Inflation Hedging: Do Not Ask For The Impossible

I ran into this article on inflation hedging with inflation-linked bonds from FT Alphaville. I just scanned it quickly, but I think that the the approach used makes the topic unnecessarily complicated. I addressed the issue in my book Breakeven Inflation Analysis, and the odds are that I also over-complicated the analysis on the basis that I wanted to keep my book longer than five pages. This article is an attempt to reiterate my views in as short a text as possible.

The way to think about this is to not dive into the weeds of details of inflation-linked bonds, and go back to basics. We need to analyse the following premise:

I want a guaranteed high return over a particular investment horizon if event X happens.

Why The "Friedman Thermostat" Analogy Should Be Uncomfortable For The Mainstream

Nick Rowe’s article on Milton Friedman’s Thermostat has popped up in online conversation. For those of you unfamiliar with it, it is about inferring statistical relationships between inflation and interest rates. Although I agree that it is possible to do some silly correlation analyses between those variables1, if we think about the analogy more carefully, it points to concerns with the mainstream approach.

Waller Comments

Nick Timiroas highlighted an exchange from Fed Governor Waller (link to speech/interview transcript) on Twitter. This article consists of two rants based on the transcript, plus a bonus rant in the appendix based on what somebody else said.

A Response To A Question About Post-Keynesian Interest Rate Theories (...And A Rant)

I got a question about references for post-Keynesian theories of interest rates. My answer to this has a lot of levels, and eventually turns into a rant about modern academia. Since I do not want a good rant to go to waste, I will spell it out here. Long-time readers may have seen portions of this rant before, but my excuse is that I have a lot of new readers.

(I guess I can put a plug in for my book Interest Rate Cycles: An Introduction which covers a variety of topics around interest rates.)

A Non-Forecast 2024 Outlook

Since I am not in the forecasting game, I not on top of what the consensus views are. I also no longer pay attention to others’ Year Ahead Forecasts (which tend to be produced in December and long forgotten by February — people seem to produce them solely because it’s traditional). However, I wrapped up my “central banks as banks” article sequence, and I am now going to catch up on some charts to see where we stand. For brevity, I am just looking at a handful of American charts; I could possibly do some comments on other markets later. As a spoiler, I am repeating what I have been saying for at least a year.

Central Banks And Crises

This article is a wrapping up of a sequence of articles on the topic of “central banks as banks,” which is expected to form a chapter in my book on banking. This version of the text is a brainstorming exercise — I expect that it would require a massive re-write to get into a book. I am presenting it in this format since it was a topic that came up in comments on earlier articles, and I also want to finish the train of thought starting in my online articles. It is breezy, and it relies on discussions that appeared in my earlier book Recessions: Volume I. I am going to suggest that readers spend their bookstore gift cards buying that book rather than repeating too much from it; my banking manuscript is going to have to be more stand alone. I also am relying on stream-of-consciousness assertions, and would need to backfill references once the text is closer to finalised.

Happy New Year!

If things are going well, the role of the central bank within the banking system of a developed country is largely invisible. The wholesale payments system just works, and there are no serious worries about the private banks that are the core of the financial system. Instead, most commentators just worry about central bankers’ abilities to centrally plan the capitalist economy by nudging a policy rate up and down and making cryptic statements about the economic future. (Of course, those of a hard money bent are continuously predicting calamities since nobody is adopting their demand that the currency be pegged to whatever collectible they favour.)