How Star Wars tells you everything you need to know about the miserable U.S. recovery and the Federal Reserve that has failed to improve it.
(Reuters/Lucasarts/Kasia Cieplak-von Baldegg)
This may not be our darkest hour, but the disappointing May jobs report showed the U.S. economy once again slowing towards stall speed. It's not just the anemic 69,000 jobs the economy added last month. More disconcerting were the sharp downward revisions to previous months. It looks like we could be in for an unwelcome rerun of the summer doldrums we have gotten to know all too well in 2010 and 2011.
Markets have a bad feeling about this. It isn't just about the deteriorating U.S. outlook. Europe and China are turning to the dark side of growth too. The euro is continuing its game of Schrödinger's currency: At any moment it is both saved and doomed. Right now, it's looking more and more doomed. Then there's the slowdown in China -- along with India and Brazil. These economies powered global growth during the dark days of 2008 and 2009, but seem certifiably wobbly now.
The Fed is our last hope -- and there isn't another. Republicans in Congress continue to block further fiscal stimulus, despite historically low borrowing costs and a clear need for better infrastructure. So that leaves Ben Bernanke & Co. as the last and only line of defense. But with short-term interest rates at zero, how much more can the Fed do? What would more quantitative easing accomplish -- and what does that even mean?
In a galaxy far, far away, there wouldn't be any question about whether the Fed could kickstart more growth. That galaxy is called Israel, or Sweden, or Switzerland. Even with zero interest rates, a central bank can increase growth thanks to three things: expectations, expectations, and expectations. Oh, and expectations. But we're getting ahead of ourselves. Let's step back and first consider why critics say the Fed is "out of ammo". Then, we'll explain why that's wrong -- by referring to the ur-text of monetary policy: the script of Star Wars. Really.
IT'S A (LIQUIDITY) TRAP!
A long time ago -- in 2008, to be exact -- monetary policy seemed simple. Central banks raised short-term interest rates when the economy got too hot, and lowered them when it got too cool. The way they did this was simple too. They sold short-term bonds to banks when they wanted to raise rates, and bought short-term bonds from banks when they wanted to lower rates. Central banks got so good at this that the business cycle seemed tamed. Unemployment was low, inflation was lower, and recessions were rare. Economists gave themselves a pat on the back for this self-proclaimed Great Moderation.
That was before the dark times. Before Lehman. Then this tidy little world came crashing down. The shock from the financial crisis was so big that even a zero percent interest rate wasn't enough to turn the economy around. It still isn't. The Fed looks stuck. It can't push nominal rates below zero. What more can it do?
The Fed has tried a new strategy. It has bought long-term bonds. In other words, bonds that still have nonzero interest rates. The idea behind this unconventional easing is the same as for conventional easing: To push up growth by pushing down interest rates -- just on different bonds. These different bonds have mostly been longer-dated Treasures, as well as mortgage-backed securities and agency debt from Fannie Mae and Freddie Mac. Taken together, this rather misunderstood bond-buying goes by the rather unfortunate name of "quantitative easing".
From a certain point of view, quantitative easing is money-printing. From another, it's just an asset swap. Let's think about what this means. Or rather, let's think about where the money for quantitative easing comes from. The magic of central of banking is that the money comes from nowhere. Or whatever the digital equivalent of nowhere is. Remember: Each bank holds a reserve account with the Fed that must meet a certain minimum balance. When the Fed buys longer-dated Treasuries from a bank, it simply creates money and credits the bank's reserve account with this newly-created money. Banks usually only keep the minimum amount in their reserve accounts -- until now, that is. The chart below shows how so-called excess reserves have grown since 2008.
Lots of people don't like this. They worry that this increasing pile of reserves will mean increasing inflation when banks eventually lend them out. Or that this is really just another backdoor bank bailout. Or that this shows that quantitative easing doesn't work.
Let's consider these in turn. First, the Fed has a number of tools to prevent excess reserves from being lent out too quickly. It's actually using one right now, although it really shouldn't be. It pays interest on these reserves. That's right: It pays banks not to lend. So relax, Zimbabwe is not in our future. Second, the Fed doesn't give banks this money for free. The banks give up bonds in return. It's swapping one asset for another. And third, just because so many reserves aren't lent out doesn't mean that quantitative easing accomplishes nothing. If nothing else, it signals that the Fed will not passively watch inflation fall too low. That message matters.
THESE AREN'T THE RATES YOU'RE LOOKING FOR
"These aren't the droids you're looking for." That's what Obi-Wan Kenobi famously tells a trio of less-than-with-it baddies in Star Wars
when -- spoiler alert! -- they actually were the droids they were
looking for. But thanks to the Force, Kenobi convinces them otherwise.
That's a Jedi mind trick -- and it's a pretty decent model for how
central banks can manipulate expectations. Thanks to the printing press,
the Fed can create a self-fulfilling reality. Even with interest rates
Central banks have a strong influence on market expectations. Actually, they have as strong an influence as they want to have. Sometimes they use quantitative easing to communicate what they want. Sometimes they use their words. And that's where monetary policy basically becomes a Jedi mind trick.
The true nature of central banking isn't about interest rates. It's about making and keeping promises. And that brings me to a confession. I lied earlier. Central banks don't really buy or sell short-term bonds when they lower or raise short-term interest rates. They don't need to. The market takes care of it. If the Fed announces a target and markets believe the Fed is serious about hitting that target, the Fed doesn't need to do much else. Markets don't want to bet against someone who can conjure up an infinite amount of money -- so they go along with the Fed.
Don't underestimate the power of expectations. It might sound a like a hokey religion, but it's not. Consider Switzerland. Thanks to the euro's endless flirtation with financial oblivion, investors have piled into the Swiss franc as a safe haven. That sounds good, but a massively overvalued currency is not good. It pushes inflation down to dangerously low levels, and makes exports uncompetitive. So the Swiss National Bank (SNB) has responded by devaluing its currency -- setting a ceiling on its value at 1.2 Swiss francs to 1 euro. In other words, the SNB has promised to print money until its money is worth what it wants it to be worth. It's quantitative easing with a target. And, as Evan Soltas pointed out, the beauty of this target is that the SNB hasn't even had to print money lately, because markets believe it now. Markets have moved the exchange rate to where the SNB wants it.
I FIND YOUR LACK OF A TARGET DISTURBING
I've seen a lot of strange stuff, but nothing quite as strange as the Fed's reluctance to declare a target recently. Rather than announce a target, the Fed announces how much quantitative easing it will do. This is planning for failure. Quantitative easing without a target is more quantitative and less easing. Without an open-ended commitment that shocks expectations, the Fed has to buy more bonds to get less of a result. It's the opposite of what the SNB has done.
Many economists have labored to bring us this knowledge -- including a professor named Ben Bernanke -- and yet the Fed mostly ignores it. I say mostly, because the Fed has said that it expects to keep short-term interest rates near zero through late 2014. But this sounds more radical than it is in reality. It's not a credible promise because it's not even a promise. It's what the Fed expects will happen. So what would be a good way to shift expectations? Let's start with what isn't a good way.
Interest rates can deceive you. Don't trust them. Because most people think the point of quantitative easing is to push down long-term interest rates, they think that any time long-term interest rates fall that it's a form of "stealth quantitative easing". Not so. Consider the chart below from Bloomberg that shows one-year inflation expectations.
Inflation expectations have jumped whenever the Fed has eased. That's not surprising. That's the point of Fed easing. What might be surprising is that sometimes long-term interest rates have fallen when inflation expectations have fallen. In other words, targeting interest rates alone can be misleading. A far better target would be the variable that the Fed ultimately cares about: the total size of the economy. Unfortunately, that kind of regime change is too radical for the Fed now. A second-best policy would be targeting the second-best variables: inflation and unemployment. Chicago Fed president Charles Evans has proposed such a rule, saying the Fed should commit to keeping rates at zero as long as core inflation is below 3 percent or unemployment is above 7 percent. Even better would be to promise to keep doing quantitative easing until the economy hits one of those targets.
EASE OR EASE NOT: THERE IS NO TRY.
The ability to manipulate interest rates is insignificant next to the power of expectations. The latter is never out of ammo, because the Fed can always promise to turn on the printing press and buy stuff until people get the message. It's not magic, but it's the closet thing we have to it. The only reason the Fed has failed so far is that it hasn't been determined to succeed. It's tentatively tried things instead. Switzerland shows that there is another path.
Use the force, Ben. Use the force of inflation expectations.
In a unique, home-spun experiment, researchers found that centripetal force could help people pass kidney stones—before they become a serious health-care cost.
East Lansing, Michigan, becomes a ghost town during spring break. Families head south, often to the theme parks in Orlando. A week later, the Midwesterners return sunburned and bereft of disposable income, and, urological surgeon David Wartinger noticed, some also come home with fewer kidney stones.
Wartinger is a professor emeritus at Michigan State, where he has dealt for decades with the scourge of kidney stones, which affect around one in 10 people at some point in life. Most are small, and they pass through us without issue. But many linger in our kidneys and grow, sending hundreds of thousands of people to emergency rooms and costing around $3.8 billion every year in treatment and extraction. The pain of passing a larger stone is often compared to child birth.
After Donald Trump became the Republican nominee, he was asked on Fox News about his views on NATO and other American alliances. He gave his familiar “they’re freeloaders” answer:
The fact is we are protecting so many countries that are not paying for the protection. When a country isn’t paying us and these are countries in some cases in most cases that have the ability to pay, and they are not paying because nobody is asking….
We’re protecting all of these countries. They have an agreement to reimburse us and pay us and they are not doing it and if they are not going to do that. We have to seriously rethink at least those countries. It’s very unfair.
For decades, the candidate has willfully inflicted pain and humiliation.
Donald J. Trump has a cruel streak. He willfully causes pain and distress to others. And he repeats this public behavior so frequently that it’s fair to call it a character trait. Any single example would be off-putting but forgivable. Being shown many examples across many years should make any decent person recoil in disgust.
Judge for yourself if these examples qualify.
* * *
In national politics, harsh attacks are to be expected. I certainly don’t fault Trump for calling Hillary Clinton dishonest, or wrongheaded, or possessed of bad judgment, even if it’s a jarring departure from the glowing compliments that he used to pay her.
But even in a realm where the harshest critiques are part of the civic process, Trump crossed a line this week when he declared his intention to invite Gennifer Flowers to today’s presidential debate. What kind of man invites a husband’s former mistress to an event to taunt his wife? Trump managed to launch an attack that couldn’t be less relevant to his opponent’s qualifications or more personally cruel. His campaign and his running-mate later said that it was all a big joke. No matter. Whether in earnest or in jest, Trump showed his tendency to humiliate others.
A new study looks at rates of lethal violence across a thousand species to better understand the evolutionary origins of humanity’s own inhumanity.
Which mammal is most likely to be murdered by its own kind? It’s certainly not humans—not even close. Nor is it a top predator like the grey wolf or lion, although those at least are #11 and #9 in the league table of murdery mammals. No, according to a study led by José María Gómez from the University of Granada, the top spot goes to… the meerkat. These endearing black-masked creatures might be famous for their cooperative ways, but they kill each other at a rate that makes man’s inhumanity to man look meek. Almost one in five meerkats, mostly youngsters, lose their lives at the paws and jaws of their peers.
Gómez’s study is the first thorough survey of violence in the mammal world, collating data on more than a thousand species. It clearly shows that we humans are not alone in our capacity to kill each other. Our closest relatives, the chimpanzees, have been known to wage brutal war, but even apparently peaceful creatures take each other’s lives. When ranked according to their rates of lethal violence, ground squirrels, wild horses, gazelle, and deer all feature in the top 50. So do long-tailed chinchillas, which kill each other more frequently than tigers and bears do.
One man conducted hundreds of interviews to understand the motivation and morality of those in the finance industry.
How can bankers live with themselves after the destruction wrought by their industry? That’s in part what the Dutch journalist Joris Luyendijk sets out to uncover in his new book, Among the Bankers: A Journey Into the Heart of Finance, which was published overseas last year under the title Swimming with Sharks. The book attempts to lay bare not the technical workings of a very opaque industry, but the emotional and moral considerations of those who operate within it.
Luyendijk, a reporter at The Guardian who has a background in anthropology, poses that question of conscience over and over again. To answer it, he conducted hundreds of interviews with people who work in the City, London’s version of Wall Street.
The films touted for consideration this year include prestige projects like Martin Scorsese’s Silence and festival hits like Barry Jenkins’s Moonlight.
With the main film festivals of the fall (Telluride, Venice, and Toronto) now concluded, and Martin Scorsese finally confirming that his much-anticipated drama Silence will come out at the end of the year, the next three months will bring a calendar loaded with prestige releases. Among them are films that better reflect the wide range of faces and voices in America (and around the world), which have recently been severely under-represented on Oscar night. Audiences and critics will be paying especially close attention to the works and actors the Academy chooses to recognize, after the awards were condemned this year for nominating only white performers two years in a row.
The question, as always, is which films will be able to stand out once studios begin their awards campaigns in earnest. A lot can happen in a few months; after all, the season has already seen its earliest anointed front-runner practically disappear from the race. The former Best Picture favorite was the big story out of Sundance: The Birth of a Nation(October 7), a searing depiction of Nat Turner’s 1831 slave rebellion in Virginia written and directed by Nate Parker. The film won the festival’s Grand Jury Prize just as the conversation over the largely white Oscar nominations was at its loudest. The movie was acquired by Fox Searchlight for a record $17.5 million, with the studio promising a huge publicity campaign in the fall to help push it for awards contention.
From the “400-pound” hacker to Alicia Machado, the candidate’s denigration of fat people has a long tradition—but may be a liability.
One of the odder moments of Monday’s presidential debate came when Donald Trump speculated that the DNC had been hacked not by Russia but by “someone sitting on their bed that weighs 400 pounds.” He was trying to suggest the crime had been committed by someone unaffiliated with a government—but why bring up fatness?
Weight seems to be one of Trump’s preoccupations. The debate and its fallout highlighted how he publicly ridiculed the Miss Universe winner Alicia Machado as “Miss Piggy” and an “eating machine,” and how he called Rosie O’Donnell a “fat pig” with “a fat, ugly face” (“I think everyone would agree that she deserves it and nobody feels sorry for her,” he said onstage Monday). He also recently poked fun at his ally Chris Christie’s weight-loss struggles and called out a protestor as “seriously overweight.” And when he was host of The Apprentice, he insisted on keeping a “funny fat guy” on the show, according to one of its producers.
In a clip unearthed by Mother Jones, the Republican presidential nominee boasts about hiring a possibly underage woman simply because she was attractive.
Donald Trump has faced a deficit among female voters throughout the campaign, and with just over a month left, Hillary Clinton’s campaign is seeking to throw gasoline on the fire.
In that effort, Clinton has a willing partner in arson: The ghost of Trump past.
On Wednesday, Pema Levy of Mother Jones dug up a video that will fuel the flames. It shows Trump at a 2007 appearance in San Francisco. A young woman steps to a microphone and asks how many jets she has and whether she can work on one. “Come on up here,” Trump says. “I think she’s hired.”
As the woman walks to the lectern, the crowd hoots. As she gets near, Trump takes a good long look at her décolletage, then says, “You’re hired.” What happens next is even stranger. He tells a story:
Narcissism, disagreeableness, grandiosity—a psychologist investigates how Trump’s extraordinary personality might shape his possible presidency.
In 2006, Donald Trump made plans to purchase the Menie Estate, near Aberdeen, Scotland, aiming to convert the dunes and grassland into a luxury golf resort. He and the estate’s owner, Tom Griffin, sat down to discuss the transaction at the Cock & Bull restaurant. Griffin recalls that Trump was a hard-nosed negotiator, reluctant to give in on even the tiniest details. But, as Michael D’Antonio writes in his recent biography of Trump, Never Enough, Griffin’s most vivid recollection of the evening pertains to the theatrics. It was as if the golden-haired guest sitting across the table were an actor playing a part on the London stage.
“It was Donald Trump playing Donald Trump,” Griffin observed. There was something unreal about it.
Whenever people start dating differently, a freakout inevitably ensues. As Moira Weigel details in her book Labor of Love, when young people started “going out” instead of having gentlemen callers visit women in their family homes, their elders were horrified. Some thought women who allowed men to buy them dinners or tickets to the movies were “turning tricks.” The reaction to the phenomenon of “going steady” in the 1940s and 50s was less extreme than accusing people of prostitution, but still hand-wringy.
Add technology to the mix and you get fear of change, doubled. When people began forming connections online, romantic or otherwise, the anonymity the internet allowed was terrifying. Anyone you talked to online could be a murderer, or so it seemed. Even as people got over that, a stigma lingered around online dating—that you must be desperate, or weird, to try it. In the early years, online dating carried a whiff of sadness—it was for people who had “failed” at dating in-person.