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Wednesday, September 30, 2020

Observations On The North American Fiscal Outlook

I am doing another editing pass, and do not have time for a full article. I just want to make some observations on the political/fiscal outlook in the United States and Canada.

The first Presidential debate was last night (which I skipped). From my perspective, the main hot button issues in the U.S. election are not about macro policy, at least from a high-level perspective. Obviously, economic outcomes for American households will be different, but from the vantage point of a foreigner owning U.S. Treasurys, direct impacts are harder to see.

Sunday, September 27, 2020

Understanding The Non-Existence Of Financial Constraints

The idea that there is no financial constraint on a floating currency sovereign bothers some people. However, it makes sense when we realise that a constraint is a limitation that is always binding. For a floating currency sovereign, it appears to be well accepted that it is not bound all the times by financial concerns. This is unlike a household, that has to remain within its spending capacity (as determined by its resources and ability to borrow) at all times.

Wednesday, September 23, 2020

Fiscal Sustainability And The Fiscal Folk Theorem

Fiscal sustainability is often invoked in mainstream discussion of fiscal policy. However, "sustainability" is rarely defined in editorial pieces. The reason for this reticence is straightforward: there is no agreed-upon definition. Unfortunately for the concept, there is no clear way of testing whether real-world fiscal policies are sustainable, nor what are the side effects of being unsustainable.

This is related to what I refer to as the Fiscal Folk Theorem. If the technical definition of sustainability is not specified, nor the alleged problems created by unsustainability is specified, the discussion is inherently non-quantifiable -- no matter how many numbers are mentioned. The resulting discussion collapses to the Fiscal Folk Theorem. The theorem suggests that bad things can happen due to a high level of debt. However, this does not mean that something bad will happen -- as the Widowmaker Trade demonstrated.

Sunday, September 20, 2020

The Fiscal Folk Theorem

In between editing my MMT primer, I read a burst of articles (20+) discussing government debt management in the current situation from non-MMT sources (have to see what the other side thinks). Mainly market commentary, but also op-eds from ivy league professors or other highly credentialed people, think tanks, maybe a rating agency, etc. -- but no journal articles (if one is sensitive to that sort of thing). As one would expect, the articles covered a wide range of political views and economic theory affiliations. What I realised (after the fact) was that the operational content of every single one of those articles collapsed to what I call the Fiscal Folk Theorem. It might surprise people to read this, but the folk theorem is correct. The issue is that the predictive content of the theorem is limited, and if mis-applied, it leads to The Widowmaker Fallacy.

Neoclassical economists are not going to be happy with my message. For them, the most palatable possibility is that this is purely a communications problem. Even if this is true, it is a catastrophic communications problem - this sample may have been relatively small, but I have digested so much financial market commentary to know that this is a widespread condition. Very simply, any neoclassical theory that goes beyond the Fiscal Folk Theorem is not making a dent in the wider conversation.

Wednesday, September 16, 2020

Inflation Targeting: Keep It Simple

The Powell press conference came and went, discussing the Fed's new approach to inflation targeting. My view is that not much has changed, and we just face largely pointless debates about messaging -- which are predicated upon the questionable assumption that expectation management can fine-tune economic growth.

(For this article, I will assume the conventional view that interest rate policy can be used to control inflation. I have severe concerns about this, but if we do not assume that the central bank can fine tune growth to match arbitrary trajectories, the story is a bit more plausible.)

Tuesday, September 15, 2020

Canadian Establishment: "Deficit Myths? Yes, Please!"

Chart: Canadian 5-Year Rate And Bank Rate

The Canadian Establishment has launched a full-court press against lax fiscal policy of the Trudeau government. It would be only a slight exaggeration to say that they are calling for austerity (at least not immediately), but rumours of policies like Universal Basic Income are causing alarm bells to ring. The Canadian economic establishment is very much wedded to sound finance beliefs, courtesy  of the Great Canadian Fiscal Crisis of the early 1990s.

Sunday, September 13, 2020

Computers, Productivity And Long-Term Growth

I ran into an attempted slam on Paul Krugman's 1998 argument that "the internet" would not be a big deal economically. Sadly for the anonymous account who dredged the argument up, Krugman was closer to the truth than the people he was arguing with at the time. This was part of a debate when I started in finance, and related to long-term growth. The linkage to fixed income is via the dreaded r>g fiscal sustainability debate -- what is the long-term real growth rate? 

At the time, I was largely unimpressed with economists' grasp of the technological issues. My academic background was in control systems engineering, which was the discipline tied to harnessing the power of electronics to better operate mechanical and chemical systems. My view is that there is a certain amount of economic folklore around the subject, and the correct answer is that long-term real growth projections are almost entirely garbage in-garbage out exercises.