JS Global Macro Notes

[darkhorse]

Quote from Martinghoul:

Ah yes, you see, that's the meat of the debate... Let's say you loosely believe the Taylor Rule, as it's applied during "normal" periods. Given that it operates with nominal rates, the big question that naturally arises is what to do with it when you are at the zero bound. That is where QE and the whole "dropping money from helicopters" idea comes in. There's a belief that QE can be a way of lowering nominal rates in a roundabout way. Whether you agree with this and whether there are costs associated with stuffing the system full of bank reserves is all a matter of personal preference. Clearly, Evans is a super-dovish guy who is at the far end of the spectrum and thinks that QE is a good thing, come hell or high water. I, as well as you and many others, disagree, but that's the nature of the debate, innit?

Yes, although in this case the debate is a little different. The question is not whether the Fed can lower nominal rates, I am happy to concede they can do that. The question is how the lowering of nominal rates is supposed to have a positive impact on unemployment, when available evidence suggests it could just as easily have negative impact (by forcing seniors and savers into 'hunker down' mode, via poor savings returns and higher discretionary cost of living factors vis a vis rising food and energy / debased currency, which in turn lowers aggregate consumer spending and hurts small businesses).

If Evans thinks QE3 is a good thing "no matter what," and he does not have a credible rationale as to why, then he is no better than people who swear by homeopathy or healing crystals or other pseudoscience - worse even, because his unsupported beliefs are potentially toxic rather than neutral.

This is what boggles my mind, re, the state of the world today... I am a nothing and a nobody in the big shot scheme of things, just a simple caveman trader. I don't even have a finance degree -- studied literature and philosophy -- yet it is plain to see even for me that fuckwit thinking is rampant at the very highest levels. Blind belief in a model, without understanding the drivers and principles behind that model, e.g. the fundamental underpinnings as to why the model is credible, why the model 'works,' and why it is appropriate to apply at such and such point in time, is absolutely disgusting. I have more respect for Miss Cleo than men like Evans. As far as I'm concerned, they should be pulled from their ivory towers and given the full metal jacket treatment.

 

[Martinghoul]

Quote from darkhorse:
Yes, although in this case the debate is a little different. The question is not whether the Fed can lower nominal rates, I am happy to concede they can do that. The question is how the lowering of nominal rates is supposed to have a positive impact on unemployment, when available evidence suggests it could just as easily have negative impact (by forcing seniors and savers into 'hunker down' mode, via poor savings returns and higher discretionary cost of living factors vis a vis rising food and energy / debased currency, which in turn lowers aggregate consumer spending and hurts small businesses).

If Evans thinks QE3 is a good thing "no matter what," and he does not have a credible rationale as to why, then he is no better than people who swear by homeopathy or healing crystals or other pseudoscience - worse even, because his unsupported beliefs are potentially toxic rather than neutral.

This is what boggles my mind, re, the state of the world today... I am a nothing and a nobody in the big shot scheme of things, just a simple caveman trader. I don't even have a finance degree -- studied literature and philosophy -- yet it is plain to see even for me that fuckwit thinking is rampant at the very highest levels. Blind belief in a model, without understanding the drivers and principles behind that model, e.g. the fundamental underpinnings as to why the model is credible, why the model 'works,' and why it is appropriate to apply at such and such point in time, is absolutely disgusting. I have more respect for Miss Cleo than men like Evans. As far as I'm concerned, they should be pulled from their ivory towers and given the full metal jacket treatment.

Well, this is the thing... I think you're being too harsh with the "saltwater doves" at the Fed (Evans is one of them, even though he's in Chicago). The case they make has all sorts of credible motives. I don't disagree with the reasoning, per se, but I think they're magically willing away the various costs/side effects attached to the actions that they undertake. At any rate, my point is that Evans isn't being a fuckwit. His view has some merit, even though it's somewhat misguided, in my view. Most importantly, this stuff is complex and is never really about right and wrong.

Finally, if you wanna blame anyone for this sort of thinking, the fault, IMHO, rests squarely with Congress. By giving the Fed an inflation AND employment mandate, they virtually guarantee that there will be a whole spectrum of views, including some extreme ones. Or maybe Congress wanted this, in which case they reap what they sow.

 

[darkhorse]

Quote from Martinghoul:

The case they make has all sorts of credible motives.

Such as? I swear I'm not trying to be obtuse... I just want to a hear logical "if A, then B, then C" type argument, even of a very basic nature, as to how lowering nominal rates could help unemployment... where is the cost / benefit analysis? If they are magically willing away various costs/side effects then I fail to see how that does not qualify as fuckwittery...

Quote from Martinghoul:

His view has some merit, even though it's somewhat misguided, in my view. Most importantly, this stuff is complex and is never really about right and wrong.

Sure, but doesn't it have to be about right or wrong eventually - not in moral terms but pragmatic result terms - at some point in time? If a doctor wants to prescribe ongoing chemotherapy for a patient without credible cause, and ill effects are being perpetuated, and the doctor wants to keep going just because he really likes chemo and thinks it's great, then don't we have to consult the available empirical evidence and at some point say look, dammit, enough is enough?

Why isn't the Federal Reserve held to more scientific standards? These people are conducting massive experiments. Shouldn't they make at least SOME half-assed attempts at hewing to the rigors of the scientific method, in terms of assessing the results of their experiments soberly and honestly?

These people are the nation's financial doctors. In saying "this stuff is complex," can we really just wave away mounting evidence that the doctors are quacks?

Quote from Martinghoul:

Finally, if you wanna blame anyone for this sort of thinking, the fault, IMHO, rests squarely with Congress. By giving the Fed an inflation AND employment mandate, they virtually guarantee that there will be a whole spectrum of views, including some extreme ones. Or maybe Congress wanted this, in which case they reap what they sow.

Yep, on this we agree 100%. The logical thing for the Fed to do in my estimation would be to say "Look, you people are on your own. We've done what we can, and the situation no longer involves systemic risk or need for emergency liquidity. Furthermore, mounting evidence suggests we are not able to influence the employment rate through the manipulation of interest rates anyway. We're at the lower bound and stuck in a deleveraging. Get some better policies, or voters, get yourself a better congress."

But of course they can't do that, because congress likes having the Fed around as a potential scapegoat, for the same reason that investors like having financial advisors. (When things are going well, take the credit; when things are going bad, blame the advisor.)

All of this is readily apparent but none too convincing, re, the notion that these people know what they are talking about, or deserve any benefit of the doubt at all...

 

[Martinghoul]

Quote from darkhorse:
Such as? I swear I'm not trying to be obtuse... I just want to a hear logical "if A, then B, then C" type argument, even of a very basic nature, as to how lowering nominal rates could help unemployment... where is the cost / benefit analysis? If they are magically willing away various costs/side effects then I fail to see how that does not qualify as fuckwittery...

Well, how about this argument that is put forth by Evans in the speech (as well as someone like Blanchflower elsewhere)? Basically, they say that the cost of high unemployment when the economy comes out of a recession is understated by the raw numbers. The reason is that many of the unemployed are young people who become entirely detached from the labor mkt. That has all sorts of extremely unpleasant implications for an economy for a whole generation. This consideration, to Evans types, is so significant that it warrants a sort of an open-ended commitment to do whatever it takes, come what may. Again, I happen to disagree, but this is an argument that has some merit, empirically and theoretically.

Sure, but doesn't it have to be about right or wrong eventually - not in moral terms but pragmatic result terms - at some point in time? If a doctor wants to prescribe ongoing chemotherapy for a patient without credible cause, and ill effects are being perpetuated, and the doctor wants to keep going just because he really likes chemo and thinks it's great, then don't we have to consult the available empirical evidence and at some point say look, dammit, enough is enough?

Why isn't the Federal Reserve held to more scientific standards? These people are conducting massive experiments. Shouldn't they make at least SOME half-assed attempts at hewing to the rigors of the scientific method, in terms of assessing the results of their experiments soberly and honestly?

These people are the nation's financial doctors. In saying "this stuff is complex," can we really just wave away mounting evidence that the doctors are quacks?

This is where I am in complete 100% agreement with you. As a trader, it's always something that infuriated me about the really hidebound academic types. This ability to completely insulate yourself from reality as it unfolds here and now just cannot be healthy. However, that's precisely why you have a committee and a spectrum of views, with Evans being a rather extreme representative. Hoenig and other "freshwater" types are examples of the other extreme.

Yep, on this we agree 100%. The logical thing for the Fed to do in my estimation would be to say "Look, you people are on your own. We've done what we can, and the situation no longer involves systemic risk or need for emergency liquidity. Furthermore, mounting evidence suggests we are not able to influence the employment rate through the manipulation of interest rates anyway. We're at the lower bound and stuck in a deleveraging. Get some better policies, or voters, get yourself a better congress."

But of course they can't do that, because congress likes having the Fed around as a potential scapegoat, for the same reason that investors like having financial advisors. (When things are going well, take the credit; when things are going bad, blame the advisor.)

All of this is readily apparent but none too convincing, re, the notion that these people know what they are talking about, or deserve any benefit of the doubt at all...

Well, I would argue that they deserve the benefit of doubt. There's at least one reason for it and its name is Volcker.

 

[darkhorse]

Quote from Martinghoul:

Well, how about this argument that is put forth by Evans in the speech (as well as someone like Blanchflower elsewhere)? Basically, they say that the cost of high unemployment when the economy comes out of a recession is understated by the raw numbers. The reason is that many of the unemployed are young people who become entirely detached from the labor mkt. That has all sorts of extremely unpleasant implications for an economy for a whole generation. This consideration, to Evans types, is so significant that it warrants a sort of an open-ended commitment to do whatever it takes, come what may. Again, I happen to disagree, but this is an argument that has some merit, empirically and theoretically.

Indeed, the costs and risks of high unemployment are significant.

But how does this observation justify QE as a cure?

"Mrs. Johnson, if the gangrene spreads your leg could fall off or even worse. Therefore we recommend... more chemotherapy!"

I am picturing a version of the Seinfeld routine at the airport car rental counter. Evans' trouble is that he knows how to spot problems, but he doesn't know how to solve problems. Anybody can just spot 'em.

Quote from Martinghoul:


This ability to completely insulate yourself from reality as it unfolds here and now just cannot be healthy. However, that's precisely why you have a committee and a spectrum of views, with Evans being a rather extreme representative. Hoenig and other "freshwater" types are examples of the other extreme.

I am all in agreement for cultivating a diverse cross-section of intelligent, well-reasoned views. If there are good base cases for diametrically opposed courses of action, by all means, let iron sharpen iron.

But as for the stupid views? The unsupported ones based on quackery? Throw 'em right the hell out...

Quote from Martinghoul:


Well, I would argue that they deserve the benefit of doubt. There's at least one reason for it and its name is Volcker.

Indeed! "Tall Paul" was a great man who pulled off a very hard job.

I have utmost respect for Volcker, partly because the guy has no fear of saying what he thinks and speaking truth to power. My indifference toward the Obama administration turned to outright disgust when it became clear their plan was to marginalize Volcker, using him as a figurehead, while giving him no true authority or policy making sway whatsoever.

But what do you think Volcker would say to Evans? I suspect his critique would be similar to mine... maybe sans the profanity, but no less scathing... I am by no means saying here that all central bankers are dimwits, quacks and fools, only that the ones who clearly are should get the hook.

It would do a world of good, a tremendous world of good, if we had someone with a Volcker-like spine running the Fed right now. If guys like Evans were forced to credibly defend their views on logical grounds, that alone would be a huge step... it just blows me away the free pass these guys get... Tall Paul never got a free pass and wouldn't have wanted one. He took actions that made sense and logically explained why he took them.

 

[Martinghoul]

Quote from darkhorse:
Indeed, the costs and risks of high unemployment are significant.

But how does this observation justify QE as a cure?

"Mrs. Johnson, if the gangrene spreads your leg could fall off or even worse. Therefore we recommend... more chemotherapy!"

I am picturing a version of the Seinfeld routine at the airport car rental counter. Evans' trouble is that he knows how to spot problems, but he doesn't know how to solve problems. Anybody can just spot 'em.

Well, his logic is that the high unemployment is such a desperately bad thing that it pretty much justifies anything, including the kitchen sink. I can't really defend this view, but if you look at stuff that people like Blanchflower, for example, have written, you can see a reasonably eloquent explanation.

I am all in agreement for cultivating a diverse cross-section of intelligent, well-reasoned views. If there are good base cases for diametrically opposed courses of action, by all means, let iron sharpen iron.

But as for the stupid views? The unsupported ones based on quackery? Throw 'em right the hell out...

Well, that's the thing... These are all views and "stupid" is in the eye of the beholder. I, for one, cannot say it's a "stupid" view, even though I emphatically disagree.

Indeed! "Tall Paul" was a great man who pulled off a very hard job.

I have utmost respect for Volcker, partly because the guy has no fear of saying what he thinks and speaking truth to power. My indifference toward the Obama administration turned to outright disgust when it became clear their plan was to marginalize Volcker, using him as a figurehead, while giving him no true authority or policy making sway whatsoever.

But what do you think Volcker would say to Evans? I suspect his critique would be similar to mine... maybe sans the profanity, but no less scathing... I am by no means saying here that all central bankers are dimwits, quacks and fools, only that the ones who clearly are should get the hook.

It would do a world of good, a tremendous world of good, if we had someone with a Volcker-like spine running the Fed right now. If guys like Evans were forced to credibly defend their views on logical grounds, that alone would be a huge step... it just blows me away the free pass these guys get... Tall Paul never got a free pass and wouldn't have wanted one. He took actions that made sense and logically explained why he took them.

Yeah, I agree... My only suggestion paraphrases what Gary Becker said once. It's no accident that people like Volcker appear when things look bad. I guess things aren't bad enough yet.

 

[darkhorse]

Quote from Martinghoul:


Well, that's the thing... These are all views and "stupid" is in the eye of the beholder. I, for one, cannot say it's a "stupid" view, even though I emphatically disagree.

Right, and to clarify my use of a very base term, I am ready and willing to respect the viewpoints of those who disagree with me if the logic of their thought path is valid.

There is a difference between an opposing point of view that weighs variables differently, sees a different outcome based on nuanced inputs, starts with an alternate key assumption and progresses forward from there, and so on, versus a view that is just plain unsupported by substance.

 

[Specterx]

Quote from darkhorse:

These people are the nation's financial doctors. In saying "this stuff is complex," can we really just wave away mounting evidence that the doctors are quacks?

The problem is less that the doctors are quacks than that the whole "science" is nonsensical quackery. There is no real relationship between the Fed's operational capabilities and the objectives it's attempting to achieve. This disconnect is merely more obvious now than in the past. There never was to begin with any "science," etc.

It's as though I wanted to grow to become nine feet tall over the course of the next year and consulted some 'experts' on how best to achieve this. Charles Evans says chocolate and green tea will do the trick; Martinghoul vehemently disagrees, what I really need is tincture of crushed aphids and beetroot.

Well...

 

[Martinghoul]

Quote from Specterx:
The problem is less that the doctors are quacks than that the whole "science" is nonsensical quackery. There is no real relationship between the Fed's operational capabilities and the objectives it's attempting to achieve. This disconnect is merely more obvious now than in the past. There never was to begin with any "science," etc.

It's as though I wanted to grow to become nine feet tall over the course of the next year and consulted some 'experts' on how best to achieve this. Charles Evans says chocolate and green tea will do the trick; Martinghoul vehemently disagrees, what I really need is tincture of crushed aphids and beetroot.

Well...

Yeah, but that's the thing... The process of understanding the world around us often starts with stuff that appears like real quackery. My favorite example of this phenomenon is J.J. Thompson's "plum pudding model" of the atom. Sure, it's been shown to be pretty much all wrong, but one could imagine that it paved the way for things that eventually were shown to make sense.

 

[darkhorse]

Quote from Martinghoul:

Yeah, but that's the thing... The process of understanding the world around us often starts with stuff that appears like real quackery. My favorite example of this phenomenon is J.J. Thompson's "plum pudding model" of the atom. Sure, it's been shown to be pretty much all wrong, but one could imagine that it paved the way for things that eventually were shown to make sense.

Hmm. I question whether that's a valid comparison. New scientific theories are proven through experimentation and successful prediction over time, wherein the model says that if A, then B, or given X, the result of Y should be Z, and is proven right.

Putting forth pseudoscientific reasoning and / or spurious correlation as a justification for dubious economic policy, on the other hand, has nothing to do with the rigor of scientific theory or the means by which novel theories are stress tested.

If what you are saying is that quackery is bad here and now, but can lead to something good later, it still stands to reason that application of the scientific method is the only rational means by which this could come about.

Bad policy based on bad ideas (e.g. the discredited Phillips curve) will never lead to forward advancement if no one is calling out the quackery for what it is in the first place.