What does an Austrian economist think of the tomfoolery at Volkswagen? Does the existence of inequality always indicate injustice? Is Britain better off leaving the EU? Are low interest rates immoral? Does Europe have a refugee crisis or an illegal immigration crisis?
If any of those questions interest you, you should listen to the conversation John Stepek and I had yesterday with Dr Barbara Kolm. Dr Kolm is the president of the Friedrich Hayek Institute in Vienna and the director of the Austrian Economics Centre.
Tim Price was also in yesterday. Heâs in excellent form right now. Nick OâConnor and I interviewed him about a cashless society and what exactly he means by the term âFinancial Martial Lawâ. Those are the types of subjects weâve been writing about regularly at Capital and Conflict.
Yellen falls ill
Todayâs headlines focus on Janet Yellenâs volte face on interest rates. Seeing how displeased markets were with the US Federal Reserveâs inaction last week, Yellen took the stage at the University of Minnesota. She said, âMost FOMC participants, including myself, currently anticipate… an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.â
That shouldâve cleared things up. But it didnât. The Fed didnât raise rates last week. But it wants everyone to believe it will raise rates this year. Or next year. Or eventually. Judging by the reaction of markets, investors donât believe the Fed anymore.
Iâll come back to that in a moment. There was an alarming incident at the end of Yellenâs speech, though. She seemed to lose her place several times. There were two long and awkward pauses. And she appeared to be either uncomfortable or in some physical distress.
Strangely, no one came to her aid to see if she was well. She finished her remarks and was helped off the stage. Wire services reported that she received medical attention after the speech. They cited dehydration caused by the bright lights of the stage. Yellen resumed her normal schedule later in the afternoon.
You can find the clip on YouTube. Itâs uncomfortable to watch. Itâs also a reminder of the enormous stress Yellen must be under. As a human being, you sympathise. It also perplexes me that no one stepped into help her. But everyone reacts differently in a crisis.
From a purely rational perspective, you can understand why sheâd be feeling the pressure. Sheâs in the centre of a system where human beings claim to have enough knowledge to know the price of money. That system is cracking and buckling. Itâs taking a human toll too.
From an âopticsâ point of view, itâs not a good look. Everyone at the Fed knows that. In a 2004 paper about âMonetary Policy Alternatives at the Zero Boundâ, Ben Bernanke wrote about one of the Fedâs most powerful tools in boosting inflation expectations. He used the word âcommunicationâ 30 times in the paper. Bernanke wrote the following (emphasis added is mine:
âAlthough communication is always important, its importance may be elevated when the policy rate is constrained by the ZLB [zero lower bound]. In particular, even with the overnight rate at zero, the central bank may be able to impart additional stimulus to the economy by persuading the public that the policy rate will remain low for a longer period than was previously expected. One means of doing so would be to shade interest-rate expectations downward by making a commitment to the public to follow a policy of extended monetary ease. This commitment, if credible and not previously expected, should lower longer-term rates, support other asset prices, and boost aggregate demand.â
The Fed is trying to do the opposite today. Itâs trying to talk interest rates up without actually moving them up. It wants the effect without the action. Markets arenât buying it any more. Now it has a credibility problem. Bernanke wrote about that, too, in this 2004 paper:
âShaping investor expectations through communication does appear to be a viable strategy⌠By persuading the public that the policy rate will remain low for a longer period than expected, central bankers can reduce long-term rates and provide some impetus to the economy, even if the short-term rate is close to zero. However, for credibility to be maintained, the central bankâs commitments must be consistent with the publicâs understanding of the policymakersâ objectives and outlook for the economy.â
Itâs the last part thatâs interesting as we end the week. If the Fed thought the US economy was healthy, it would have raised rates. If the Fed thought the world was normal, it would have raised rates. If the Fed thought China wasnât a risk, it would have raised rates.
The Fed didnât raise rates. But now it says it will. The market doesnât find the Fed credible. The expectation of low rates and more quantitative easing (QE) has been the foundation of the bull market since 2009. As the foundation crumbles, it could take the bull market with it.
The blood supermoon
In a completely unrelated astronomical note, watch for the âblood supermoonâ on Monday, 28 September. It should be a sight to see. The moon will appear huge, hence the âsuperâ designation. Its position in the sky and its proximity to Earth create the effect. The âbloodâ part is more confusing. The reflection of the sun off the Earthâs atmosphere apparently accounts for the effect. In any event, have a look. It should be memorable.
Marxist Greek gives Brits an earful
Former Greek finance minister Yanis Varoufakis took the British airwaves last night and gave the City and George Osborne an earful. In this instance, itâs hard to disagree with him. He said:
âThe notion that the Bank of England prints mountains of money, purchases paper assets in the City of London, bolsters banks â which they had to do â but that then that will trickle down into productive investment, that is a fantasy. Alternative QE is something which should be discussed. Milton Friedman and Ben Bernanke, who are on the same side of politics as the Tory party, would want to have this discussion.â
By âalternative QEâ he was referring to Labour leader Jeremy Corbynâs plan for a âpeopleâs QEâ. Keep your eye on this. Another way to think about it is monetary policy as fiscal policy. Instead of the government borrowing money â which would create an even larger deficit and debt for Britain, politically unacceptable at the moment â the central bank would monetise government debt straight away.
What does that mean? Say you want to build a new railway that costs ÂŁ1bn but you donât want to borrow to do it (sell bonds to the public). You sell them to the central bank instead. The Treasury issues the debt. The Bank of England buys it with new money it creates ex nihilo.
Presto!
Change-o!
Money for nothing and your trains for free.
Itâs coming soon to an economy near you.
Category: Economics