Tag Archives: economics

Markets and Refs

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Greg Ip has a problem with Kevin Warsh’s so-far performance as the new Fed Chair.

Warsh’s analogy of the Fed simply calling balls and strikes, borrowed from future Supreme Court Chief Justice John Roberts, doesn’t work. The Fed isn’t a neutral umpire, it is the most important player in the game.

I have a problem with Ip’s problem. He went on.

Markets respond not just to data but how they think the Fed will respond to data. Investors plug each new bit of information into the Fed’s assumed “reaction function,” which then spits out the appropriate interest rate.

That’s part of what needs to change: “markets”—which is to say investors and business management teams—need to respond to the actual economy, not what one or another arm of government (however independent or not that arm might be) is doing. They need to stop playing the ref so much and work from the economy a whole lot more. It’ll take a bit for them to learn that and then how to do that.

The Fed doesn’t have a role refereeing the markets, in any event. The Fed’s job is to maintain price stability and employment stability, which it does by setting its benchmarks at levels consistent with its long term inflation goal. Its role does not include manipulating the market’s response to those benchmark rate moves.

What He Said

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A letter-writer in WSJ‘s Wednesday Letters section had this:

China’s consumer economy is bound by families’ overinvestment in property. In the absence of a thriving retail stock market, the life savings of two or three generations are poured into housing.
With grandma’s nest egg and mom and dad’s retirement tied up in a young couple’s first home, even a slight chill in property valuations causes an arctic frost on consumer sentiment.

Yep.

Compare and contrast that with John Adams’ definition of Happiness.

“Democrats fall for Socialism Again”

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That’s the headline of a WSJ op-ed, and it misconstrues the Progressive-Democratic Party’s ideology.

Party and its Democratic Party ancestor have long favored socialism, at least since Woodrow Wilson’s attempt to nationalize American factories “east of the Mississippi River,” holding onto them until the Supreme Court made him give them back. That came shortly after one of the founders of the modern Progressive movement campaigned for President on nationalizing our railroads. Government ownership of the means of production is a core tenet of socialism.

Party continued that with subsequent Democratic Party actions presuming to dictate to those producers what wages they must pay and what prices for their produce they would be allowed to charge.

The modern Progressive-Democratic Party has continued that push for Central Government to control our nation’s economy with its constant demands for private enterprises to produce what Party wants produced and attempts at curtailing production by enterprises of which Party disapproves. Capping success, determining who would be allowed a measure of success, and redistribution of the results of such success as is allowed is another core tenet.

Party is now being more open about its preference for socialism with its enthusiastic embrace of the Democratic Socialists of America and their inclusion into the center of Party.

The Next Carrington Event

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“Authorities on space weather” are worried about a Carrington Event, a solar storm of civilization-destroying magnitude, happening in the relatively near future. Three scientists, including Brian Walsh, Boston University Associate Professor of Engineering; Daniel Welling, University of Michigan Assistant Professor of Climate & Space Research; and Allison Jaynes, University of Iowa Physics Professor—have dreamed up a program called StormWall that entails launching a half-dozen school-bus-size satellites into geosynchronous orbit, holding in their aggregate 838,000 pounds of barium, lithium or sodium. On warning of an inbound Carrington solar storm, the satellites would release that material, sunlight would “quickly” ionize it, and the resulting plasma would mitigate the surface effects of the storm as well as shield, mostly, satellites in orbits below geosynchronous, for a few hours.

It would be a single-use system that, like the automobile airbags to which the designers liken it, then would need replacement. They sell their system’s tens of billions of dollars cost as trivial compared to the losses an unprotected modern population would suffer, and in this much they’re correct. Further, in the best-case scenario, just the research would require at least five more years just to develop the rockets capable of launching such mass so high.

As often is the case in academia, they’re overthinking and over-engineering a solution to the real, once a century threat of a Carrington event. The Carrington Event of 165+ years ago burned a few telegraph stations. The threat today is the wave guide that is our electrical power grid. It would be much cheaper to harden our grid by installing surge-protecting circuit breakers in a multiplicity of places throughout the grid to break up the wave guide. This also is a well-established technology, easily emplaced, and far cheaper to do so. All that’s necessary is the political will (tacitly assumed to be extant for those satellites and their launches) to install them.

A not very distant secondary threat is the fragility of all of our computing requirements, primarily financial, control nodes of our distribution networks, defense establishments. Faraday cages would protect them—even older, more established and cheaper technology—as would surge protectors.

Of course, the surge protectors are one-use affairs, too, but they’re much more cheaply and easily replaced than those half-dozen school-bus-size satellites with their heavy payloads. The Faraday cages themselves would be undamaged by the electrical surges the Carrington event would generate.

In orbit, our satellites still would need protection, but hardening them is equally straightforward, and it could be done as we replace them–which we ought to be doing anyway to protect them from EMP that our enemies would create in any kinetic war.

A Question

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With all the hyped up fears of a coming crash in the stock market and in the economy overall—some pundits are claiming the coming crash will make the Panic of 2008 look like a little burble (e.g., the Federal government will have to make a choice between letting banks and other financial institutions fail en masse or firing up its printing presses)—more and more folks are pushing buying gold and silver or bragging about the gold and silver they already hold.

So my question: what’s the value of all that gold and silver in such a catastrophe? Do these folks really think they’ll be able to exchange their gold or silver for their rent/mortgage payments? Their grocery and utility bills? Their gasoline down at the filling station? Or get those things with markers for their gold and silver held in brokerage accounts rather than in their closets in physical form? What if their broker is one of those financial institutions that went bust? Those holdings, if not lost forever, will be inaccessible for weeks or months while the broker’s assets wend their way through bankruptcy courts and the innumerable legal fights over distribution.

And: how will the holders sell their gold or silver, whether held in physical form or in brokerage accounts? Who will be willing to spend their cash on hand to get those metals?