16 December 2015

Those Rubes

Well, it has been a while since the last "I Still Hate Neil Irwin" piece, and not because the opportunity didn't arise, but out of the spirit of The Holidays. Still, the NYT Business Editors have gone deeply into their schizoid egos today.

In my dead trees version, above the fold on an inner page is a great graphic, which the web page doesn't have. It has just the video. Too bad. But, it still has the punchline:
In other words, higher interest rates, after all that, have translated into less inflation.

I'll leave aside, for now, the obvious problem that the interest rate is real return *plus* inflation. What the sentence really means, "jack up interest rates and foment recession, which kills everything; kind of like Agent Orange". Now, anyone with at least a minimally functioning brain knows that the inflation bigots have been crying, "it's here!! it's here!!" for years. But, of course, it isn't. And the reason it isn't is that all that moolah the Fed and ECB and the Bank of Japan have been dumping, or so it is alleged, into the world economy hasn't actually been into *the economy*, but into the financial system. Where it wends its way to corporations and hedge funds and the happy 1%. And, it hasn't trickled down to the 47%; the rich get that way by being tightfisted with free moolah. You would too, I expect, in the same situation. "Fuck you buddy, I got mine!!"
Once again, the sources of inflation:
1) wage push
2) cost push
3) demand pull

All three have been notable by their utter absence. Monetary policy, as being implemented these days, hasn't and can't compel any of these.

The moolah sits on balance sheets. The M&A extravaganza is only just starting. Why invest, and employ, when you can just buy your competitors? Not only less risky at the outset, but also gets you closer to monopoly (or, in a pinch, oligopoly).

Not so obvious, if one just scans the dead trees version, is Eduardo Porter's column. Since he echoes most of my Rational Macro-quant Analysis, which you can find by perusing past entries to these endeavors, I could have titled this missive "I Also Still Hate Eduardo Porter". But I didn't. Here are some quotes, each of which should sound very familiar.

Still, the urgency to head off alleged inflationary pressures seems premature, especially given that the Fed and many economists on and off Wall Street have been crying wolf about inflation for years.

... if the economy falls into a recession when inflation is very low, it might be nearly impossible for the Fed to engineer the negative real interest rates -- after accounting for inflation -- needed to jolt the economy back to life.

There are other tools at the government's disposal to reinvigorate the economy. Notably fiscal stimulus, but with today's Congress, that's doubtful.

The previous consensus among economists that we would rarely, if ever, reach this floor was based on analysis of the American economy after World War II, a period of mostly robust, stable growth. Extrapolating from that track, Mr. Williams calculated, a nearly two-year contraction like the Great Recession, which shaved 5 percent off economic activity, could be expected only once every 570 years.

The postwar golden age, though, turned out to be atypical. Basing the analysis on broader historical data -- the experience of 17 developed countries since 1870 -- raises the odds to once every 23 years.
(This one is among my top 1 or 2 errors made by the econ/quant crowd: the post WWII era was the anomaly just because Western leaders, public and private, were of the Greatest Generation and still viewed their world as a social construct. Ayn Rand had not yet polluted their hearts and minds.)

Among economists and investors, the problem with the Fed's 2 percent target is that just about everybody believes it is really a ceiling. That makes it even harder for inflation to rise to that level. The market expects the Fed to act pre-emptively to ensure it never goes over that line -- which is what it seems to be doing now.

So, the right wing in DC (and Europe, too) has dug in its heels since before the Great Recession, stopping any meaningful fiscal tools from being used. The simple fact is that supply side machinery has never worked, and still doesn't. What hard headed CEO is going to make more widgets when there isn't unsatisfied demand for said widgets? Nary a one. Give said CEO piles of moolah, for free (or nearly so), and he'll find the most self-serving way to use it. Which may be just to sit on it, waiting for the next recession/depression/deflation to make his pile more valuable. Appeasement never works.

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