Weekend Reading
I don’t think the Fed wants to hike aggressively or has a handle on how to otherwise address inflation, but they are pot committed now. If inflation expectations/inflation stay high or go higher, they will hike. With less uncertainty about the Fed’s reaction function the market is more certain that the economy will roll and lowered peak funds by 25 bps and priced a sharper reversal in the forwards. For the next month or two volatility will come almost exclusively from economic data and geopolitics. The market seems primed for a recession/bond rally that will come before the effects of the this tightening pass through to inflation. It’s really too bad the Fed was so deliberate in the second half of 2021.
Happy Fathers Day and enjoy the somewhat surprising (or was to me) long weekend (Juneteenth!).
Larry Summers, who must be loving this, getting interviewed by Barrons.
What do you make of the Fed’s big move?
The Fed is showing determination. I understand the decision to do a 0.75-percentage-point move as a significant policy step. But I still don’t believe that the Fed has realistic projections. In March, I said that the dot plot, which charts members’ individual rate forecasts, wasn’t remotely realistic. While [the dots] were significantly adjusted this time around, unfortunately I still don’t think they are realistic. Why should anyone think that inflation is going to come down from the 8% range to the 2% range without unemployment rising above the Fed’s estimate of its normal rate, an estimate that is itself too low? My guess is that you will see further increases in projected inflation, projected unemployment, and projected interest rates.
I think the 0.75-percentage-point move was a desirable move for the Fed’s credibility, but I don’t think the Fed helped itself with the new projections and rhetoric. We are still headed for a pretty hard landing.
John Cochrane paper on the fiscal theory of inflation.
Why does money have value? It only costs the government a few cents to print a dollar bill, yet we work hard to get those pieces of paper, and we can trade them for valuable goods. The bits on a computer that are most of today’s money cost essentially nothing to produce, and we work just as hard for those. Equivalently, what determines the overall level of prices and wages? What causes prices to rise in a time of inflation such as we experience in 2022? The fiscal theory of the price level offers a novel answer to this age-old question. The fiscal theory states that: • The price level adjusts so that the real value of government debt equals the present value of primary surpluses.
If his model is correct, then the 8% inflation we’ve experienced is 40% of what is coming, i.e. the price level will go up 20%. Much more at his blog entry—here.
There are lots of controversies I try to ignore, but often wonder “why is this a thing?” Tablet magazine has a good rundown of how some of the Pritzkers are making trans issues a thing.
In the 60s the FBI infiltrated and sabotaged what were considered leftist organizations with an operation called COINTELPRO. Either they are at it again or this is some of the best evidence yet or Conquest’s third law (“The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies.”)
https://theintercept.com/2022/06/13/progressive-organizing-infighting-callout-culture/
Good piece on the European geopolitics of Ukraine.
https://americanaffairsjournal.org/2022/05/the-eu-after-ukraine/
Very likely, a protracted confrontation over Ukraine would force Russia into a close relationship of dependence on China, securing China a captive Eurasian ally and giving it assured access to Russian resources, at bargain prices as the West would no longer compete for them. Russia, in turn, could benefit from Chinese technology, to the extent that it would be made available. At first glance, an alliance like this might appear to be against the interests of the United States. It would, however, come with an equally close, and equally asymmetrical, American-dominated alliance between the United States and western Europe, where what Europe can deliver to the United States would clearly exceed what Russia can deliver to China. Something like a stalemated phony war in Ukraine could be in the interest of a United States seeking to build global alliances for an imminent battle with China over the next New World Order, monopolar or bipolar in old or new ways, to be fought out in coming years, after the end of the end of history.
Whatever we’re doing to help the homeless isn’t working, Matt Yglesias says we should give SROs another try—not the worst idea.
Have a great weekend.
“what Europe can deliver to the United States would clearly exceed what Russia can deliver to China” - how so?