Scott Sumner has posted some of his thoughts on the stock market crash in progress. It’s a good read and I highly recommend it, and the Lars Christensen post he links to as well. There isn’t much for me to add with only a few opportunities for refinement.

I was surprised that after the beating US equities and commodities markets took beginning in the latter half of the week last week that the NGDP prediction market on Hypermind was predicting that NGDP would rise by approximately 4 basis points. Scott Sumner believes the market is simply inefficient. He is likely correct. But one other possibility is that those participating in the market are far more optimistic regarding the Fed’s reaction function than I am, as it would make sense for the market to rise if participants thought that the Fed would react to unanticipated developments by either not tightening as planned or actively easing, which would raise NGDP from the previous expectation of 3.2%.

Though, of course, I have been monitoring the Fed’s movements, including recent developments of the reverse repo that was increased to $88Bn /month and expanded to money markets last month. Having at least a semi-understanding of the bureaucracy involved, that program is probably more like an ocean liner than it is a motor boat and cannot easily be reversed if it has undesirable effects as it causes friction against the demand for money. And it can be turned only if it is recognized to be a source of the problem, if it indeed is as I believe it is more likely than not, recalling that interest rates are an intermediate variable and are more likely to reflect reality rather than cause it (never reason from a price change).

I don’t have a lot of confidence that the Fed will recognize tight money in the US as the problem, let alone identify the program that caused the tight money to be at its core given its track record in admitting huge mistakes that cost the economy trillions in potential, especially after it has been handed the excuse of China’s devaluation by idiots in the media and Donald Trump. I expect timid to no reaction to the turmoil, and certainly no admission of guilt either overtly or implicitly by reversing its behavior to that regard, cutting the reverse repo, and I expect to be able to deliver a huge and expensive “I told you so.”

This is where we find out if I have been right about the individuals that make up the institution of the Fed or if the Hypermind NGDP market has me pegged as nearly as much of an idiot as I have accused those individuals of being. But hey, at least I can admit that I am an idiot when required and bow out, hopefully in a graceful way.

As far as a recession coming from all of this, I believe we have been on the whiskers of a recession since QE3 was ended and the advent of the reverse repo has certainly increased the odds of a negative nominal shock by, at the very least, decreasing the Fed’s ability to respond to a external shock of any kind. Given that any downturn has the potential to turn into a depression if not managed appropriately by monetary authorities, my guess is that 2016 will be a bad year mainly for reasons previously explained, and others that I won’t get into here as to not be accused of being a bad apple.

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