Utterly confused lot

A quick glance through the blog posts in the website of the Economic Policy Institute (EPI) suggests that they are barking at inequality and yet baying for a loose monetary policy.

Loose monetary policy does zilch for good old inflation that they are hankering after. It does a lot for asset price inflation that contributes immensely to the inequality that they are opposed to.

She would, in short, be doing America’s working families a big favor. If she does decide to stay on after losing her chair position, we should all thank her. [Link]

The good folks at the EPI want Yellen to continue as a Governor in the Federal Reserve Board even if she were not the Chairperson! She supposedly tightened interest rates and financial conditions eased considerably, creating asset price inflation that favoured the rich and she had nothing to show for her efforts in generating inflation in goods and services.

EPI is doing a disservice to the workers whose cause it claims to espouse.


Trickle-down hypocrisy

The Keynesian Fed economists who were dismissive of Reagan’s trickle-down theory still don’t appear to see the irony in the fact that they applied trickle-down monetary policy in the hope that by giving a boost to asset prices they would create wealth that would trickle down to the bottom 50% of the US population or to Main Street. It didn’t. [Link]

Well said, John Mauldin. The link is almost two months old. Does not matter. The observation is very relevant even now.

Baloney from Blanchard

Based on the Bloomberg story from the American Economic Association meetings:

The International Monetary Fund’s former chief economist saw what he called “suggestive” evidence that policy makers might be able to push joblessness below what is seen as its natural rate without risking higher inflation.

So what does that mean for the Fed? “There is a decent case” it should overheat the economy and try to attract more people into the labor force, said Blanchard, now a senior fellow at the Peterson Institute for International Economics in Washington. [Link]

Where do financial markets and bubbles figure in all this? Jobs that created in the real economy because monetary policy keeps nominal and real rates too low (well  below where they should be, for investors to be mindful of both risks and return) would be lost when the bubbles burst either because monetary policy eventually reverses or due to any other reason.

See this and this – conversation between Stanley Druckenmiller and CNBC host.


Interesting Powell

Zerohedge has done a blog post or two based on the transcripts of FOMC meetings of 2012 in which the Federal Reserve resorted to QE3. You can see the blog posts here and here. Of course, Jeffrey Lacker dissented in the September meeting when the Federal Reserve decided to purchase mortgage backed securities to the extent of USD40bn per month on top of the USD45bn of Treasury Securities it was already purchasing. It would have been interesting to read his comments. But, correctly, the market had decided to focus on what Powell said in those meetings. Check out the blog posts by Zerohedge. He had spoken well. It makes his stewardship likely interesting.

More than his remarks that were highlighted by Zerohedge, these remarks caught my attention and I will explain why:

In the new deal market, there’s a large industrial deal that I’m pretty familiar with that is being done at 6¼ times leverage in the next few weeks. It’s rated CCC by both Moody’s and S&P. In most ordinary markets there is no CCC market for paper, and this is being done at 6¼ times leverage with a weighted average cost of capital of under 6 percent. So private equity firms are more focused on the level than they are the spread, and under 6 percent for that kind of paper is an all-time record, again, very reminiscent of a bubble period. So demand for leveraged loans and high-yield bonds is far in excess of supply.

This can be expected to continue. On the bright side, you do not yet see the return of that leveraged mark-to-market structure that was so unstable in the crash, and you also don’t see very large deals getting done yet. There’s sort of a cap around $5 billion, and you don’t see dealers committing their balance sheets. I think all three of these things are positives for holding down the systemic risk aspects of this emerging bubble, if you will. But we’ve seen the competitive dynamic develop into a race to the bottom before, and so these markets are definitely worth keeping a close eye on.

He made these observations in the FOMC meeting of October 2012.  See p. 143 of the link. What is interesting is that if he saw leverage as a risk in 2012, how much of a risk would it be in 2018?

Hence, we have no idea of  what and how much would unravel when asset bubbles burst.

Raghuram Rajan’s first salvo for the year

Raghuram Rajan had fired his first salvo of the New Year – not for the first time, of course.

Probably, “a sober assessment of their policies over the last few years” will have to start with the radical possibility that central bankers have very little control over inflation – in either direction. The only known case of successful inflation management was by Paul
Volcker but achieved at the cost of two recessions in quick order. That central bankers were made responsible for inflation was a consequence of the monetarist theory of inflation of Milton Friedman.

It is only a theory and not THE THEORY. What if inflation was more likely caused by real factors than by monetary factors?

Perhaps, central bankers are effective in managing inflation only in the presence of certain enabling conditions and that those conditions are ignored in the assessment and evaluation of their effectiveness and the credit is mistakenly attributed to central bankers.

Another article that appeared in ‘Project Syndicate’ by Jason Furman is very realistic even though it is directed at political leaders. But, it very much applies to central bankers too:

In fact, the solution to our political problems, in 2018 and beyond, may lie not in any new policies or materially changed circumstances, but in finding better ways to communicate about the challenges we face, the efforts being made to address them, and the inherent limits that confront all policymakers. There has to be a better answer than just lying to people about what our policies are capable of accomplishing. [Link]

I like the emphasis on challenges, limitations, etc. That is the best start to solving problems.

So, the origins of a review of central banks’ policies lie elsewhere – in humility!

Thus, the review of central banks’ effectiveness has to be so radical that it won’t happen voluntarily at all!!

Jaggi goes for the jugular

Jaggi’s piece in Swarajya on the Monetary Policy Committee of the Reserve Bank of India contrasts with the Edit in MINT on RBI.

To an extent, strictly going by these two pieces, Jaggi’s piece struck a better chord than the MINT Edit.

Of course, I still believe that too much is made of India’s real rates. That diverts attention from the many failures of omission and commission on the part of elected governments.

Plus, I am a sucker for ‘tough love’ in micro or  macro matters. Examples abound:

  • Volcker with monetary policy in the USA from 1979 to 1981
  • Germany and Japan with their appreciating currencies and export growth built on productivity and quality
  • Rangarajan’s high real rates in 95-97 that ‘persuaded’ Indian corporations to de-leverage between 1998 and 2001 and be ready and hungry for re-leveraging and unleashing a capex cycle since 2002 (it turned excessive later)
  • Hong Kong’s real estate cycle deflation after the Asian crisis that lasted nearly a decade
  • Singapore’s approach to the real estate bubble since 2013, up to now

On balance, MINT Edit came across as a ‘gratuitous’ praise. Not wholly disproportionate but partially.

In other words, I am not sure RBI has done enough to deserve this praise. It may well, down the road. But, for now, it struck me as early days.

Democratic non-accountability of Central Banks

There has been a hiatus in blogging in the last one week. I went to Chennai for a Board meeting on Monday and Tuesday last week. Returned to Singapore to move houses on Thursday. Still settling in, in the new abode. Hence, the relative paucity of blog posts. Not that the world was any poorer, on account of it.

I just finished teaching my last class at the Singapore Management University for the M.Sc. in Applied Finance 2017-18 cohort. I taught one section. The course is Advanced Economic and Quantitative Analysis. The economics bit is disproportionately bigger in my class.

(1) I had just finished telling the students of the importance of behavioural insights and of the way brain functions for successful investing that I came across this excellent post by Jason Zweig.

The post is about the investment folly of Sir Isaac Newton. He had a well diversified portfolio until the temptations of the South Sea bubble did him in (circa 1720):


Newton appears to have lost as much as 77% on his worst purchases, or at least £22,600, estimates Prof. Odlyzko. That’s the equivalent of £3.1 million, or nearly $4.1 million, in today’s purchasing power. Overall, he lost at least a third of his account value.

Prof. Odlyzko finds that the words often attributed to Newton were ascribed to him years after his death, so the great man might or might not ever have said that he “could calculate the motions of the heavenly bodies, but not the madness of the people.” [Link]

(2) His (Zweig’s) best books to read (for investors) is worth taking a look too.

(3) I was just lecturing the class today about the unintended consequences of unconventional monetary policy. Couple of hours later, I was trying to catch up with Tim Price’s blog, ‘The price of everything’. Thanks to this post, I stumbled upon a letter by Baroness Ros Altmann. The letter is worth reading in full. I post two paragraphs here:

Quantitative easing artificially boosts asset prices but with assets so unevenly distributed, the wealthiest and older households become even wealthier, while QE-induced house price inflation and rent increases have further disadvantaged non-homeowners and the young. Such social, distributional — and political — side-effects of unconventional monetary policies are routinely overlooked.

If politicians announced tax changes to enrich the wealthiest groups and redistribute away from young to old there would be a voter backlash. But disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability. [Link]

I am glad to note that someone of her reputation in the City and a former Minister said something what needed to be said – of the absence of democratic accountability of monetary policy. May be, it is all a brilliant plutocratic strategy. They lose the most when financial assets crash because they hold them the most. Commoners hold bank accounts. So, when the crisis of 2008 struck, they conceived of this wonderful idea of QE with a vengeance! That is a possibility.

Just as one thought that the pendulum was about to swing back from capital to labour, they ensured that not only that did not happen but also that the pendulum swung further in their favour!

In an earlier longer piece for FT, she had mentioned that QE had robbed pensioners of their incomes, something that OECD too had documented in its Economic Outlook published in June 2016. This is what she wrote:

In 2008, a £100,000 pension fund would have generated a life-long annuity income of around £7,900 a year from age 65. But today, that £100,000 fund would only generate around £5,000 a year — a 36 per cent fall, leaving pensioners permanently poorer. [Link]

(4) Lastly, close on the heels of his piece in ‘Project Syndicate’, Dani Rodrik has a longer piece in ‘The Boston Review’. He writes about neo-liberalism and this sentence made my day because that is what I tell my students all the time:

Good economists know that the correct answer to any question in economics is: it depends. [Link]

Come to think of it, ‘it depends’ applies to most social phenomenon. It is not that there are no ABSOLUTES that are context-invariant. But, they are a lot fewer than we think.

(5) Finally, a blog post by MarkGB (ht Tim Price) in which he takes apart a piece by Martin Wolf defending central bankers is worth reading. I am providing a short extract:

There are 255 million Americans of working age. Of these, 102 million are not employed.  This represents 40% of the working age population, up from 35% at the millennium.  Of those, the percentage of unemployed males in the core group of 25 to 54 is at record highs. Meanwhile the percentage of Americans over 55 who are still in work is soaring…again arse about face…

Of the 153 million Americans who are employed, 26 million are in low wage, part time jobs. Of those, 8 million hold multiple jobs.  10 million people classify themselves as ‘self-employed’, which includes a large number who are barely scraping by.  A further 21 million people work for the government, jobs that generate no revenue, which are therefore funded by private sector taxes.

Jim Quinn of ‘The Burning Platform’ summarises it thus:

“When it is all said and done, there are approximately 94 million full-time workers in private industry paying taxes to support 102 million non-workers and 21 million government workers. In what world does this represent a strong job market?”

So: there are a lot more people available in the labour market than is suggested by the BLS.  So then the question is this: Why aren’t businesses hiring them? Why do employment surveys consistently quote employers ticking the box that says ‘hard to find workers’?  [Link]

The post by Tim Price that features the above is also a useful read.