Bloomberg and CNBC have articles about statements NY Fed chief Dudley has made about the particularly active hurricane season, alluding to hurricanes increasing economic activity, and that the Fed is still on track to remove “accommodation.”

My guess is that back in school, Dudley probably failed Broken Window Theory and QTM 101 because while hurricanes may increase economic activity, they leave us all poorer due to the opportunity cost and, in addition, increase medium term liquidity needs. The markets are already forecasting slower growth as a result, while the TIPS market appears to agree. I’ve before gotten into trouble looking at the oil market, but it is also down. These are ominous signs that Dudley’s statements are damagingly incorrect.

I suppose that when one’s basis for policy formation is guided solely by a targetless and rather nebulous fear of inflation, any inflation at all, without any firm anchor to reality such as TIPS spreads, one may come to the misguided conclusion that economic activity will increase due to hurricane damage, and therefore strengthens the case for tighter money when the opposite is more likely true.

And we’ve seen this tortured logic used as reasoning for tighter policy before when hurricanes ravaged the US oil industry in the Gulf in 2007-08, and it didn’t end well. The negative supply shock from the hurricanes was aggravated into a negative demand shock with tighter money, and it is likely to happen once more if Dudley gets his way. If he does indeed get his way, it would be a sign that the Fedsters apparently have never learned the right lesson from the financial crisis and are more than willing to keep making the same mistake of believing that hurricanes over Texas and Florida necessitate a monetary translation to Joe Lunchbucket in Ohio, New York, and Wisconsin becoming unemployed, over and over again without any knowledge of how or desire to measure any short to medium term damage being inflicted.

During the presidential campaign, Trump highly criticized mistakes of the Obama Administration. Yet, like Obama, he is neglecting to fill vacant seats on the Fed’s Board of Governors which has the effect of skewing the determination of monetary policy toward the desires of regional Fed presidents who, like Dudley, often have no monetary theory background at all. And thus we get policy choices advocated by people who simply do not understand what they are doing, and who have no accountability for the outcome. This is like leaving children to toy with economic nukes with no adult in the room, thus I believe that whatever happens as a result of the direction of monetary policy going forward ought to be laid squarely at his doorstep.

Advertisements