If confirmed, this is just another example of pension funds nearly blowing themselves up.

https://twitter.com/edconwaysky/status/1575128310740389889

If true, this is the financial crisis that everyone was worried about since 2008. The private sector entered into massive leveraged positions that relied on market prices adjusting slowly. The BoE had to bail them out to avoid a crisis.

Luckily, we have DSGE models that scientifically can determine the effects of interest rates on inflation. Not sure what everyone is getting all excited about. Somewhat less snarkily, the gilt market is doing literally what it is supposed to be doing, according to neoclassicals. Fiscal policy loosened, which implies higher policy rates according to the conventional reaction function.

I saw someone compare mortgage spreads in other countries to the 30Y mortgage/30Y US Treasury spread. That’s not the spread you want to use in the US. Using the 10Y is better, but that’s still a simplification. A 30Y conventional mortgage is amortising - principal paid back continuously. A 30Y Treasury has a bullet structure - 100% payment at maturity. Even if we ignore everything else (spoiler: we can’t), the bulk of the cash flows need to be discounted by shorter maturities.

This tweet makes no sense. CPI is literally a composite of component prices. It’s tautological to observe that if your modelling on the components fails, the aggregate forecast will fail. Well, what would you expect to happen?

https://twitter.com/jasonfurman/status/1547223428989497344

The problem with a “macro” approaches is that they are terrible. If the methodology worked now, it probably blew up in the 2010s.

Bank Debate Woes: Part II

The next instalment on banking and loan growth constraints. Due to length, this will take at least another article. This one discusses loan growth from the perspective of a bank.

bondeconomics.substack.com/p/banking-deba… How does a bank look at the effect of extending a loan on its balance sheet? The short answer is: do not read economists' stories on the topic. The answer is simultaneously simpler and more complicated.

New article: Banking Debate Woes (Part I)

This is the first part of series that discusses bank lending (probably 2 parts, but it might take 3).

The focus here is: how do banks operate (spoiler: don't read Econ 101 texts)?
bondeconomics.substack.com/p/banking-deba… My argument is as follows:
1) The generic problems of balance sheet management for a bank is the same as that of non-bank levered financial entities.
2) What makes banks special? They are the core of liquidity management in the financial system.

New short article: “Richmond Fed MMT Critique”

I tweeted about this. It was about as terrible as one might expect.

The only reason I linked it is because they discussed some (bad) new literature on fiscal sustainability. bondeconomics.com/2021/04/richmo… The badness matches my priors.
1) They say that MMT asserts there are no constraints on spending, then they admit that MMTers are more concerned about potential inflation than others.

I’m not an elite economics professor, but even I see the contradiction.

Short article: Video Clip About North American Lumber Situation

Lumber was a big part of my Twitter feed last week, and this is my delayed reaction. bondeconomics.com/2021/04/video-… Nothing too deep, but I see two points of interest.
1) A hard constraint on lumber implies a hard constraint on construction. This means that the feed through to the real economy is not expansionary.

Only way it is expansionary if investment in lumber mills explodes.

“MMT and Government Finance: You Can't Always Get What You Want”

This piece attracted a bit of attention. It’s best described as incoherent. It makes insanely wrong statements about MMT, then immediately contradicts them. richmondfed.org/publications/r… Apparently, you can get a doctorate in neoclassical economics, and believe that you can critique a theory with literally zero citations of proponents of that theory.

Wow, much science.

New article: Is Money Supply Growth The True Definition Of Inflation?

One of the entertaining tics of internet Austrians is that they believe that everyone else uses the word “inflation” wrong. They argue that “inflation”=“money supply growth.” bondeconomics.com/2021/04/is-mon… There’s two legs to discussing this.
1) An assertion that the Austrian definition was the original, and then wrong-thinking people started using the word “inflation” wrong.
2) By using the wrong definition, people analyse the economy incorrectly.

Here’s a fun question: which economist has had the greatest influence on popular discussion of inflation right now (in North America, at least)?

I’m not discussing citations or “academic influence,” rather people being aware of this person’s output. My answer (which could be debated): John Williams of Shadowstats has had the greatest influence on popular discussion of inflation (in the US, at least).

Everybody in this area knows about Shadowstats. I’d wager a significant portion of the population believe his arguments.

Doing some background reading on inflation. I read an article by an Austrian that suggested that we cannot measure the CPI because it makes no sense to average the price of bread and milk (for example).

Please tell me the Austrian critique of aggregation is not that stupid. Did some further digging, and ran into this article. Although interesting, I suggest reading all the way through to the comments. 😂

My paperback arrived!

The paperback edition of “Modern Monetary Theory and the Recovery” is live on Amazon.
(It will appear on other online stores sooner or later.) The description is here (with outdated information about the paperback).
bondeconomics.com/2021/03/modern…

New article: Comments On Tavlas' MMT Critique

A response to Tavlas’ terrible MMT critique. The only interesting angle was the discussion of Greece’s historical policy options, but that was weaksauce. bondeconomics.com/2021/03/commen… The “big idea” was that Greece had a “financial crisis” in its free-floating era because govvie yields were 20%.

Well, the overnight rate was ... around 20%.

The tactic of tech firms loading up on Bitcoin is an impressive tactic. It pretty much vapourises any traditional attempt to value the things.

Since these moves have almost no relationship to the real economy, no obvious fundamental catalyst for disaster. This is somewhat different than the late 1990s. The big tech firm’s fortunes were tied to investment spending, and that eventually ended following the Minsky-an script.

New article: The Great Vacation: Recessions In DSGE Models (Part I)

First part of a discussion of The Great Vacation Effect: since DSGE model outcomes represent optimal choices for households, a depression just represents a mass desire for a vacation. bondeconomics.com/2021/02/the-gr… The Great Vacation Effect is obviously silly (which explains why I like writing about it). There’s a political economy angle. It is no surprise that Univ. Chicago faculty member(s) blamed the Financial Crisis on workers deciding to go on welfare.

New article: “Rajan Accuses MMT Of Making Errors Made By Mainstream”

Raghuram Rajan’s recent attempt at critiquing MMT is remarkable. Most of the analytical errors attributed to MMT are in fact errors made by mainstream economists, which MMTers rejected. bondeconomics.com/2020/12/rajan-… 1) MMT allegedly finds a “free lunch” by having the central bank buy central government bonds.

In fact, that’s the position of neoclassical central bankers who believe QE is stimulative, MMTers dismiss QE as an “asset swap.”

It's Friday night, and time to party! So, time for another r* chart!

It's the Groundhog Day scenario: what happens if the years 2009-2019 repeated? (Ignore the recession bar for 2020).

Yet another downtick in r*.

(Disclaimer: work in progress, could be horribly wrong.) Unless I made a mistake (entirely possible), I just repeated the data series from the peak in 2008 for inflation/rates, with GDP level shifted to keep quarterly growth rates in line with the previous cycle.

I was running some errands today, but I was mulling over my r* discussion. I thought I had a great way of explaining what happened to r* after the Financial Crisis.

Unfortunately, my beautiful story was slain by inconvenient facts. Back to the drawing board... I really need to go back to my systems theory. I’m getting bad vibes from the Kalman filter - which is an attitude that might provoke a riot in some quarters.

New article: “The Perils Of Non-Causal Models: r* Edition”

In my previous analysis, I did not respect the 2020 spike as much as I should have. It blew up parameter estimation, and the r* estimate moved a lot. bondeconomics.com/2020/10/the-pe… My previous analysis was qualitative, and not much really changed. However, the charts were perhaps too dramatic, since r* wiggled around like a greased pig. (I prefer to leave the sensationalism to equity and BTC investors.)

New article: “Falling r* Is No Accident”

Feel free to throw out your dual y-axis charts, r* (roughly, the natural rate of interest) falls as a result of artefacts in the construction of the estimation. bondeconomics.com/2020/10/fallin… This work is preliminary, but it matches up with what one would expect from first principles.

(Given the baroque methodologies used in the construction, the risk was that first principle analysis would be misleading.)