Pensions And Public Policy: The Golden Era

The pension industry is the result of complicated regulations, and discussions about pensions often devolve into arcane technical debates. In my view, this hiding behind technical arguments is a mistake; the economic analysis of pensions from the point of view of the public interest is straightforward. What the technical complexity hides is the complete lack of coherent views amongst policymakers as to what the public interest is. As a result, the problems with pension policy are moral, not technical.

Output Gaps And Inflation

The output gap is a key concept in mainstream economic analysis of inflation. Although I am not happy with the details of the standard analysis of what determines inflation, I use a weaker version of the standard output gap in my thinking. I refer to this version as the generalised output gap (GOG). In this article, I give a simplified summary of economic theories of inflation and how various conceptions of the output gap relate to this.

U.S. Economic Growth - Mediocrity Rules

Looking at U.S. data in isolation, I see very little to distinguish the current environment from the rest of the post-2010 period. (There was a strong bounce after the recession, which is unsurprising given the extent of the drop in activity. To use a phrasing popular amongst market commentators, it was a "dead cat bounce.") I believe that the unemployment rate is essentially broken as an indicator, and there is no reason to expect a pickup in inflation on any reasonable time frame. On the other hand, I still do not see enough weakness to justify the panic periodically seen in the risk markets over the past couple of months.

The Non-Falsifiability Of The Natural Rate Of Interest

The "natural rate of interest" is an analytical concept which is embedded in mainstream approaches to economics. Modern Dynamic Stochastic General Equilibrium (DSGE) models are built around the importance of interest rate (including expected interest rates) and the central bank's setting of those rates. If you are willing to assume that mainstream macro is correct, it provides a way of looking at the world. For example, "secular stagnation" (slow growth) can be blamed upon the natural real rate of interest falling to a negative value, leaving central banks unable to stimulate the economy.

However, if you are less willing to assume that mainstream macro is correct, and would like to test the efficacy of interest rates for steering the economy, you will run into a severe problem. The way that the natural rate of interest is currently conceptualised means that it can explain any observed economic outcome; that is, it is non-falsifiable. As a result, there is no point in trying to prove modern mainstream macro as being incorrect; that task is impossible. The only way forward is to ask whether modern macro can make an useful predictions (as opposed to fitting historical data); I would argue that there is little sign of any such predictive power.

A Snapshot Of Canadian Sectoral Balances

I was asked about the sectoral balances in Canada, and the chart above shows the data. This article comments on some of the trends in the chart above.

Book Review: The National Debit

The book The National Deb(i)t: How the Post-Gold Standard Modern Monetary System Really Works (Second Edition) by Edward J. Delzio is a good introduction to Modern Monetary Theory (MMT).  Like the reviewer, the author worked in the fixed income markets, and was similarly attracted to the insights provided by MMT. Although I believe the book is worthwhile, it must be kept in mind that it is introductory, and it is not enough to grasp some of the online debates surrounding MMT.

The Effect Of Fed Rate Hikes (Or Lack Thereof) On The Dollar

I am uncertain whether or not the Fed will raise rates any time soon. In my view, I think the monetary policy hawks' analysis is widely missing the mark; inflation is not going to be a problem in the United States any time soon. That said, I see little cost to the Fed raising rates. The most plausible reason to worry about a Fed rate hike is that it will cause the U.S. dollar to become "too strong" and create a severe external drag on U.S. growth. It looks to me that the currency markets have already "priced in" rate hikes, and so I do not see a reason for the U.S. dollar to become appreciably stronger versus other developed currencies.

Net Financial Assets And Equity

An old debate about "Net Financial Assets," a term used in by Modern Monetary Theory (MMT) was reopened by Steve Roth at Asymptosis.in the article "Where MMT Gets Its Accounting Wrong -- And Right." This generated a lot of comments, and a response by Steve Randy Waldman at interfluidity ("Translating Net Financial Assets"). This also generated discussion at Mike Norman Economics. I largely agree with Steve Waldman's view, but I just want to offer what I think is a more introductory version of what I understand to be the underlying issue. That is, does it make sense to "net out" equity?

2015 Lift-Off Isn't Looking So Good. Let's Start Talking About 2016!

Although Fed speakers have been promising a rate hike "in 2015," for what seems like forever, the latest data have possibly pushed the "lift-off date" into 2016. I may be premature with this, as the Fed may want to do a token hike to get the 0% monkey off their back. However, with risk markets swooning, such a move could easily look incredibly stupid, even if it appears useful psychologically.