LateMechanic
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User ID: 1841
LateMechanic
18d ago
What are the fiscal problems we're looking to fix? Trying to get inflation back down to roughly 2%, and optimistically try to get unemployment down a bit more, to like 3%?
I would definitely give the neo-fisherians a shot, and try dropping the policy rate to somewhere around 0-1.5%. Cochrane's modeling also supports Bessent's moves to phase out longer-maturity securities in favor of shorter bills, in order for interest rate changes to have fewer conflicting effects. Any debt monetization beyond that is pointless, and under current various rules there are probably enough institutions that prefer/need the bonds that I wouldn't suggest bothering with more QE.
Predictions based on the supposed perpetual dominance of fiscal policy over monetary policy? I guess stuff like the prediction that the eurozone was set up poorly and would dramatically struggle to deal with the first big crisis, that you should prepare for a crash if austerity politicians start winning again and fomenting a fear of large numbers, and that otherwise the US with a demonstrated willingness to keep running large deficits (to supply the desired savings to the domestic private sector and the rest of the world while maintaining solid aggregate demand) is exactly where you want to be for the best economic growth & business investing environment.
No idea about Japanese exchange rates, looks like they started accumulating US treasuries again in '09/10, which would be intentionally devaluing the yen to make their exports more competitive? And this year they finally did a massive sell-off of some of their foreign reserves to push the yen back up? I'm more of a fan of just leaving exchange rates purely floating, but I'm open to some mercantilist wisdom of keeping your industrial base stronger than what might happen naturally.
LateMechanic
18d ago
Same as it ever was, really. People in the last 50 years really wanted to think of central bankers as our modern wizards, fine-tweaking the economy with their monetary policy dials, while we breathlessly hang on every word of their forward guidance. But they've been more accurately caricatured as the kid in the passenger seat with a fisher-price steering wheel & pedals who thinks they're the one driving. The only awkward part is that the adult who is actually driving (fiscal policy of spending & taxing, which have enormous clear 1st-order effects) is often actually looking at the kid and also thinks they're the one controlling the car.
As for "monetization" inflation theories: Anyone who still thinks of interest-bearing government debt in the form of central bank reserves as "money" but interest-bearing government debt in the form of treasury securities as "not-money" has been exposed as having an incoherent understanding of the accounting fundamentals. QE not being stimulative or inflationary broke a lot of those brains awhile back, but people come up with cope or just conveniently forget about it and go back to their old textbook understanding years later ('gasp, you shouldn't monetize the debt, that would be inflationary!'). Some mainstream economists like Summers & Krugman finally came around in the mid/late 2010s to notice that in a zero-rate environment, there is no 'money' difference, and the deficit is effectively printing money regardless of what form it ends up in, be it reserve balances, securities balances, physical coins/notes, etc. They still didn't seem to note that in the post-2008 world, the monetary policy regime switched to hitting their interest rate target by paying interest on reserves directly (a much better & simpler system than using reserve requirements and OMOs to drain all excess reserves all the time from the banking system), so there's no 'money' difference between reserves and securities even if the policy rate isn't zero.
Fiscal dominance for American citizens has been happening for 250 years, so I would anticipate more of that general trajectory. Especially similar is the last 90 years with a central bank that got modernized based on the experience of the great depression, and the introduction of income taxes which are a massive fiscal automatic stabilizer where taxes paid go up & down with the state of the economy without any active intervention needed by congress. Just because it's the water we swim in, doesn't mean it's less important; that's the steering wheel that's actually attached to something.
To the extent that you actually have to check empirically to find that raising the policy interest rate to 50% (meaning the government effectively increases the size of all bank accounts constantly with a bunch of free money), turns out to shocked pikachu drive inflation up to 50% rather than 'taming' it down to 0...well I would say you're learning which 'channels' are more powerful in the real world, free money vs cost-of-borrowing, rather than needing to get too creative speculating about whether we've transitioned between monetary vs fiscal dominant worlds at any given moment. And it starts to click why the Fed couldn't get inflation up to 2% no matter how low they set rates, and now can't get it down to 2% no matter how high they set them. I haven't read the econ blogs in awhile, but I know of at least John Cochrane as still trying to get the 'fisherian' word out that interest rates are positively causally correlated with inflation, as well as MMT's Warren Mosler.
LateMechanic
21d ago
Shit, where's the modern monetary theorists up ins? Aren't we due for a lecture about how the deficit isn't actually a problem, how the National budget isn't actually like a household budget, how debt isn't real?
Most of the rest of them are at least borderline trump-deranged, tribally, but I'll happily accept & promote a random one-off stimulus check to everyone. Though I'll save any attempted lectures (which take too much finesse for me to ever deliver convincingly) for those who seem to be honestly pained by their beliefs I think are mistaken, rather than wheeling one out for OP who is always just looking for a new 'republican bad' angle.
For this thread, I would just note that we had frequent economic depressions until FDR, and none since. So not only am I aboard the FDR & trump trains, I'm looking for which party will angle for that 'socially conservative, fiscally liberal' winning side in the post-trump future, and am happy to see others affirming that position now. I think the economic Charybdis looming serious disaster isn't being negligently forestalled at all, and is merely a mirage. To the extent that nationalists and reds at least go with your logic of not playing the losing game one-sidedly, then there's some hope of using the economy as a tool to fight off the actual cultural looming disaster.
All I would say from my perspective is that I've seen quite a lot of people who don't seem to know or write much about banking/accounting/money, still very much took to the zirp 'free money' story as part of any fun narrative-building they wanted to do. It reminds me of narratives about the falling rate of profit in capitalism or peak oil doomerism, where people work in some kind of questionable economic fudge factor for why some dam hasn't quite broken yet in their story.
In the same way that every random redditor "knows" that the Fed was allowing inflation to stay up in '22 and was screaming at them to raise rates to kill that inflation, similarly tons of people "know" about the distortionary impact of zirp as some story for anything happening in the 2010s. I just don't think the story really works like that. The default neutral state is for the risk-free monetary base to be non-interest-paying. It takes active government intervention to artificially set the base risk-free rate at something above 0%, upon which all other interest rates get set at a spread above. And banks don't just give infinite free money out when the base rate is zero, they take their marginal cut for the service they're providing, do their best to price in the credit risk appropriately, and get closed by the government for failing to be run properly. The economy clearly wasn't exactly turbocharged by 0% or negative interest rates, the way the wizard-believers were hoping.
As for other jobs the Fed does, yeah they have a ton of different roles. In addition to being charged with trying to use monetary policy to achieve stable prices and low unemployment, they also run the payment settlement system, do much of the financial regulatory policing, run the Treasury's books (so technically even treasury securities are a type of account at the Fed), and the branches each do plenty of interesting academic research & paper-writing to different audience levels, etc. If this was stemming from the 'toddler thinks they're driving the car' analogy, that was saying that monetary policy really doesn't drive the economy, compared to the overwhelming dominance of spending & taxing. Not that it has no effects, or that they do nothing useful.
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