It’s a good thing that trained economists can communicate with each other using something that sounds a little like “Fed-speak” because when I read things like the exchange between Bill Woolsey and George Selgin, the explanations seem a bit dry and lifeless, as in hypotheticals.
So to me, when someone tries to explain why QE just kind of piled up in excess reserves, I try to paint a more every day picture. Take Janet Yellen in September 2008, for instance, which is rather surprising coming from someone who is supposed to be a dove.
Furthermore, we have seen a remarkable decline in inflation compensation for the next five years in the TIPS market. I would not rely heavily on this decline to support my view, but I do have to say that the decline is a lot more reassuring than the alternative. I was also encouraged by the 30 basis point drop in long-term inflation expectations in the most recent Michigan survey. I anticipate that the recent jump in the unemployment rate will place some additional downward pressure on growth in labor compensation, which has been quite low, and in core inflation.
Only an inflation targeter can be encouraged and reassured while unemployment is rising and inflation is falling below target so dramatically, for the reasons these indicators where changing, illustrating the perverse incentives to basically throw the baby out with the bath water – to sacrifice on the altar of the arbitrary headline target that has suddenly become short term instead of long term whatever is necessary, be it individuals, financial institutions, political stability, etc… Or being a bit more charitable, one could say being not being particularly alarmed, curious or even interested in why those things deemed to be positive developments are occurring and simply welcoming them with open arms. Yellen and her colleagues played the fiddle while Rome burned. She even wrongly made up some notion of the NAIRU shifting up in order to explain it all away.
Fool me once, shame on you. Fool me twice, shame on me.
So when the economy was collapsing I found myself without a job and my income had been about 5/8 of my household income – just vanished. We, my family, went through what felt like hell trying to get all of our obligations taken care of while the central bankers were fiddling.
And now, our cars are older. My husband’s Jeep, a ’96 Grand Cherokee that we bought brand new and drove wheels off of, is likely done. We have to get something else for him to drive and, being now nearly debt-free, the thought of having a car payment gives me a near panic attack. I’ve been trying everything I know of to avoid it. I had the heap towed to a garage to have them look at it to see if it’s worth trying to get another year out of it – hoping it is not a costly fix. But it likely is the end of the line.
I know I will never again look at the world of finance and credit the same way as I did in 2007, and I’m pretty sure I’m not alone because I certainly wasn’t alone in being sacrificed on the headline inflation targeting altar.
And you know, while some things have changed, some of the more important things surely haven’t. We still have this opaque, unaccountable institution called the Fed. If I had said those things concerning my occupation and had been so wrong to cause only a fraction of the damage I would have been fired with cause without so much as a chance to explain. But at the Fed, they get promoted.
We still have the inflation targeting and the perverse incentives that go with it. We still have the hawks who are so hawkish they make Yellen look like a dove when at least the September 2008 transcript demonstrates that she isn’t even rational. There hasn’t been any mea culpa, and no reassurance that the central bankers will never again throw the baby out with the bath water.
There is scarce any way out of this mass of base but to change those things, and I see it happening only very slowly – just little nibbles around the edges. But nobody knows for sure what these sadistic people will do next, which means in a nutshell that we’ve far more to lose than to gain.