Markets/Econ
Either sell protection on US cds or sell assets. Using the T 1 ¼ 05/15/50 as the CTD on 1Y cds, the market is pricing an approximately 4% chance that the US defaults. Given the extent to which the market freaked out in 2011 and the incentives on both sides of the aisle for brinksmanship, my guess is that the market will discombobulate sooner, rather than later.
Biden Can Steamroll Republicans on the Debt Ceiling—This is wrong, because the Fed has a durable institutional interest in not politicizing itself to this extent, but interesting.
Given that the Federal Reserve is not a real barrier to solving the debt ceiling crisis without Congress, the White House has the freedom to be bolder. Joe Biden and Janet Yellen should threaten to deploy any of the alternative options being proposed, and if Republicans don’t pass a “clean” debt ceiling increase, simply use one of them. The White House doesn’t have to negotiate with hostage takers, so it shouldn’t.
The Mysterious Footnote 7: To Whom and on What Terms is the Fed Lending $173 Billion?
As of April 19, those loans equaled $173 billion. By way of comparison, that is more than 3 times the peak amount of regular discount window lending in response to the COVID crisis and half again as much as the peak amount of regular discount window lending during the Global Financial Crisis.
The Fed has released no other information about these loans. It has not provided the interest rate, the collateral, any other terms, or the legal basis for the loans.
How do interest rates lower inflation?
The point today: The statement that we have easy simple well understood textbook models, that capture the standard intuition -- higher nominal rates with sticky prices mean higher real rates, those lower output and lower inflation -- is simply not true. The standard model behaves very differently than you think it does. It's amazing how after 30 years of playing with these simple equations, verbal intuition and the equations remain so far apart.
Interest Rates Likely to Return Toward Pre-Pandemic Levels When Inflation is Tamed
To investigate this issue in more depth, we use a detailed structural model to identify the most important forces that can explain comovement in natural rates over the past 40 years. On top of global forces that impact net capital flows, we find that total factor productivity growth (the total amount of output produced with all factor inputs in the economy) and demographic forces, such as changes in fertility and mortality rates or time spent in retirement, are major drivers of the decline in natural rates.
Related: Low for (Very) Long? A Long-Run Perspective on r* across Advanced Economies
A bull year is ahead for MSR trading
“So, you’ve got a $1.5 trillion [in legacy MSRs expected to trade] which is like the rat going through the snake, plus you’ve got the new production volume [at current market rates] that’s going to trade, let’s call that $1 trillion to $1.25 trillion,” Smith said. “… It’s a really low-risk, high-quality asset that I would say, for investors, is sort of a dream asset to buy.”
I am more bullish about the prospects for unconventional production growth in the United States than the conventional wisdom is. The conventional wisdom focuses on a single margin: the stock of potential drilling locations. That totally overlooks the real shale story: massive technological improvement, largely driven by learning effects. Those learning effects work on a variety of margins, including getting more out of a given well, and reducing the cost of drilling a well.
The Fed as social psychologist
The biggest problems arise when the Fed has the wrong model, and makes a decision that market participants view as likely to lead to a negative outcome for the economy. Lots of these bad decisions occurred in the early 1930s, and again in late 2008. The fear isn’t that a rate cut will expose an already weak economy, it’s that the Fed won’t cut rates when it’s clear to market participants that a rate cut is appropriate.
Related: Recent Studies of the Identification Problem
Some of the earliest attempts to estimate the impact of monetary shocks resulted in what’s called a “price puzzle”. It seemed like easy money led to lower inflation, and vice versa. That makes no sense. (A similar problem occurs with fiscal policy, where deficit spending is often correlated with slower economic growth.) The trick is to find the exogenous part of monetary policy, not the response to economic conditions. Are interest rates rising because of tight money, or because of higher NGDP growth expectations?
This means that it is bondholders, not taxpayers, who pay the price for rising debt and high inflation, as their real returns are eroded. This conclusion is consistent with that of Hall & Sargent (2022, link), who show how inflation was the biggest driver of the reduction in the debt-to-GDP ratio after World War II and how bondholders suffered as inflation rose. The same thing seems to be happening now. Bondholders are paying the price for the huge expansion of government debt during the pandemic, as policymakers allowed inflation to flare up while interest rates failed to follow inflation on its way up.
Foreign
Comparing the EU and NATO with past empires reveals differences that are as interesting as the similarities. Politically, neither the European Union nor the United States will ever present themselves as an empire, nor would they be well advised to do so. Analytically, however, it is worth reflecting that whereas the twentieth century saw most of Europe transitioning from empires to states, the world of the twenty-first century still has empires—and it needs new kinds of empire to stand up to them. Whether Europe actually manages to create a liberal empire strong enough to defend the interests and values of Europeans will, as always in human history, depend on conjuncture, luck, collective will, and individual leadership.
Here, then, is the surprising prospect that the war in Ukraine reveals: the EU as a postimperial empire, in strategic partnership with an American postimperial empire, to prevent the comeback of a declining Russian empire and constrain a rising Chinese one.
The Chinese economy after the ‘Two Sessions’
What is clear is that in the delicate balancing act between economic efficiency and stability in the financial system, the CCP has decided to carry its centralisation tendencies further into the financial sector and place a big bet on stability. A more centralised system of political control could reduce fragmentation in the system, and lessen the ability of financial intermediaries to indulge in ‘regulatory arbitrage’ between decentralised regulators and provincial agencies.
On the other hand, it could also turn out to be an agent of still greater financial instability, which is always more likely when the balance sheets of financial institutions are highly correlated. As it is, the PRC’s 4,000 or so banks are already under state control and account for the bulk of the financial system since the authorities shrunk shadow banking. Greater uniformity in the system’s balance sheet behaviour can amplify fault lines such as bad debt, illiquidity, and other problems including poor decision-making.
The Long Run is Short in Norway
the planner often “does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” What the policymakers in Norway apparently failed to consider is the way the rich might respond to a tax policy of “soak the rich.” It turns out that more often than not, the rich don’t particularly like being soaked, and when you make it more expensive to live or do business in a particular place, fewer people will want to live or do business there.
Culture/US
Killer drone opera lands at Kennedy Center this fall—Not The Onion.
Throughout the show, the “hot shot” pilot wrestles with the mental impact of firing rockets from a drone in Afghanistan from a trailer in Las Vegas. “As Jess tracks terrorists by day and rocks her daughter to sleep by night, the boundary between her worlds becomes dangerously permeable,” an ad tells us.
The production is brought to you by presenting sponsor General Dynamics, one of the world’s largest weapons companies (and, wouldn’t you know it, the maker of Jess’s favorite plane).
The Military-Industrial Stock Buyback Complex
And that brings me to the Pentagon defense finance contracting report that just came out on Wednesday, which was the first wholesale reexamination of the “effect that the DOD’s contract financing and profit policies have on the defense industry” since 1985. Most DOD reports are meek, but this one attempted wholesale change in the framing of the relationship between contractors and the Pentagon. After reading it, I have to say someone in the bureaucracy is very angry at Lockheed Martin, Boeing, Raytheon, Northrop Grumman, and General Dynamics.
Peter Turchin: Announcing My New Book: End Times
When a state, such as the United States, has stagnating or declining real wages, a growing gap between rich and poor, overproduction of young graduates with advanced degrees, declining public trust, and exploding public debt, these seemingly disparate social indicators are actually related to each other dynamically. Historically, such developments have served as leading indicators of looming political instability. In the United States, all of these factors started to turn in an ominous direction in the 1970s. The data pointed to the years around 2020 when the confluence of these trends was expected to trigger a spike in political instability.
AI, NIL, and Zero Trust Authenticity
Notice both the similarities and differences between Drake and O’Bannon: O’Bannon was doing something that was unique and valuable (playing basketball), and seeking compensation for that activity, which he — and now many more college athletes — received in the form of compensation for his name, image, and likeness. For Drake, though, it is precisely his name, image, and likeness that lends value to what he does, or at least in the case of this video, could realistically be assumed to have done.
I am of course overstating things: just as a popular college athlete could absolutely provide value as an endorser, certainly Drake or any other artists’ music has value in its own right. The relative contribution of value, though, continues to tip away from a record itself towards the recording artists NIL — which is precisely why Drake could be such a big winner from AI: imagine a future where Drake licenses his voice, and gets royalties or the rights to songs from anyone who uses it.
The exception to the rule that fertility falls below replacement in modern societies is provided by sectarian communities like the Amish and Hasidim and Haredim, for whom propagation is a religious imperative. In 2020 there were 344,670 Amish people in the United States.
For the last century, the Amish population has doubled approximately every 20 years. If this continues, then according to one estimate, in 2220, two centuries from now, there will be 358 million Amish Americans.
The scope and depth of conservative failure can seem nothing less than miraculous. Recent history has brought us to the stage of naked parody. Perhaps inevitably, projects of conservative restoration transition smoothly—and with stunning rapidity—into militant leftist movements. “Neoconservatism” is still less conservative than “neoliberalism” is new. The novelty of the latter is sheer concession, based on overt surrender of all social agency to the state. Neoconservative betrayal is even more clownishly cynical, reducible without remainder to the hijacking of a pre-established electoral constituency, for ends that terminate in pure foreign-policy adventurism
Book Review: From Oversight To Overkill
Dr. Rob Knight studies how skin bacteria jump from person to person. In one 2009 study, meant to simulate human contact, he used a Q-tip to cotton swab first one subject’s mouth (or skin), then another’s, to see how many bacteria traveled over. On the consent forms, he said risks were near zero - it was the equivalent of kissing another person’s hand.
His IRB - ie Institutional Review Board, the committee charged with keeping experiments ethical - disagreed. They worried the study would give patients AIDS. Dr. Knight tried to explain that you can’t get AIDS from skin contact. The IRB refused to listen. Finally Dr. Knight found some kind of diversity coordinator person who offered to explain that claiming you can get AIDS from skin contact is offensive. The IRB backed down, and Dr. Knight completed his study successfully.
Just kidding! The IRB demanded that he give his patients consent forms warning that they could get smallpox. Dr. Knight tried to explain that smallpox had been extinct in the wild since the 1970s, the only remaining samples in US and Russian biosecurity labs. Here there was no diversity coordinator to swoop in and save him, although after months of delay and argument he did eventually get his study approved.
Impact of the Natural Compound Urolithin A on Health, Disease, and Aging
Urolithin A (UA) is a gut microbiome-derived natural compound that only 40% of people can naturally convert from dietary precursors at meaningful levels.
Positive effects of direct UA administration in health, aging, and age-related conditions have been identified in several recent studies.
Experimental models consistently show that UA increases mitophagy and mitochondrial function and blunts excessive inflammatory responses.
GlyNAC supplementation in OA for 16-weeks was safe and well-tolerated. By combining the benefits of glycine, NAC and GSH, GlyNAC is an effective nutritional supplement that improves and reverses multiple age-associated abnormalities to promote health in aging humans.