….
The United States has independent monetary policy and a floating exchange rate. The Fed uses its independence to set the short-term interest rate… long-term rates and the exchange rate do the adjusting…. If you think short-term rates are heading up [because the Fed thinks the depression is about to end]… long-term bonds become less attractive; better to park your money and wait for better yields…. In such a case long-term rates rise--but because this rise is driven by greater optimism about the future, it's hard to see how it can have a contractionary effect on the economy.
Incidentally, this seems to me to be a big problem with the story Brad DeLong tells about bond vigilantes in the very early 1990s. He argues that the wide gap between short-term and long-term rates reflected market expectations that deficits would eventually cause higher inflation…. But why would such expectations be a drag on the economy? Yes, nominal rates would be higher than otherwise; but real rates would, if anything, be lower. It's not at all easy to tell a coherent story in which the effect of future expected deficits on today's interest rates is contractionary….

[T]he big fear now is that we'll have a quite different type of vigilante attack, in which fear of default leads to a general flight from our nation's assets, sort of like this…. Well, if you're Greece, the exchange rate is fixed…. So what happens is that both short-term and long-term interest rates rise… funds flee the country [and] the money supply plunges…. But that can't happen in the United States, where the Fed retains control over the money supply and of short-term interest rates. So what would happen instead would be a plunge in the exchange rate. And this would actually have an expansionary effect on the U.S. economy.
The point is that the analogy with Greece is just completely wrong; the difference in our monetary positions means that even if the bond vigilantes did attack, they would probably help, not hurt, our economy in the short run.

Three points in response:
First, if Tim Geithner--or somebody else who believed that a strong dollar is always and everywhere in America's interest--were in charge of the Federal Reserve when the bond vigilantes appeared and began selling long-term bonds for foreign assets, he could turn the United States into Greece if he decided to react by pegging the value of the dollar. The Federal Reserve would then respond to the fall in the dollar and the rise in long-term interest rates by raising short-term interest rates to pull hot money back into the United States. That increase would pull the dollar back up. It would also push long-term interest rates up even further--which could then cause momentum traders to try to get ahead of the curve by selling even more long-term domestic bonds for foreign assets, which would push the dollar down and call for another round of increases in short-term interest rates to maintain the strong dollar that is in America's interest--and then we would be Greece.
Second, if the major New York banks have placed large leveraged bets on the continuation of the strong dollar policy by selling unhedged dollar puts, then the U.S. is Greece, and is vulnerable. Do the major New York banks understand their derivative positions? Does the Federal Reserve understand the derivative positions of major New York banks? Are they properly regulated and surveilled? The questions answer themselves.
Third, back in 1992-94 the level of short-term interest rates was not an increasing monotonic function of the rationally-expected future state of the economy. If it were, Paul would be correct: the bond-market vigilantes would attack only when the economy strengthened, and their attack could moderate and partly offset growing economic strength but not produce economic weakness.
But there were--and are--other motives that could trigger an attack by bond-market vigilantes. One would be a rationally-expected belief that the Federal Reserve is about to start raising short-term interest rates even though the economy is weak because it fears an outburst of inflation. Why should the Federal Reserve fear such an outburst? It would if it believed that inflation might accelerate because the national debt is high even though unemployment is still far above the NAIRU. Could the Federal Reserve believe such a silly and counterintuitive and irrational thing? Alan Greenspan is the type of person who is named to chair the Fed. The question answers itself. For Paul Krugman's argument to be water-tight it is not enough for it to be irrational for the Fed to inordinately fear inflation and raise short-term interest rates when the economy is depressed, it must be the case that the Fed will not inordinately fear inflation and will not raise interest rates when the economy is depressed.

https://delong.typepad.com/sdj/2012/...ytimescom.html

[up an down]

mattig... Thanks for your educational posts!!. You are a great asset for all of us less informed but still interested to learn financial noobs.