Paraphrasing article: US monetary policy has failed consistently because it is predicated on a rise in inflation caused by decreases in the unemployment rate, but this hasn't occurred - probably because the unemployment rate (or how its measured) doesn't correctly capture the change in spending power in the labour market.
/Paraphrasing
It's kinda the same in my country - for the statistical purposes of the official Statistics Department unemployment rate, you are no longer unemployed if you a) work 1 hour a week or b) have actively stopped seeking employment.
I guess it's designed that way according to international best practice or something, but it means we have rather odd situations where the unemployment rate decreases, but the amount of people seeking income support increases.
US monetary policy has not "failed" pretty much since Nixon. Janet Yellen's tenure is really the only blemish, but only because she didn't raise rates when we could have.
I think you're confusing the "Dual Mandate" of the Fed to minimize inflation and maximize employment with some misplaced belief in economics. Every American economist of the last century has realized these are often competing ideals. It's their raison d'etre, without it the Fed doesn't exist.
Yea, the point is that all the evidence we have shows the connection between inflation and employment has weakened since the 70s and is pretty tenuous right now. It theoretically exists, but its unclear what is going on in a world of both increasing automation and decreasing or stagnant productivity per worker.
And yet somehow they have in fact kept inflation at less than 2% while bringing unemployment to near zero (well, pre-pandemic, as the rest of the article, this year's numbers are screwy). That's weird, right? What's up with that?
That has more to do with globalization and how we measure inflation and unemployment than monetary policy. If you look at markets that aren't influenced as highly by global trade (like housing, healthcare, and education) they are greatly inflated.
There isn't one unemployment rate in the U.S., there are actually 6. What the news usually calls the unemployment rate is the U3 rate. [0] You're suggesting the U6 is a better measure, which makes sense to me, but I'm not an economist.
What I've read recently though, is that workers' expectations of inflation also play a big role in inflation. [1] The idea is that low unemployment means workers are confident and have leverage to demand pay raises that meet their inflation expectations. We may have broken inflation expectations. The Brazilians did an amazing psychological hack with the creation of the Real to fix their inflation expectations to get their inflation in check. (Though, they had the opposite problem, workers expecting very high inflation.)
Cheers, I don't know much at all about economics, especially not US economics, was just trying to paraphrase the article for the person I replied to, but cheers for the link, always good to learn something new :)
Here in the US we have different unemployment numbers to track different kinds of unemployment.
The most common number is the U3, which measures all the people who want to get back to work. That number is a good way to track all the labor that could easily be pulled into the market if the right jobs were available. Shorter term shocks might move this number around, as people get laid off and find new employment.
There is also the U6 rate, which includes a lot of people that have fallen out of the market, and those who have taken up part time work because they couldn’t find full time work.
You have to look at both to get a good picture of the employment situation. There are a lot of cases where the U3 might drop, a good thing in normal times, because the economy is so bad that a lot of workers have either given up on finding work, or have taken up part time work since they can’t find a full time job. Both rates are useful, but focusing on only one will certainly lead you astray.
Essentially, the Fed seems to be putting more effort into appearing like they are doing something to help the economy in the hopes it assuaged people's fears and gets them to transact than actually doing anything to help.
Powell has essentially responded to things by equivocating and shifting some language around so that facilitating increased employment is now a higher priority to the feds than a stabilized interest rate.
Much of the economy, banking, and finance is fundamentally about trust. Without that, people don't spend, or take risks. Money doesn't flow, and businesses can't thrive. Lack of a thriving business environment chokes the ability of the entire economic/financial system.
Keynesian economic theory calls for governments to start spending in a big way. This "rallies" people and generally inspires confidence which drives demand. The main point is to get people paid for doing something not even necessarily useful,and get them to stop worrying about whether the Sun will rise tomorrow.
The article author finds hope in the Fed's equivocation that they at least appear to be coming to terms with the fact this is the right thing to do.
What I'm not clear on is how in the hell the Fed can justify "Haha, money printer goes brrr..." Without a matching Act of Congress, but it's hard to take anything seriously when you start getting into the more arcane aspects of how monetary policy works, because monetary policy is nigh indistinguishable nowadays from "Quick! Look busy so that everyone thinks everything will be okay!"
That's the gist of the article as I get it at least.
My understanding is the balance sheet is unimportant as long as the economy continues to grow; debt is outpaced by the growth. To that end, what's most important is that people are comfortable, capable, and willing to participate in keeping the economy growing. Something not happening because there's a physical risk to recklessly engaging in massive unconstrained economic activity, and no one knows how long until people stop ranking fear of Coronavirus a more pressing concern than the crashing of the economic machine.
Personally, I think this is a reckoning a long time coming, and something the Fed can't use it's traditional tools to fix since the last 40 or so years fundamentally shifted the economic capabilities away from decentralized industry due to a regulatory environment that highly favored consolidation and centralization. That isn't something you necessarily bounce back from quickly, which is actually an opportunity in it's own way. The bigger, more omnipresent and impossible seeming a problem the government can get everyone on board (and paid) to solve the better. If only enough unity materialized to do it.
You make very good points. Additionally, I believe banks, even though they get 'free money' from the Fed, have seriously constricted lending. Most people, even if they started feeling positive again, just can't get (another) loan. And America is so debt-based, if you can't get a loan to pay off a previous loan, you're fucked.
While the Federal Reserve talks a lot about how its rate policies have improved the economy, actual figures from inflation and unemployment don't back up any of the improvements they're claiming, and haven't for years. Now, the Fed is moving the goalposts -- saying low unemployment can no longer be a reason for a rate increase, only inflation, since inflation has also stayed lower than the target metric. As inflation generally rises when people have more money to spend, this implies that even though the unemployment figures are way down, and the stock market is way up, people and businesses aren't actually spending any more money. Why not? Simplest answer is "they don't have money to spend".
“The price of Big Macs should be rising at a steady rate. It is bad if the price of Big Macs falls. Let’s put in some policies to make sure the price of Big Macs rises steadily!
Oh wait, they aren’t rising steadily, they’re rising much slower! Our policies aren’t working! Hmm maybe it’s ok to have periods where Big Macs get cheaper, as long as there is an equal period afterwards where they make up that loss and get more expensive. We can call this symmetry!”
The article is basically calling this idea of symmetry a big joke.
The beginning of the text feels really odd, almost GPT-3-like at some points. At least, that's the way it seems when you do not know the jargon. It just rambles on and on. Thankfully it gets more coherent later on, but I am not sure what the author intended to say in this piece.
That "we're going to allow even bigger than 2% inflation" is the bullshit of bullshits because they've never even been able to hit that 2. Means all the printing's been useless and things are going to shit. (or have already)
How do I go from not understanding economics/finance, to pretending to understand it? I feel like that finance uniquely is a field that every time I have tried to penetrate I get a mix of unintelligible jargon and mathematics as a facade of rigor.
I am comfortable reading both math and programming textbooks, but every finance book I've picked up so far seems to quickly not make any sense to me at all.
Having tried this in undergrad, lets say you’ve gotten through an Econ 101 text all the way through harder Finance math like understanding Black Scholes- you’re about half way. Now you have to learn about huge arbitrary or historical institutional complexity around how finance really works. The only way I can see how anyone keeps it in their head is they are paid to do it every day. Also there is not necessarily one truth to grasp, its more like studying climate change.
I have an MBA in Finance, and after getting to the bottom of the math, it's all just bare faced gambling, dressed up with $10 words. I really wish I could say it was not, but this blog analysis of the Fed and the attitude it voices is spot on. The Economists of the world are fucking idiots.
And that was one of the points, apparently physicists switching to economists say math is simplistic and superflous.
Math is math, but it can be used as a window dressing for you opinions.
On the other hand if your field pretends to be science. Also creates and awards itself a Nobel prize and pretends its an actual thing. Well maybe its a sign of a con.
Agreed. When that hunch crept in I scrolled to the bio, read this, then immediately hit the back button:
> [The author, in third person] is not an economist, which is probably why he's been able to develop a working model of the global monetary system. His research is unique and informative in ways an economist would never consider.
>I have an MBA in Finance, and after getting to the bottom of the math
There is a distinction between an MBA or finance degree and the field of economics. You might not have gotten quite to the bottom of it.
Of course financial activity has a lot of resemblance to gambling. Mathematicians have been analyzing gambling for a long time, but does that make them the same as anyone playing slots in Vegas?
but seriously, from a quick skim, this article seems to be mostly macroeconomics, with a little finance sprinkled in. for a cursory understanding, no (additional) math is needed, just micro, macro, and basic finance. you could take online courses for those and use investopedia as a quick reference.
>As I’ve written here, there’s even more to write about this utter stupidity and I’ve put together a good deal of it already today for publication tomorrow.
Hopefully with more clarity, as this is opaque and suggestive as duck (sic)...
36 comments
[ 2.6 ms ] story [ 78.0 ms ] threadIt's kinda the same in my country - for the statistical purposes of the official Statistics Department unemployment rate, you are no longer unemployed if you a) work 1 hour a week or b) have actively stopped seeking employment.
I guess it's designed that way according to international best practice or something, but it means we have rather odd situations where the unemployment rate decreases, but the amount of people seeking income support increases.
I think you're confusing the "Dual Mandate" of the Fed to minimize inflation and maximize employment with some misplaced belief in economics. Every American economist of the last century has realized these are often competing ideals. It's their raison d'etre, without it the Fed doesn't exist.
What I've read recently though, is that workers' expectations of inflation also play a big role in inflation. [1] The idea is that low unemployment means workers are confident and have leverage to demand pay raises that meet their inflation expectations. We may have broken inflation expectations. The Brazilians did an amazing psychological hack with the creation of the Real to fix their inflation expectations to get their inflation in check. (Though, they had the opposite problem, workers expecting very high inflation.)
[0] https://www.investopedia.com/articles/investing/080415/true-...
[1] https://www.economist.com/schools-brief/2020/08/22/why-does-...
The most common number is the U3, which measures all the people who want to get back to work. That number is a good way to track all the labor that could easily be pulled into the market if the right jobs were available. Shorter term shocks might move this number around, as people get laid off and find new employment.
There is also the U6 rate, which includes a lot of people that have fallen out of the market, and those who have taken up part time work because they couldn’t find full time work.
You have to look at both to get a good picture of the employment situation. There are a lot of cases where the U3 might drop, a good thing in normal times, because the economy is so bad that a lot of workers have either given up on finding work, or have taken up part time work since they can’t find a full time job. Both rates are useful, but focusing on only one will certainly lead you astray.
Powell has essentially responded to things by equivocating and shifting some language around so that facilitating increased employment is now a higher priority to the feds than a stabilized interest rate.
Much of the economy, banking, and finance is fundamentally about trust. Without that, people don't spend, or take risks. Money doesn't flow, and businesses can't thrive. Lack of a thriving business environment chokes the ability of the entire economic/financial system.
Keynesian economic theory calls for governments to start spending in a big way. This "rallies" people and generally inspires confidence which drives demand. The main point is to get people paid for doing something not even necessarily useful,and get them to stop worrying about whether the Sun will rise tomorrow.
The article author finds hope in the Fed's equivocation that they at least appear to be coming to terms with the fact this is the right thing to do.
What I'm not clear on is how in the hell the Fed can justify "Haha, money printer goes brrr..." Without a matching Act of Congress, but it's hard to take anything seriously when you start getting into the more arcane aspects of how monetary policy works, because monetary policy is nigh indistinguishable nowadays from "Quick! Look busy so that everyone thinks everything will be okay!"
That's the gist of the article as I get it at least.
My understanding is the balance sheet is unimportant as long as the economy continues to grow; debt is outpaced by the growth. To that end, what's most important is that people are comfortable, capable, and willing to participate in keeping the economy growing. Something not happening because there's a physical risk to recklessly engaging in massive unconstrained economic activity, and no one knows how long until people stop ranking fear of Coronavirus a more pressing concern than the crashing of the economic machine.
Personally, I think this is a reckoning a long time coming, and something the Fed can't use it's traditional tools to fix since the last 40 or so years fundamentally shifted the economic capabilities away from decentralized industry due to a regulatory environment that highly favored consolidation and centralization. That isn't something you necessarily bounce back from quickly, which is actually an opportunity in it's own way. The bigger, more omnipresent and impossible seeming a problem the government can get everyone on board (and paid) to solve the better. If only enough unity materialized to do it.
“The price of Big Macs should be rising at a steady rate. It is bad if the price of Big Macs falls. Let’s put in some policies to make sure the price of Big Macs rises steadily!
Oh wait, they aren’t rising steadily, they’re rising much slower! Our policies aren’t working! Hmm maybe it’s ok to have periods where Big Macs get cheaper, as long as there is an equal period afterwards where they make up that loss and get more expensive. We can call this symmetry!”
The article is basically calling this idea of symmetry a big joke.
I am comfortable reading both math and programming textbooks, but every finance book I've picked up so far seems to quickly not make any sense to me at all.
And that was one of the points, apparently physicists switching to economists say math is simplistic and superflous.
Math is math, but it can be used as a window dressing for you opinions.
On the other hand if your field pretends to be science. Also creates and awards itself a Nobel prize and pretends its an actual thing. Well maybe its a sign of a con.
> [The author, in third person] is not an economist, which is probably why he's been able to develop a working model of the global monetary system. His research is unique and informative in ways an economist would never consider.
There is a distinction between an MBA or finance degree and the field of economics. You might not have gotten quite to the bottom of it.
Of course financial activity has a lot of resemblance to gambling. Mathematicians have been analyzing gambling for a long time, but does that make them the same as anyone playing slots in Vegas?
but seriously, from a quick skim, this article seems to be mostly macroeconomics, with a little finance sprinkled in. for a cursory understanding, no (additional) math is needed, just micro, macro, and basic finance. you could take online courses for those and use investopedia as a quick reference.
Hopefully with more clarity, as this is opaque and suggestive as duck (sic)...