Friday, May 29, 2015

Kruggers on what to expect when rate tightening begins

Kruggers - sex and drugs and zero rates. Wherein he notes this chart:

which actually is scary, when you think about it.

I'd add that this chart also shows that a full 85% of wall street traders have never even seen a secular bull market - all they've seen is the doom of the Nasdaq collapse, followed by a tepid market recovery, then a banking collapse with OMG tanks in the streets and America presided over by a Kenyan gay muslim communist sleeper agent.

Then Kruggers gives us this comment by Kevin O'Rourke which seems perfectly believable:

The markets want money for cocaine and prostitutes. I am deadly serious.

Most people don’t realize that “the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior to them. In addition, they generally possess the mentality and probably intelligence of junior cycle secondary school students. Without knowledge of these basic facts, nothing about the markets makes any sense—and with knowledge, everything does.

Yup, I believe it. My god though, Kev: this means that in order to beat the market handily, all you have to be is an even-headed non-coke-addict with some emotional maturity.

Then Kruggers bitch-slaps the clown at Bloomberg who wrote the story:

Side benefit: read the caption on the Bloomberg chart, and note how bad economic analysis — the specific kind of bad analysis one finds on cable TV business news — gets presented, probably unknowingly, not even as opinion but as fact. “Inexperienced traders will have to tackle markets without the central bank’s artificially low interest rates …” [my emphasis]. Who says they’re artificially low? What does that even mean? It might mean rates below the Wicksellian natural rate, which is the rate that produces stable inflation — but with inflation consistently below the Fed’s target, this criterion would if anything say that rates are artificially high, propped up by the zero lower bound.

I love the crotchety, mean-spirited new Krugginator.

Anyway, this whole rate-cycle thing doesn't really matter, considering enough of the Fed seem to want to concentrate on the unemployment section of their mandate and see how low this fabled "NAIRU" really is. And besides, the crappy data we've seen, with the lack of post-winter bounce, must suggest the economy has slowed and the Fed wouldn't have the growth headroom for raising rates for a while, right?

Though of course the cokehead brats on Wall Street will happily believe that Yellen will happily sabotage the US economy, driving it back into a liquidity trap. Because they're cokeheads and paranoia is their thing.


  1. So, I assume that Krugman is talking about consumer price inflation when he talks about inflation, no?

    We have 0% CPI here in Sweden but an annual inflation of 10-15% in the housing market. Apartments in Stockholm are selling for 15 000 USD/square meter, which is actually quite affordable since the interest rates are very low (1-1.5%), and this due to the lack of CPI inflation. This makes no sense to me as a non economist layman. I think the situation is quite similar in Canada? What does Mankiw or Krugman has to say about this?


    1. I'm only doing first year intro macro, but here's the answer I've learned:

      "Inflation" is a rise in prices due to the reduced value of money. "Prices", in this story, crucially refers to *two* markets: the market for goods and services, *and* the market for factors of production. That's why inflation isn't supposed to hurt the working consumer very much: he is a factor in the labour market, so his wages are supposed to (eventually) track inflation.

      (Inflation really hurts the rich, however, because it functions as a tax on capital gains and a tax on interest income. Meanwhile, if the inflation is *unexpected*, it also functions to reduce the debts of the working class, as my dad saw in the 70s. That's why the plutocratic elite hate inflation so much - it's inherently redistributive.)

      Housing is not in itself a component of CPI, because housing is considered an *investment* and not consumption. So housing is *capital*, not part of the factor markets: your housing is not consumed as you use it (though it is depreciated, but so is other capital). Now sure, technically, treating housing this way creates a market good in "owner equivalent rent", which *is* part of CPI, but I don't know how they calculate OER to incorporate it into CPI so I can't say how significant that component is.

      Anyway, if housing is an investment, then it becomes apparent that all you're seeing is the same old bubble that we've seen everywhere: inflation is critically low, GDP growth is nonexistent, but people on the richer side are still making money by extracting rents (this word used here has nothing to do with the "rent" word used above, it's a specialized bit of terminology), mainly because of market failures created by politicians to benefit the ruling elite. That excess money then blows bubbles in investment assets. This happens cos there's too much money chasing too few goods and happy to earn more in capital appreciation than they can earn by lending.

      You saw the same thing in Spain a few years ago, we saw it in the US. I have no idea how it'll end for Sweden. It can end, but I'm thinking it requires political change, to encourage money to flow back into productive investment to chase a revitalized consumer. Has Sweden swung economically right-wing over the past decade?

    2. Yes, both economically, socially and politically, but from a position quite far to the left. The Socialdemocrats (socialists) lost the election in 2006 and were replaced by a coalition of four liberal parties (we don't have any conservative parties similar to the conservatives in the US or GB) that made some dramatic changes to society, eg allowing companies run by venture capitalists and registered in the Cayman Islands to take control of schools and elderly care. Paying taxes was not high on their agenda.

      Not only are the low interest rates fuelling out of control house prices. We also have loans without amortization, minimal property taxes which were heavily reduced after 2006 and the possibility of generous tax deduction of your interest payments. Do I need to add that our banks are extremely profitable? We are one of the most indebted nations in the world (place number 5) when you include private/household debt. Most people seem content as long as prices keep going up but the situation might already be beyond repair.

    3. OK, so I guess the criminal kleptocrats have taken over Sweden too.

      Canada's next government is going to be a labour party. Hope you're jealous.