Two paper rule and MMT

Update on May 25:  “Intellectual horror show”

Brian Romanchuk has taken me up on my request for confirmation that MMT actually holds the position I had assumed it does on an important and currently-relevant policy issue.  The position is that policy makers (and those seeking to influence them) should utterly ignore the path of the debt/GDP ratio when setting spending and taxation.

Here is Brian in his own words. For context, I had asked him — or really any other MMT advocate — if they could confirm they agreed with an assertion I was inclined to ascribe to them. Brian was very precise in his reply, scratching out bits he disagreed with and adding detail/correction as required.

Screen Shot 2017-05-25 at 10.29.57 AMI am pretty sure Brian’s response includes reckless policy advice, for which a public intellectual should be held responsible.  (I too am responsible for what I say, but just do not rise to the level of public intellectual.)

How you get to that advice, how many agreeable academics you can cite in getting to it, the width of the mud moat you put around it, and how you might mischaracterize the views of those who disagree are — practically speaking — almost irrelevant. What matters is the advice, particularly if taken.

Brian had earlier told me that he was not convinced that the MMT perspective offered any additional “policy space”, but that it was nevertheless analytically insightful.  That take seemed more benign.  The passage above implies that the policy space is itself The Vasty Deep.

MMT comprises many ideas *, and I have tried to be clear that I do not disagree with all of them.  Partly this is because they occasionally seem sensible if not unique to MMT (e.g. loans create deposits) or not worth arguing about (e.g. whether this or that idea can be traced to Keynes). Besides, my knowledge is very limited and this ain’t about me.

Moreover, MMT has been on the side of the angels recently, arguing during the teens that austerity was mistimed and misguided, particularly among “sovereigns” issuing their own currencies. To my mind, that was very constructive. And they get extra points for being so cocky! If you are right, cocky is a feature.

But to argue that spending and taxation decisions should be set utterly without regard to the path of the debt/GDP ratio seems reckless. And I would like to shine a light on that — most practically relevant — aspect of what MMT is currently pushing.  They have been very loud on the point and the first step to correcting them is to get clear they own it. (In fairness to them, maybe they have always been clear. I did not want to assume.)

As for Noah’s original point about not needing to read anything you think is probably stupid, I see that among the scholars and voracious readers from MMT residing over at Brian’s blog five** clicked on what I had actually written.  I am not even sure if those were among the guys who so loudly complained about my piece.  Please keep us up on the importance respecting others’ views, guys. You are a light unto the world.

On the other hand, maybe MMT is just more discerning than I realized.  It would be hypocritical to claim they need to read what they are already certain and agreed is stupid. Caring about the path of the public debt is stupid, apparently.

* Thanks to one of the less-hyperventilating commenters to Brian’s site for mentioning this paper by three prominent MMT advocates.  It seemed like a fine paper, but just didn’t happen to address the main policy issue, as I see it, at least directly.  My one quibble is that the authors complain, inevitably, about being misunderstood.  That goes to why I prefer the stark question over the vast literature or “sacred texts”, as I have called them. A direct answer can avoid misunderstanding.

Original post:

From Krugthulu, screenshot:

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That passage really reminds me of MMT, as did Noah’s original post.  I am not interested in the vast literature there and Noah has crystalized for me why I don’t need to be.  *

I read Warren Mosler’s Innocent Frauds, and pointed out some nonsense there, to which I got, that is not part of the formal vast literature, it is just his popular work.  But public intellectuals are responsible for what they try to convince the public of. And why would the content of the popular work vary from the formal? Opinions vary, but it is a red flag if they do so within one person.

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But this debate can be simplified by getting straight to the central point, at least as I see it. MMT advocate do you agree with the following statement, which is an attempt to summarize what I think I have heard your peeps saying?

The public sector budget constraint is either non-existent or a trivial accounting identity with no practical implication.  Accordingly, tax and spending policy should be set without  any regard to the deficit and long-run trajectory of the debt/GDP ratio.  Fiscal policy may occasionally need to be tightened, but the signal for that would be only an acceleration of inflation to an undesirable pace. Worrying about the trajectory of the debt itself is merely a reflection of a misunderstanding of how the payments system works, and is pointless.

Full disclosure: the question is meant to be a trap. But it is simple and pretty close to a yes / no.  Maybe I could complicate it a bit by asking, if not, then how not? And precisely, without deflection.  If not two papers, then one answer.

* Noah did not address MMT in his post, but reading it the school popped into my head and stuck.  Amusingly, the very first note in his comments went to MMT and drew Noah out on it. Agree. 

Remedial remittance arithmetic

As a follow-up to my rant earlier today, I thought I would write down what determines Fed profitability and thus remittances to the Treasury.  Maybe, I could try the tougher task of being correct, rather than just critical.  I have been whining a lot lately, you twelve may have noticed.

Bloomberg spreading nonsense still ticks me off, but it ain’t about Bloomberg, in fairness. I have developed an allergy to journalists getting simple stuff wrong in the past year. But it matters more in politics, than in finance.  So I should be clear that I pick on Bloomberg only because they cover stuff I would claim to understand and where normative issues are most easily bracketed.

Here I am just going to ignore two things that deliver a bit of slippage between Fed profitability and remittances. First, remittances need not be timed to the achievement of profits, which seems neither feature nor flaw, to me. Second, some might say that not all profits earned at the Fed are returned to Treasury, because the Fed pays “dividends” to private banks for their capital. I view that as a fixed cost.  In any case, it is small beer by the standards of the trend in Fed profits and the variation around it. So I ignore it, along with timing issues.

When the Fed has a normal balance sheet comprising only bills on the asset side and no interest-bearing reserves on the liability side, the source of Fed profitability is simply the gap between market interest rates and the zero cost of finance the Fed pays on currency (and much less importantly) reserves. Traditionally, this is called seniorage on “the” monetary base. But I am going to call it pure seniorage, to distinguish it from another source of profitability that has arisen recently, when the Fed has had a balance sheet that has been abnormal, at least by historical standards.  Importantly, the interest elasticity of demand for base money is low enough, i.e. close enough to zero, that pure seniorage correlates positively with rates, at least with rates in their plausible range and at horizons long enough to be relevant for budget analysis. People get that backwards.

We may describe the Fed’s balance sheet as “abnormal”, at least by convention, when the size of the asset side exceeds that required to meet currency and non-interest-bearing reserves demanded at the target fed funds rate.  Recently, the abnormal balance sheet has involved a large stock of interest bearing reserves (and other interest bearing liabilities, which we will set aside for simplicity) on the liability side and longer-maturity government-like debt on the asset side.  We call that QE.

In this environment, there is – or more strictly, may be — a second source of profitability, that arising from positive carry.  Lets’ call that trading profitability, because it involves a speculation on the path of short-term interest rates, which – in fairness – the Fed may be uniquely qualified to engage in.  (Hence the rates signal aspect of QE.)  And let’s be careful to distinguish it from what I am calling pure seniorage.

I think people, such as for example Stephen Stanley, sometimes overlook that the source of trading profitability is not the low-level of the fed funds rate or thus the low rate paid on excess reserves. And nor is it the positive slope of the yield curve.  To see this easily, just imagine a counterfactual (or recent experience) in which the slope of the curve less than fully compensates for a possible rise of short-term interest rates.  In such an environment, carry trades held to maturity of the asset leg would generate losses.

I guess how you analyze trading profitability is a matter of (modeling) taste.  But these three sources sum, by construction, to all of it. We can think of trading profitability as reflecting three things:

  • Luck
  • The Fed’s forecasting edge
  • The term premium in the yield curve

The first factor cannot be relied upon going forward. At some level this is painfully obvious. But I think some of those claiming that a lower balance sheet just necessarily means less profits / remittances may be forgetting this and just extrapolating the history of the past decade, during which carry trades – of the sort QE represents or, hell, is – have been very profitable.

The second factor is perhaps a bit more reliable, at least at short horizons, on the grounds that the Fed has a better insight into the path of the funds rate over the very near term than the market does.  But, the Fed demonstrably does not have a better view than the market at even medium term horizons, as the history of the past decade has shown clearly.

And whatever the Fed’s medium term advantage might have been, the escape from zero bound will predictably make it less compelling. In the interest of time and not losing the plot, I will leave figuring out why that is the case as an exercise for the reader.

So that leaves us with the third item.  The term premium is a very important determinant of the prospective profitability of carry traders, particularly among those – like myself – who still have some modicum of respect for the idea that the fixed income market might often be roughly efficient.

One problem is that term premium is not directly observable and there are good grounds for skepticism about attempts to estimate it.  Right now, the term premium does not seem to be very large, I would point out with appropriate humility.

But the point is that the Fed cannot control the term premium, even with QE, I would say. And for those who say that the Fed can control the term premium with QE, then even spotting that premise does not get you very far in this context. After all, asset rundown would raise the term premium, and thus lift the prospective profitability of the remaining carry trade, arising out of the remaining QE assets. For example, if cutting QE assets in half raises the term premium from 0 to 50 bps, that is a win for total remittances over time.

I have said it before and I will say it again. QE will have been conceived, implemented, scaled up, tapered and run off before the consensus even has the remotest clue of what QE is or how it affects things.  Getting its effect on Fed remittances wrong in just par for the course.  For me, that is a recurring theme.

Yeah, that’s the main point. Whatever your take, even if you insist on holding to the wrong one, all this remittance stuff is peanuts relative to the broader trends in the budget and egregious lying about them.  It is interesting much more as an example of how QE is intellectual kryptonite, turning even sensible people’s brains to mush.

Please, Bloomberg, just stop and do some reading

Probably temporary, tweet support

To the extent that Fed remittances reflect balance sheet policy, they are profits on an interest rate bet that the Treasury can replicate if it wants to.  Mnuchin has expressed a strong desire to do the opposite of that trade, by lengthening maturity, which you should consider in this context to be reverse-QE.

If balance sheet run-off and explicit maturity lengthening are too much for him, Mnuchin can adjust. It is up to him, especially if the Fed moves slowly via a passive run-down.  Hell, Mnuchin can go full-retard QE by just issuing 100% bills. Fun fact: Former Treasury Secretary Summers has actually recommended that.

Away from the interest rate bet driver of remittances, higher short-term interest rates would lift, rather than reduce, pure seniorage.  Rates going up slightly if the economy seems to need that is neither up to Yellen nor a drain on the budget.

Then there’s the big picture: there is a $2 trillion error in the budget, which is so egregious I did not get it, even when it was explained to me and even though I am a card carrying Trump hater. My eyes just refused to see that level of dumb. It is far more important than remittances, even on your wrong view of how they work.

“Obama regime”? Really? Stephen Stanley? Really?

Citi humblebrag about their silly surprise indicator

This post is not that relevant. It is largely a reflection of a bad habit of leaning into unimportant things pretending to be important. So you have been warned. Maybe equities will go down for another reason. No view.

Before I get around to making fun of Citi’s humblebrag about their economic surprise index, I just want to point out that the recent collapse of the Citi index has not been confirmed by a similar index produced by Goldman.  Indeed, the Goldman US “MAP” is in the top quartile of its range, although there is something going on in China and India, apparently.

I prefer the Goldman index to the Citi because it includes only real activity indicators and is not affected by inflation data, negative surprises around which are probably not even bearish equities, because they slow the Fed.

Separately, and secondarily, the GS index does not assign 90 different weights to each release and is available both as a 3-month rolling window and as the underlying daily results.  This latter advantage allows us to tell if recent moves in the 3-month aggregation reflect recent developments or just base effects. However, it is not relevant to the contrast I draw between the Citi and GS surpise indices, both of which are conventionally presented as a 3-month window.

I don’t want to show the GS series because it is provided to me by Goldman as a courtesy, presumably because I used to “work” “on” Wall Street in the distant past and because I happen to be a fan of their chief economist. Goldman may be the vampire squid, but their macro econ team is best of class.  It is high quality squid. Anyhow, if you are curious about this call your friendly Goldman sales rep – or just take my word for it.

Ok, now to making fun of Citi for their humblebrag.  I see in an FT Alphavile article, kindly brought to my attention by Joe Little (thanks, Joe) that Citi is leaning into the idea that weakness in their indicator is bearish.

The Citi Economic Surprise Index is a perfect example of unique proprietary design which has almost no bearing on those who discuss it. The models were built by quantitative analysts in Citi’s FX unit and were structured for currency trading. Thus, if the CESI wiggles one way or another, investors get signals to buy the yen or the euro or the loonie, etc. It was not meant to be used for stock prices or for Treasuries, but coincident rather than causal relationships are relied on even if they have no consistency whatsoever. For example, Figures 1 and 2 show the relationship between the S&P 500 and the 10-year yield versus the CESI over the past five years. If one looks at just nine months, the gap looks worrisome for stocks (see Figure 3) but not necessarily for 10-year Treasuries (shown in Figure 4). Unfortunately, we find that the narrative becomes the dominant feature, not the historical trading evidence.

That is great, if extremely belated, but the problem is that they leave a clear impression that the Citi index is designed to provide input into timing in currencies.  I have never seen evidence that that works, although this may be just a reflection of my own ignorance – and currently being out of it.

But I can tell you this.  The weights that Citi assigns to the data surprises are a function of fitting the magnitude of the surprise to roughly instantaneous reactions of dollar currency pairs.  The index, then, is inherently backward looking. If the fit were perfect, it would just look like roughly 3-month changes of the trade-weighted dollar index, which would be helpful – even in currencies – how?

For me, there is no compelling evidence that the Citi index is “wrong”, athough I prefer the GS series, which seems cleaner – as a measure of the backward looking question of how the activity data have been surprising.  But the way these series are abused and mischaracterized is a sight to behold.

As I mentioned in an earlier post, with pseudo-academic flare flair, * they appeal to our System I, not system II. That is a flaw, not a feature. If they are going to be pseudo-quant, I sure as hell give myself the freedom to be pseudo-academic in describing them.

* If you put pseudo-academic in front of a noun, prolly best to the spell the noun right.

Doesn’t seem to work on the way down, either

My friend, Dennis at ISI, directed some traffic to a piece I wrote five months ago leaning into the idea of using the Citi Economic Surprise index as a market timing indicator.  Why would the market react predictably to old news? It doesn’t seem to.

At the time I wrote the post, the surprise index had just moved higher, which got people excited the market would rally.  Ok, it ended up doing so, but seemingly not because of that indicator.  At short horizons, on my simple calculations, rises of the CESI above zero from meaningfully below have been a contrary indicator, although extremely unreliably, even as that.

In this note, I would like to address the current concern, that the decline of the CESI is a bad omen.  I don’t currently have a market view; been that way for a while. [1] But the CESI does not seem to work on the way down either.

I will get to the tedious task of “testing” the CESI in a second. But before turning to that, I would like to speculate on what might actually draw attention to this silly CESI thingy.  Take a look at this chart, which shows the Citi surprise index to yesterday.  Look at that steep plunge.  That looks pretty unnerving, eh?

Screen Shot 2017-05-19 at 8.30.11 AM

The line was high and now the line is low. But let’s back that up.  More than half of that decline, i.e. to the thick horizon line, was inevitable at some point, simply on the basis that the data would eventually be inline, the definition of unremarkable.

The remaining bit reflects that the data have missed recently. Or at least that they have missed according to the CESI hodge-podge, which includes inflation as well as activity indicators, and has the bizarre feature of assigning 90 different weights over time to one economic release.

But never mind that.  This index is built not to work on the System II part of your brain, but on the System I, the plains ape bit.  You see that steep decline and you think, oh my god, things are really going to hell here.  But just ask yourself, because you probably remember, was there some huge disappointment – or set of disappointments – in the data recently, which went miraculously unnoted by others?

The obvious retort is that by “quantifying” these issues we can identify an accumulation of evidence that people have actually missed. That is the marketing pitch. But there is no compelling reason to believe it is true or ever any evidence offered in support of it.

Ok, now to the dreary bit of testing it. I did one whole test, which is one more than you will see from advocates of the CESI. I looked at whether declines of the CESI from above +50 to below zero predict changes of the S&P500 index over 3 or 6 months. No, they do not – or have not.

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I looked at declines from above 50 because I wanted to eliminate whip saws, which typically do not attract the attention even of the street. I wanted to look at declines from “meaningfully” above zero to below. But you could easily imagine another threshold or even an infinity of other ways to test this.  I chose one.  Given how strong the priors are against the idea that such a silly thing would predict, choosing more than one test might be data mining. But by all means, fill your boots.[2]

[1] Or more precisely equities seem to me to be indistinguishable from fairly priced to deliver subpar returns. They looked that way 15% ago too. My ability to distinguish is pretty limited.

[2] You might also want to check my results.  I did not actually right a bunch of if statements to find when my condition was satisfied.  Rather, I just eyeballed the chart and physically looked at the data. Reinhart-Rogoff risk would be high here.

Business credit looks a bit less weak, with no implication

A month or two ago, some macro types were in a bit of a lather about weak business credit growth. They warned it meant the wheels might be coming off the economy.

I found the business credit slowdown striking, but not for the conventional / bearish reason. As Jason Benderly of Applied Global Macro Research has explained convincingly, at this stage of the cycle, with credit-financed spending (basically on all forms of durables) well off the lows, credit should again tend to outpace nominal GDP growth.  And yet recently it has not been doing so, at least by much.

The explanation of that, besides inevitable minor slippage in any macro perspective, would seem to be largely transitory weakness in inventories, the required stock adjustment in the energy patch, and perhaps some other noisy weakness in capex.  It is not something I would be inclined to extrapolate, because I buy what I assume is still Benderly’s view.[1]  But more to the point, there was no reason to believe that the credit side should lead.

In my view, the best way to monitor the link from spending to credit involves use of Flow of Funds data or what they now call the quarterly Financial Accounts.  Those data are comprehensive and do a good job of isolating who has the liabilities, rather than the assets, whose growth rate can be distorted by definitional changes and securitizations.  Benderly makes expert use of them. But they are reported with a long lag, so can’t help much with interpreting the little wiggles, such as we have seen recently.

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So take a look at this second- or third-best approach.   Regrettably, no correlations or real analysis, but just a picture, at a distance and up close. I show a rough proxy for short-term business credit, defined as C&I loans plus domestic nonfinancial CP outstanding. The data are monthly to April and then (conservative) “estimates” for May, comprising the first week for C&I loans and the second week for CP.

I make nothing of the recent hook higher, which is tentative, lagging and what we should have expected based on a thesis that really tells us little about the outlook for the economy per se.  In fact, the underlying tendency for credit not to stay weak is probably marginally negative the economy because it reflects that demand growth is now more dependent on credit growth. Minor point, but just not currently a positive.

[1] I have not actually seen an update of the AGMR work on this, but durables demand has not collapsed, so I assume the automatic releveraging thesis is still intact.

Low unemployment and “the curve”

A continued steep decline of the headline unemployment rate and corroborating evidence from alternative measures of labor market slack have convinced some analysts that the cautious Fed may be falling “behind the curve.”  You can see here and here for two very similar examples from Bloomberg. (In fairness to Tim Duy, he wrote his take first.)  But I am sure you are familiar with the idea.

There is a reasonable debate, I think, about what is meant by “full employment” and how that links to the inflation outlook and what the Fed should do. For whatever it is worth, I don’t hate the idea of full employment, and think it may be a relevant concept even if the Phillips Curve is flat or non-existent. That is a separate discussion.

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But for the sake of argument, let’s take it as a given that the Fed will want to ration demand growth down to (supply-side) potential once the economy has hit full employment.  For good or ill, the Fed leadership leaves every impression that they intend to do that.  Either way, at some point, the unemployment is going to (have to) stop falling. That is definitionally true, although we can quibble about where some point is.

To me, that simple point comprises the germ of truth in the idea that the lower unemployment will force the Fed speed up its tightening. But it is only a germ.  The idea that the appropriate level of the funds rate – and thus the speed of tightening – correlates reliably with the unemployment rate is not supported by the evidence or even logic.

Who knows? Maybe demand growth will cool on its own, as pent-up demands get exhausted or wealth effects eventually dissipate. I would not bet on this result in fixed income, because the forward curve is pretty flat  and does not spot you much.   But, again, that is a separate discussion.

The idea that the appropriate (real) funds rate correlates reliably negatively with the unemployment rate is a vestige of the Taylor Rule.  I explained here my take on why the Taylor Rule and similar reductionist approaches to monetary policy cannot work in the neighborhood of the zero bound.   In my view, the gist is:

Crucially, the Taylor Rule does not identify the level of the funds rate appropriate to the current position of the business cycle. It would be a bizarre coincidence, as Dudley emphasizes, if the funds rate exactly appropriate to today could be described as a linear combination of the unemployment rate (or output gap) and the inflation rate.  

… No, the key feature of the Taylor Rule is that it incorporates stabilizing feedback signals that allow it to perform well in most economic environments (at least as simulated by econometric studies) despite its failure to identify the appropriate level of the fund rate in real time (which would be impossible).

For example, if the Taylor Rule were to prescribe a funds rate of 4%, and if that turned out to be too restrictive, then the following sequence of largely-benign events would arise.   The economy would slow in an undesired way and either the unemployment rate would rise or the inflation rate would fall. This would be recognized by the Taylor Rule as a signal that easier policy was required.

… However, none of that (is operational) in the current environment, which is why following the Taylor Rule or allied approaches is ruled out.  Right now, the Fed needs to make a judgment call on how its rates policy path will affect the economic outlook and cannot rely on the central feature of the Taylor Rule, which is that mistakes are easily corrected. This is admittedly a sticky situation to be in. I do not envy them.

Unsurprisingly, then, the Fed has not been following a zero bound for the past decade, and not just because it has been technically difficult to deliver a negative funds rate.  The timing and pace of “liftoff” should also vary from Taylor Rule prescriptions when the zero bound is proximate, for reasons Ben Bernanke alludes to in his most recent blog post, although a bit elliptically.

Screen Shot 2017-05-11 at 4.41.16 PMTake a look at the chart above.  The top panel is from an earlier Bernanke post in which he argues that the Fed at least implicitly followed a “balanced” Taylor Rule during the 2000s. Bernanke’s point is not that the Taylor Rule is a godsend but that – demonstrably – following a version of it would not have prevented the bubble.  In that chart, Bernanke uses data that was available to the Fed in real time, as is appropriate to his purpose.

The lower panel of the chart just updates the same Taylor Rule to today, although using data available only now, and at a monthly rather than quarterly frequency. I use Bernanke’s strange green and try roughly to overlay the date ranges, which is why the chart at bottom is wider. That construction allows you to see the effects of the revisions, although that is incidental, as my use of current-vintage data is mostly about data constraints (on me) and laziness.

Anyhow, the Fed has not been following even a dovish parameterization of the Taylor Rule, even as the zero bound has not been strictly binding.   The issue with the zero bound is that it is proximate, not currently binding, as I explained in my original post.

Janet Yellen has argued, incredibly to me, that the Fed is following the logic of policy rules but is aware that the coefficient on the output gap may vary, along with the equilibrium real interest rate or even extent of “inertia” in the actual policy rate. I think I know why she chose to do this. She wants to ward off the threat Congress might impose  that the Fed make at least some reference to the Taylor Rule in setting policy.

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Her point to Congress is that the Fed of already are following Taylor or the like. But that is marketing BS. If you can tweak the variables and even add new terms, then you are following discretion and not Taylor.  Which is good, in the current circumstance. But that goodness is separate from the deception involved here.

When the zero bound is proximate, the Fed simply cannot follow the logic of the Taylor Rule. And I would say that as an extension of that there is no reliable negative correlation between the unemployment rate and the (real) fed funds rate that the Fed will or should deliver.  I mention this not to be dovish.  The forward curve spots you so little.  Rather, this is just leaning into a quite conventional take that seems wrong.


I have been moaning and whining and bitching and passing value judgments at will quite a bit recently. It is not going to change, except maybe to get worse.

The stuff going on right now is super scary, and despite my earlier Alec-Baldwin-type claims, I can’t just run back to Canada because: a) the weather blows, b) the business culture blows, c) my wife has vetoed it, and d) the idea that Canada is far enough away to make a difference is max naïve.  Re b), I am unemployed, but still.

So I am going to be normative a lot. I am going to say things like, pissing away democracy and limited government would be BAD. Not just bearish for the stock market, which it might not be anyway, but BAD in the non-analyzable Humean sense.  Moreover, the Republicans who seem so ok with this are also BAD for America. So shoot me.

However, this post is not really that normative, but more a sincere expression of surprise.

I had a friendly exchange with a former colleague today and he gently ribbed me for being partisan.  Having been away from Wall Street for sixteen months now, I was taken aback a bit, because I had forgotten how strong the centrist pull is across much of Wall Street.

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The main political impulse there, as you will know, is libertarianism. “Let me guess, you are a fiscal conservative, but a social liberal.”  It is as if some sort of chip were inserted to control the brain and then a tape inserted to express how.

But even stronger than the pull of libertarianism is that of centrism.  Far worse than being wrong, incidences of which are usually impossible to identify objectively anyway, is the sin of being partisan.

My opinions on that are known to anybody reading this blog, so for once, I will not reiterate.  I know you don’t care. And while I generally don’t care if you care, in this case I will conform.

But still, I find that centrist impulse really striking. And to repeat, I was taken aback somewhat today. Guy could have called me a douche or stupid or whatever. But he went with partisan.

Being seen to be avoiding partisanship is a really high priority across much of Wall Street.  As I recall, sometimes it even got in the way of talking about the practical effects of policy.

Incidentally, I saw a bit of history of the guy in the photo above while googling to get the picture. He was actually an early adopter of Nazism but ended up falling in love with a Jewish woman.  Once the issue became personal for him, apparently, he changed his mind. By then, things had moved on.

Right there, you got one of yer cases for abstract reasoning. Try to imagine a situation that might be slightly different from the one staring you in the face now.


I kicked myself off Twitter again today, cuz I was being too windy.

But there is an, and another thing, so I will just stink up my own blog. If you came here, then that is your fault. This is pull, not push, technology — unless you signed up on email, which again is your fault.

It seems to me that Bitcoin and the like embody three things:

  1. Blockchain technology, which may have uses independent of how the transactions are denominated.
  2. An object of speculation.
  3. Moneyness.

I am not into essences and categorizations. To me, they are mostly a waste of time. Shit is what shit does. So spare me your amateur philosophical speculations into what this or that really is.  Yawn.  Such things are just tricks to make stupid people think you are a smart person.

But having said that, I don’t think Bitcoin has a shot at being money, at some risk of referring to an essence. Maybe if they pegged to the dollar it would be money. Maybe the blockchain will evolve to achieve just that.  Or maybe a blockchain forward market in BIT/USD would achieve roughly the same thing. Who knows?

As it stands now, the price of actual US stuff denominated in Bitcoin has been collapsing. That makes Bitcoin very cool as 2) but useless as 3).

Effective full employment has probably drawn a bit closer

Friday’s jobs report showed a continued decline of the “employment gap”, as measured by my simulation of Blanchflower and Levin.  The official unemployment rate is now actually below the CBO’s estimate of the natural rate, while the spread between the participation rate and its presumed natural level continues to edge lower.  The number of people working part time for economic reasons has also been declining and is now near what B&L have somewhat-arbitrarily defined as normal.

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If the gap continues to close at the pace of the past four months, it will be eliminated by early summer. That is obviously false precision as these things are measured very loosely and the whole idea of an employment gap is itself controversial.

San Francisco  Fed President John Williams may be jumping the gun when he says flatly that the economy is already “operating above potential.” But on this metric at least, things have moved a bit more quickly than my simulations from a couple months ago implied.

The labor market tightening implied by B&L is not yet corroborated by a meaningful quickening of wage growth, which seems – understandably – to be providing some comfort in the bond market.  If wages were to begin to accelerate, then people would be much more concerned that the labor market was overheating. So I guess on Bayesian grounds, the absence of that development lowers the odds that we have already pushed to or through effective full employment.

On the other hand, the lead from achieving full employment to a quickening of wages could be quite brief.  This is not something on which I have a strong view.  The state of the art here is not that highly developed, so far as I can tell.

A couple months ago I mentioned that I would write a post going over the implications of the apparent decline of labor market slack.  I have failed so far to follow up, because other things have interested me more and because I am a bit of a multi-handed economist on this issue.  But here are a few interpretations offered as assertion and in point form:

Measuring the natural levels of unemployment and participation is not hard science or even best practice for social science. To the extent we use this concept to think about the inflation outlook, there is data mining involved, because estimates of the employment gap are themselves a function of historical inflation. It is good to be skeptical about this stuff, IMV.

One does what one can. Leaving aside the link between inflation and slack, the economy’s medium-term growth potential is more limited when labor resources are more scarce.  So any acceleration of demand growth from here would probably be self-limiting, in part (only) by provoking the Fed.

Somewhat related, the 2- to 3-year recession risk has risen, as the Fed’s priorities have shifted, and is probably now slightly above average. However, the approach of full employment has not historically been a pressing threat to the expansion, so far as I have studied (which is not fully).  And the economy does not now currently seem to suffer from major inflationary or real-side imbalances.  So, fwiw, I don’t see much reason to be alarmed by recent developments.

This would be an odd time to endorse fiscal stimulus on macro grounds, because there is no obvious deficiency of demand, as evidenced by the fact that the Fed is tightening. Were demand growth to be forced above its current trajectory, we would just get more tightening, rightly or wrongly. I would say rightly, but practically speaking it does not matter, unless you want to change the Fed’s mandate or leadership.

The tightening labor market slightly raises the urgency to tame demand growth to the economy’s apparently-reduced supply side potential growth rate, as mentioned. However, it does not follow from this that the Fed should follow the logic of the Taylor Rule or other reduced-form policy rules. That is a separate discussion.

I am sure MMT followers reading this post will be appalled and insist that this take is based on a flawed model.  Fine. We all have our models, whether they be mathematically formalized or more qualitative, as in my case.  I am not a fan of the MMT world view, as I have probably been clear enough about.  This post is not aimed at MMT. They are no more persuadable than I am on these issues.

In any case, there seems little need to pound the table here. As I read it, the current situation does not present an outlier.  We are arguably near full employment and the Fed is reacting appropriately cautiously to that.