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Rebutting Rand Paul's Bullsh1t

ResponsiblyIrresponsible
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9/18/2015 3:37:10 PM
Posted: 1 year ago
It never ceases to amaze me when uniquely incompetent dipsh1ts opine on things wildly out of their depth. That's no less true for Senator Rand Paul and Mark Spitznagel, who recently penned an op-ed in the WSJ. How in the world these people are given a platform, but the Journal hasn't given 16k or me a regular column, astounds me.

Anyway, I'm going to take probably a few posts to rip this bullsh1t apart. Enjoy!

Note that this guy, along with his father, predicted (a) hyperinflation, (b) a currency crisis, (c) a spike in long-term interest rates, and (d) a bubble/crash.

Since then we've had:

(a) Inflation is at 0.3% over a 12-month basis in July. Core--excluding food and energy--is at 1.2%. The target is 2%, and inflation is extremely more inertial and rigid due to a myriad of research showing the Phillips curve has flattened out (i.e., price rigidity has intensified) and remains flat at high levels of labor-market slack (i.e., either accept a larger employment gap or concede the curve is flat). The Fed has consistently *overestimated* inflation and growth over the past few years, and doesn't project it'll hit 2 percent until 2018. Yet, they're still raising rates, at least partly because ignorant dipsh1ts like Paul and friends in Congress keep giving it sh1t. The Fed's inflation projection for *this year* was revised down to 0.3 to 0.5 percent, from 0.6 to 0.8 percent.

(b) Hardly. The dollar has *appreciated* by over 17 percent over the past year, which is pushing down imports, reducing net exports, and pulling down inflation, in spite of the imperfect pass-through (i.e., research from Jackson Hole found that a 10% appreciation of the dollar reduces import prices by 4.4% because U.S. exports are invoiced in dollars). It appreciated even amid 2008 and is going to continue to appreciate as the Fed raises interest rates this year and as China continues to disintegrate.

(c) Nope, they're near record lows -- a little over 2 percent. To the contrary, inflation expectations, measured by nominal and inflation-protected Treasury spreads, have plummeted over even a 10- and 30-year maturity, and that's an issue. They're are a lot of technical issues I won't get into either as to why Treasuries will be low, as they were in 2004, even after the Fed raises rates, but even as China sold off a record amount of foreign currency reserves--which dipsh1ts like Paul have been "warning about"--the dollar didn't even move and Treasury yields didn't rocket. Why? A lot of reasons: one is that the Fed is holding hundreds of billions of long-term Treasuries and is maintaing the size of its balance sheet by replacing them upon maturity.

(d) Ridiculous. Look at the current RGDP and inflation numbers and tell me with a straight face there's a bubble: you can't, because to assert there's a bubble, you need to be uniquely incompetent and incorrigibly ignorant of the data. Not to mention, risk spreads financial stress have *rocketed* to the highest level in three years according to several well-watched stress indices. That's not a sign of "reaching for yield," which itself is a belligerent concept because it assumes low interest rates mean easy money--they dont, they mean that money was tight (Milton Friedman).

Now... onto his article.
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Excerpts from Paul's article are produced below and bolded.

"The recent tumult in U.S. equity markets has prompted many analysts to urge the Fed to postpone any increase in interest rates. This advice assumes that rock-bottom interest rates are balm for a weak economy, with the only possible side effect being price inflation."

No, it doesn't make that assumption. Never once have I ever asserted that low interest rates mean easy money, In fact, I've argued that policy has been *too tight* and the equilibrium real rate too low, and that's a direct byproduct of incompetent monetary policy. The point isn't even that the zero bound is the be-all-end-all; it's what it signals about the Fed's intentions and its reaction function, and the moving part of raising interest rates signals that the Fed doesn't care about low inflation, financial volatility, tightening in financial stress, global uncertainty, hidden labor slack, etc. The credibility concerns of tightening and having to reverse--think Japan, ECB, Sweden, and about 9+ other central banks over the past decade--are enormous, and the costs of that *outweigh* the risk of price inflation. It's a complex risk calculus that is beyond Paul's comprehension.

But, yes, the only genuine consequence is higher price inflation, which (a) won't happen because inflation is persist and wages rigid (same reason we didn't have sustained *deflation* amid the financial crisis and (b) is a good thing for credibility purposes, for gauging labor supply elasticity, for long-term potential, etc. Bubbles aren't a concern for a multiplicity of reasons, and much of the literature comes firmly down on opposing "leaning" against them--and that detecting them requires a crystal ball.

"Yet it is the Fed"s artificially low interest rates that set up the economy for the 2008 crisis, not to mention previous crises."

Completely wrong and without context. Paul won't tell you that if you use any gauge *other* than nominal interest rates--which is a horrid gauge at that--policy, if even too loose in the early 2000s, was hardly conducive to bubble conditions. There's a fundamental difference that's lost on him between easy credit and easy money. The Fed can only casually control the first, but *that* was the underpinning of ninja loans. That wasn't due to "easy money," but to horrid regulatory policy.

And, of course, easy money means higher future interest rates and higher long-term rates. There was no overheating in the 2002-2007 period, nor was there intolerable inflation. By no reasonable metric--good luck calculating the Wicksellian equilibrium real interest, Rand Paul (hint: he doesn't know what that is)--was money so easy that it induces underpricing of risk.

"The "doves" are right to point out that higher interest rates will lead to a repricing of many securities, aka a crash."


Actually, a lot of this repricing has already happened. Goldman released a report finding that markets are already pricing in three rate hikes. There will be volatility, but it'll be over the expected *path* of interest rates due to changes in market perceptions of the reaction function. If you want evidence of well that worked out for the Fed in 2013, google the phrase "Taper Tantrum." It's not pretty.

"But years of near-zero interest rates have made this inevitable."


Again, Paul is reasoning from a price change. Interest rates are not at zero because of the Fed, but because of the state of the economy. Prices will adjust in a post-liftoff era as market expectations filter and transmit policy changes--that's completely normal, and no one ought to fear that (and the Fed has been very clear that it doesn't pander to markets, a la the "Greenspan put")--but that only becomes threatening when it's coupled with uncertainty or rapid, malicious repricing due to ineffective communication and an ambiguous reaction function. That's what lifting off will do, and in no way is this inevitable--it's only inevitable, ironically, if we listen to Paul.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
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9/18/2015 3:37:38 PM
Posted: 1 year ago
Expect the rest in a bit. This is a long bloody article.

I can't remember whether I linked to the article. Here it is: http://www.wsj.com...
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
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9/18/2015 4:10:57 PM
Posted: 1 year ago
Another point:

"Artificially low" is a misnomer. Even "liberal" -- which is supposed to be mean "intelligent" these days when dipsh1ts like Donald Trump and Rick Perry can run for president for the GOP -- commentators, like David Pakman, regularly fck this up, which sort of underscores why political types should shut the fck up about monetary policy (or, for that matter, defer on technical matters outside of their area of "expertise"... if I were even so generous as to call it that, which I won't).

No matter what, the Fed determines the size of the monetary base. Therefore, it controls in a crude sense the money supply, and thus interest rates, and thus NGDP. Even if you had a computer spitting out dollars or electronically transferring funds on autopilot (which explains the October 15, 2014 "flash crash," btw), that's determining the base. Doing nothing, therefore, would constitute keeping rates where they are until the balance sheet runs off -- i.e., assets mature -- after which the base would start to taper off. That's a contractionary policy. Raising rates, on the other hand, isn't the Fed "backing away"; it's the Fed actively intervening to tighten credit conditions.

Finally, there is no "artificial level of interest." True, the Fed sets a target range for short-term rates, and can to a large extent influence short-term money markets via buying and selling securities -- or, now, setting a target range via a combination of its overnight reverse repurchase program facility and the interest rate it pays on excess reserves -- but in so doing it merely targets the Wicksellian equilibrium real interest rate, which fluctuates with the state of the economy. Paul wants to *raise* rates such that we're above the Wicksellian, which depresses demand even further -- and is thus a fundamentally stupid idea.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ClashnBoom
Posts: 886
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9/18/2015 5:11:18 PM
Posted: 1 year ago
Dig
I will change my sig weekly. Week 4.

Fun fact of the week
Clumsy alien Jar Jar Binks was introduced in The Phantom Menace for comic relief, but he was initially a two-faced mercenary who was to betray Qui-Gon Jinn, a Jedi Master played by Liam Neeson.

Joke of the week:
Nerd 1: "Why can't you trust atoms?"
Nerd 2: : "Cause they make everything up!"