Thread by @vpalsmith33

/THREAD/ Lately, I've been thinking about the ways my two chief interests—China and the Fed— combine. Paraphrasing his Rhodium boss, @jordanschnyc once gave a clue highlighting how the Party, like the Fed, retreats to the presumed safety of status quo whenever flirts with reform.

https://twitter.com/shortl2021/status/1508762906262913031

2. To entertain this observation, I would like to pull a section from a episode of #Oddlots hosted by @tracyalloway @TheStalwart feat. Viktor Shevets. It contains his review of the Mian & Sufi on inequality as driving factor of declining r* (19:20-30:00).

3. The headline conclusion, which perhaps you can take with a grain of salt as Shevets is first to admit he is not always right (e.g. Chinese equities), is "2022 will year of removal of fiscal & monetary supports, '23/'24 will be year of putting back on." (49-50:15)

4. But the old adage about the journey, not the destination applies here. Let's follow his logic, starting with initial observation that sparked @TheStalwart question on whether fiscal supports to poor were an inflationary driver in the interview. (19:20-20)

5. When read all important authors, you can extract important info on the real economy, but they have a fatal blind spot—the financial economy, Shevets argued. Dean Baker argued this is a Maginot line: why no attention to financial economy when 6x larger and can crush real econ?

6. So how does one bring assets into the picture? From a distributional perspective. Asset side of the balance sheet is top 10% (and in fact concentrated in top 1 %), while liability side is bottom 60%. This isn't new. See below excerpt from a 1998 book

https://twitter.com/vpalsmith33/status/1421510987878862851?s=20&t=M-XIU9yHdQ3BSFVyauldBg

7. The political right is already starting to get uncomfortable with this riff. How do we distinguish from the ramblings of a mad Marxist? Their instincts aren't misplaced—Gilded Ages (Shevets notes 1910's and now similar) have a way of making crude Marxist analyses look astute.

8. I found it interesting how effortlessly you could adapt his riff to the Marxist historian, Robert Brenner's notion of escalating plunder. "Wealth creation of the top 10% just keeps on accelerating." Could have just as easily used the word escalating. newleftreview.org/issues/ii123/a…

9. Brenner's Marxism is an accounting identity—escalating is an asset side phenomenon, and plunder enters on the liabilities side. "As continue to create excess wealth, that needs to get deployed somewhere," Viktor Shevets.

10. Remember the propensity to consume is an economic law. Maybe some of the savings glut of the rich can get deployed in vanity goods—Veblen wrote of them during prior Gilded Age—like Ferraris, Picassos, Hampton mansions, perhaps even super-yachts and NFT's, but not enough.

11. According to Shevets' theory of the case, interest rates (or, r*) have declined so precipitously because only durable solution since 1980 has been to transfer to bottom. Bottom barely keeping up with commitments as is, so cost of money must fall

https://twitter.com/AtifRMian/status/1431239286603620353?s=20&t=M-XIU9yHdQ3BSFVyauldBg

12. Shevet's key claim on the metaphor of the Fed's intermediary role between top 10% and bottom 60%: "They are the conductor of the orchestra to see that both sides of the balance sheet are in unison." Not an enviable task, particularly as imbalances grow with escalating plunder

13. Addresses critics: "All dependent on asset prices as cue for decisions. [Some say] Let's break that system. Fair enough, but how do you break it without causing massive asset collapses in the meantime?...401k's, pensions, real estate prices not gonna be worth what you think."

14. Similar theme in China— perennial political logic to economic reform. Reporting on property tax experimentation in Chinese provinces notes political problem of asset price dependence wsj.com/articles/in-ta… Here too, covert repolitization of Fed

https://twitter.com/vpalsmith33/status/1490949942143111168?s=20&t=M-XIU9yHdQ3BSFVyauldBg

15. "When people are discussing that we should junk this monetary system that we have built since the 1980's, and replace it with another system, I basically say good luck. I agree. Should have done it decades ago. But how are you going to do it—point A to point B?"

16. There is an old Irish joke of a traveler on the best way to Dublin. The shepherd's wry response, "Not from here." I first encountered it in The Code of Capital on legal guardians of financialization. Tellingly, @shortl2021 cited the same joke on China

https://twitter.com/shortl2021/status/1479457745464090625?s=20&t=M-XIU9yHdQ3BSFVyauldBg

17. His tweet reply was in a debate thread between Tooze and Armstrong is worth revisiting as it likely inspired a new FT Unhedged & Chartbook collaboration, which I will continue to follow enthusiastically.

https://twitter.com/rbrtrmstrng/status/1506978561617506312?s=20&t=0uTYEmLUjnG0iY4o3TRLFQ

18. I side with Armstrong and Pettis. I acknowledge Tooze's point often holds, i.e. what is often viewed as unsustainable can in fact be sustained under effective technocratic hands, IFF willing to accept tradeoffs involved. But what if essential condition doesn't hold?

19. China's leaders stared at the escalating plunder of property bubble and social repercussions (eg young couples shut out, falling demographics) and said no more. This elastic "common prosperity" agenda caused Marxists like David Harvey to retract earlier neoliberal assessment

20. America's leaders remain willfully blind, Shevets concludes in his riff. "Financial markets and asset prices are not treated as part of system itself, [to say nothing] of a critical part of the system." Median home prices in my area up 200k since 2020. Something's gotta give.

21. While I agree w/ Shevets that monetary policy not the ideal way to deal w/ crisis, I would reverse his good luck admonition. What happens if we don't have a Volcker moment in reverse to usher new monetary era that unravels escalating plunder? Status quo may not be safe

22. That intuition is influenced by a readable law review article on the Japanese property bubble. Author outlines all reasons why MP a blunt instrument, but still concludes, "Where a bubble becomes so large as to pose a threat the entire economic system, the central bank may..."

23. "... appropriately decide to use monetary policy to counteract a bubble, notwithstanding the effects elsewhere." Whether our current 3 sigma bubble has reached that point is debatable. heinonline.org/HOL/LandingPag…

24. One important counterpoint emphasized in my progressive political economy circle on this site—The Volcker shock is a guide to the ethical Q of reverberations in the developing world. Don't let the deflationary bust go global prospect.org/world/developi…