Soft science

[JohnRoberts]

I often joke that economics is a "soft" science, since it generally involves human responses to incentives, and humans can be well you know squishy. That said the study of macro (large scale) economics is a mature field with strong correlations identified.

A few recent examples of leaders ignoring these economic relationships, are the leader of Turkey insisting that lowering interest rates will slow inflation (currently running around 50%), and in the US where massive liquidity injections and even more proposed government spending will supposedly not increase inflation.

Erdogan in Turkey has fired his finance minister and other economic advisers trying to thwart inflation by raising interest rates. The value of the Lira relative to other world currencies continues to drop. At some point he may figure this out and raise interest rates... or not.

The impact of government spending and central bank liquidity injections in US is less clear cut. For years the fed struggled tying to hit the 2% inflation target, now it looks like they are overshooting to the upside and will need to pull in liquidity and raise interest rates soon. The stock market is starting to predict tightening next year but "tina" (there is no alternative), maybe buy real estate?

Wage inflation will increase worker pay, but this will also increase costs and prices so net benefits may be etherial.

JR

 

[ruffrecords]

JR, you are about my age so you will know that low interest rates never happened last century and neither did very low inflation rates. Last century, both oscillated around 5%. Things ran quite well with these figures. The interest rate was high enough to attract plenty of savers and the similar inflation rate meant that in ten years your wages would have increased enough that the mortgage was no longer a millstone around your neck and you could afford a family. My grandchildren have only known historically very low interest rates and even my kids have only known the same once they reached adulthood and actually took notice of that kind of thing.

Cheers

Ian

 

[JohnRoberts]

JR, you are about my age so you will know that low interest rates never happened last century and neither did very low inflation rates. Last century, both oscillated around 5%. Things ran quite well with these figures. The interest rate was high enough to attract plenty of savers and the similar inflation rate meant that in ten years your wages would have increased enough that the mortgage was no longer a millstone around your neck and you could afford a family. My grandchildren have only known historically very low interest rates and even my kids have only known the same once they reached adulthood and actually took notice of that kind of thing.

Cheers

Ian

Yup I am old enough to remember when our currency was backed by gold (until 1971), etc. we haven't had a normal, or what was a normal economy for almost a decade and a half. Some of the short term interventions from back around 2007-2008 are still in place.

I have long been critical of the US central bankers having the dual mandate of managing both inflation and employment. I thought that was one too many, but now they are trying to throw climate in as a third factor to somehow manage..... Save the climate by killing the economy (that would sure reduce fossil fuel usage)?

JR

PS: Don't get me started on MMT (modern monetary theory), that takes a new kind of stupid.

 

[living sounds]

Save the climate by killing the economy (that would sure reduce fossil fuel usage)?

Civilizations have often perished because of climate change, should we take a chance and ignore the thread?

Anyways, this often is a false dichotomy. Directing capital to transit to a fossil-free economy can be a win. One example: I just returned from a holiday to an island with a very arid climate. They literally produce drinkable (and bathable) water from oil, by desalinating sea water. What an incredible stupidity. They have wind and sun all year round, all that is needed is a (relatively small) investment to build wind and solar farms and do the whole thing without the use of oil. In the long term this would of course also be much cheaper.

But governments have been captured by the interests of fossil fuel companies and the wealthy, the ones profiting the most from the status quo. This isn't "soft science" but facts. A very lopsided distribution of wealth allows for very corrupt practices.

Economies move in cycles, and the macro debth cycle is nearly finished. It might be 2 years or 10, but eventually we will see a deleveraging event, (mostly) peacefull or not. From a macro perspective of history it happens regularly.

 

[JohnRoberts]

Civilizations have often perished because of climate change, should we take a chance and ignore the thread?

If that "often" happens it must be easy to provide some examples.

JR

 

[living sounds]

If that "often" happens it must be easy to provide some examples.

JR

https://en.wikipedia.org/wiki/Societal_collapse#Natural_disasters_and_climate_change

 

[JohnRoberts]

https://en.wikipedia.org/wiki/Societal_collapse#Natural_disasters_and_climate_change

Thanks, I have actually sent money to wikipedia when I learn something useful. I didn't send money for this.

JR

 

[JohnRoberts]

Breaking economic news... (not typical for the discipline)

#1 There is contentious concern about the true cost of the BBB act. Promoted by political advocates as costing nothing because it was fully paid for. The CBO (congressional budget office) is tasked with scoring the cost of the bill "as written". Legislators have been known to game the true cost of legislation by sunsetting entitlement programs to end after a year or two, while tax revenue is collected over the longer period. Apparently there was a significant number of programs inside BBB written to end while the tax collection continues for years. I don't recall ever seeing this done before and the CBO is supposed to be non-partisan but they revisited BBB and scored it as if the new entitlements don't sunset (because they never do). This new scoring reveals that BBB will increase the deficit $3T over it's duration (oops... truth).

#2 Inflation has just peaked at 6.8% without seasonal adjustment. This is notable after the Fed targeted 2% for so many years. The Fed has stopped calling it transitory assuming it would quickly return to trend. Inflation is generally a money supply imbalance (too much money chasing too few goods), but this time feels a little different. Wage inflation is generally good for workers, unless price inflation for goods outpaces the income increase like we are seeing now. While stimulus spending and injected liquidity certainly is a factor, there are others.

The clamp down on the fossil fuel industry has turned us from a net energy exporter with ability to influence marginal world prices, we are not forced to import oil putting OPEC+ back in charge of marginal supply and world prices.

Then the number of people who have left the work force for different reasons has still left many businesses challenged to hire enough workers to operate at full capacity (increasing wages and product prices, while reducing supply).

Another elephant in the already crowded room of inflation causes is the supply chain bottle necks. In the short term reduced supply will lead to price increases. Long term this will work out but I expect some volatility. There are already halloween supplies that missed that sales window and will be money losers for the corporate buyers when they finally show up.

I saw a small news item about a major chicken supplier investing millions into robotic deboning automation. I expect many of these visible supply chain issues to work them selves out. An old economics saying, "the solution for high prices is high prices", namely high prices attract investment and competition (at least in a free market).

So IMO the inflation peak is transitory at least in part, I also expect markets to over react when the central bankers finally take their foot off the gas. The stock market will be a bumpy ride with little good alternative (hint a lot of big tech managers have been insider selling, a suggesting that markets may be over bought, uber wealthy are buying land).

JR

[edit new inflation number 9.6% /edit]

 

[john12ax7]

We might agree that climate change is a necessary pursuit. But that's not a task for a central bank. Their only goal should be price stability, everything else causes more problems than it solves.

 

[JohnRoberts]

Erdogan is standing strong on his suggestion to keep lowerong interest rates despite 21% inflation. His newest strategy to prop up the lira is to guarantee bank deposits.

Shorting (UK) currencies is how George Soros made big money years ago. I wonder if he is sniffing around the turkish lira now?

JR

 

[living sounds]

It's great for crypto, adoption has been going on at a rapid pace in Turkey for many months now.

 

[Jim McKeveny]

Soft science indeed. It would seem a fool's errand to try and codify anything where 2 of the major variables are the social and political wildcards, but - in the interest of easing human suffering - some try.

Alternately, it is studied to eff your fellow man and get choking rich.

 

[hodad]

Speaking of soft science, am I the only one who read that they're studying the use of Viagra to treat Alzheimer's?

 

[JohnRoberts]

I can't remeber

JR