The Bond Market Is Discounting an Eventual Recession

The flattening of the yield curve has attracted some commentary, but it appears to be telling us very little. By itself, the 2-/10-year slope (above) is not at a particularly interesting level; one should expect flattening during a rate hike cycle. Current bond market pricing is consistent with an eventual recession, and so arguments that the Treasury market is "in a bubble" appear to be hyperbole.

Summer Schedule

I have been tied up with various non-writing projects (as well as being hit by some kind of virus this week), so I will be now dropping to a summer schedule. Unless I want to write a quick rant about something, I will aim for one weekly article, probably published on Wednesdays. (Although this is not a subscription service, I try to keep to a weekly writing schedule.)

Yeah, the Fed hiked rates this week. Not worth getting excited about, until they are hiking every second meeting...

Let's Talk About Debt, Baby

Gerard MacDonell wrote "The debt debate is relevant now" a couple of weeks ago. In it, he argues that debt sustainability in the United States is a relevant issue now, not an academic issue a couple of decades out. He realises that economists in the Modern Monetary Theory (MMT) school will disagree, and he explains why he disagrees with the MMT view. I am in the MMT camp, and I suspect that I do not violently disagree with Gerard's view on the current state of the cycle. I would side-step his concerns about "fiscal sustainability," and instead argue a slightly-modified version of his argument: fiscal policy is relevant now (and it always is). However, political economy matters. That is, I do not think we can discuss fiscal policy in the dry technocratic terms our elites prefer to use; we need to accept that fiscal policy is inherently political. "Debt sustainability" is best labelled "political sustainability of debt." Given the drift in the Debt Ceiling debate, "(political) sustainability" is an issue that may hit in a matter of months.

Quick Comments On Ongoing Projects

This article gives a few comments on some projects that I am involved in. They are the upcoming Modern Monetary Theory (MMT) academic conference (in September), my stock-flow consistent (SFC) models guide, and my struggle to put mainstream Dynamic Stochastic General Equilibrium models into a formal mathematical framework that makes sense to me.

The Relationship Between sfc_models And Godley And Lavoie

The text Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, by Wynne Godley and Marc Lavoie is cited heavily within the sfc_models framework. This text is a standard text for SFC modelling, and has already been the object of extensive modelling. The fact that the models are well known is extremely useful from the point of view of development. These existing models were used to calibrate the sfc_models code.

(This article is an unedited draft of a section from my upcoming book "Introduction to SFC Models with Python.")

Primer: Funding Versus Credit Risk

The act of lending involves two fundamental operations: extending financing (funding) ans taking credit risk. These two roles are typically thought of together, which obscures what is happening. By decoupling these concepts, we can better understand the effects of debt issuance. If we can eliminate credit risk, the circular nature of financial flows means that the only limitations on debt issuance are real resource constraints. This understanding helps us better understand the behaviour of economic models (why they depart from real-world behaviour), governmental finance, and banking.

The Horrifying Mathematics Of Infinitesimal Agents

Highly recommended
for Lovecraft fans.
(Cover is link to
Amazon.com.)

Three men were swept up by the flabby claws before anybody turned. God rest them, if there be any rest in the universe. They were Donovan, Guerrera, and Ångstrom. Parker slipped as the other three were plunging frenzied over endless vistas of green-crusted rock to the boat. and Johansen swears he was swallowed up by an angle of masonry which shouldn't have been there; an angle which was acute, but behaved as it was obtuse. ("The Call of Cthulhu," H.P. Lovecraft,  1928.)

Searchers after mathematical horror haunt strange, far concepts. Being swallowed by non-Euclidean geometry is one form of terror. But the true epicure in the terrible, to whom a new thrill of unproveable ghastliness is the chief end, esteems most the hideous infinitesimal agents of mainstream economics.

This article examines the curious mathematics of infinitesimal agents, which are not merely infinitely small, they are indexed on the [0, 1] interval. Such agents are of critical importance in New Keynesian economics, as the standard Calvo pricing uses such agents to generate price stickiness. However, it is impossible for this mathematical formalism to be the limit of a large number of firms, nor is it possible to properly define an optimisation problem for such agents. Since the solution of the mathematical problem is not the result of optimising agents, such models are just as vulnerable to the Lucas Critique as the old Keynesian models. It may be possible to create a proper optimisation structure for such models, but it would probably requite re-writing most of the mathematics.