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.
It’s known as a modern-day hub of progressivism, but its past is one of exclusion.
PORTLAND, Ore.— Victor Pierce has worked on the assembly line of a Daimler Trucks North America plant here since 1994. But he says that in recent years he’s experienced things that seem straight out of another time. White co-workers have challenged him to fights, mounted “hangman’s nooses” around the factory, referred to him as “boy” on a daily basis, sabotaged his work station by hiding his tools, carved swastikas in the bathroom, and written the word “nigger” on walls in the factory, according to allegations filed in a complaint to the Multnomah County Circuit Court in February of 2015.
Pierce is one of six African Americans working in the Portland plant whom the lawyer Mark Morrell is representing in a series of lawsuits against Daimler Trucks North America. The cases have been combined and a trial is scheduled for January of 2017.
Biology textbooks tell us that lichens are alliances between two organisms—a fungus and an alga. They are wrong.
In 1995, if you had told Toby Spribille that he’d eventually overthrow a scientific idea that’s been the stuff of textbooks for 150 years, he would have laughed at you. Back then, his life seemed constrained to a very different path. He was raised in a Montana trailer park, and home-schooled by what he now describes as a “fundamentalist cult.” At a young age, he fell in love with science, but had no way of feeding that love. He longed to break away from his roots and get a proper education.
At 19, he got a job at a local forestry service. Within a few years, he had earned enough to leave home. His meager savings and non-existent grades meant that no American university would take him, so Spribille looked to Europe.
The Democratic National Committee chair has resigned amid an email controversy.
NEWS BRIEF Debbie Wasserman Schultz has resigned as the chair of the Democratic National Committee (DNC)following a leak of thousands of emails that appeared to show committee staffers favoring Hillary Clinton over Bernie Sanders for the party’s presidential primary contest.
The Florida congresswoman said in a statement Sunday she will step down from the job at the end of the Democratic National Convention, which begins Monday in Philadelphia.
“I know that electing Hillary Clinton as our next president is critical for America’s future. I look forward to serving as a surrogate for her campaign in Florida and across the country to ensure her victory,” she said. “Going forward, the best way for me to accomplish those goals is to step down as party chair at the end of this convention.”
Yet nearly half of all married couples are likely to divorce, and many couples report feeling unhappy in their relationships. Instructors of Northwestern University’s Marriage 101 class want to change that. The goal of their course is to help students have more fulfilling love relationships during their lives. In Marriage 101 popular books such as Mating in Captivity and For Better: The Science of a Good Marriage are interspersed with meaty academic studies. Students attend one lecture a week and then meet in smaller breakout groups to discuss the weekly topics, which range from infidelity to addiction, childrearing to sexuality in long-term relationships.
Why Millennials aren’t buying cars or houses, and what that means for the economy
In 2009, Ford brought its new supermini, the Fiesta, over from Europe in a brave attempt to attract the attention of young Americans. It passed out 100 of the cars to influential bloggers for a free six-month test-drive, with just one condition: document your experience online, whether you love the Fiesta or hate it.
Young bloggers loved the car. Young drivers? Not so much. After a brief burst of excitement, in which Ford sold more than 90,000 units over 18 months, Fiesta sales plummeted. As of April 2012, they were down 30 percent from 2011.
Don’t blame Ford. The company is trying to solve a puzzle that’s bewildering every automaker in America: How do you sell cars to Millennials (a k a Generation Y)? The fact is, today’s young people simply don’t drive like their predecessors did. In 2010, adults between the ages of 21 and 34 bought just 27 percent of all new vehicles sold in America, down from the peak of 38 percent in 1985. Miles driven are down, too. Even the proportion of teenagers with a license fell, by 28 percent, between 1998 and 2008.
It's possible to get a higher salary without taking anyone captive.
The question that most people ask themselves as they walk into their boss's office to negotiate their salaries is likely some variant of "What am I going to say?" But according to hostage negotiator Chris Voss, that might be the least important thing to keep in mind when negotiating.
Voss, now an adjunct professor at Georgetown University's McDonough School of Business, spent 24 years at the FBI. It was as an FBI agent that he started to get interested in hostage negotiations. At the time, a supervisor told him to start by volunteering at a suicide hotline to gain the set of listening abilities that a hostage negotiator needs. By 1992, he was training at the FBI's school for negotiators, and from 2004 to 2007, he was the FBI's lead international hostage negotiator. After retirement, Voss founded The Black Swan Group to bring negotiation know-how to the business world.
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.
The virtues that Hillary Clinton identified in Tim Kaine are also the ones that have led her astray in the past.
In 2008, Barack Obama famously wanted a “team of rivals” in his administration. He began with his running mate, who was utterly unlike him. Obama was a political newcomer; Joe Biden was a Beltway veteran. Obama appealed to African Americans and upscale liberals; Biden appealed to blue collar whites. Obama was disciplined; Biden was unruly. Obama was cool; Biden was warm.
Hillary Clinton, by contrast, has chosen a male version of herself. Like Clinton, Tim Kaine is a culturally conservative liberal. He’s a devout Catholic who personally opposes abortion despite believing it should be legal. For her part, Clinton is a devout Methodist—she’s taught Sunday school, lectured on Methodist theology and participated in various prayer groups—who is personally skeptical of abortion, too. In 2005, she called it “a sad, even tragic choice to many, many women” and looked forward to the day when “the choice guaranteed under our Constitution either does not ever have to be exercised or only in very rare circumstances.”
Fulfilling what might be the Russian autocrat’s dearest wish, Trump has openly questioned whether the U.S. should keep its commitments to NATO.
The Republican nominee for president, Donald J. Trump, has chosen this week to unmask himself as a de facto agent of Russian President Vladimir Putin, a KGB-trained dictator who seeks to rebuild the Soviet empire by undermining the free nations of Europe, marginalizing NATO, and ending America’s reign as the world’s sole superpower.
I am not suggesting that Donald Trump is employed by Putin—though his campaign manager, Paul Manafort, was for many years on the payroll of the Putin-backed former president of Ukraine, Viktor Yanukovych. I am arguing that Trump’s understanding of America’s role in the world aligns with Russia’s geostrategic interests; that his critique of American democracy is in accord with the Kremlin’s critique of American democracy; and that he shares numerous ideological and dispositional proclivities with Putin—for one thing, an obsession with the sort of “strength” often associated with dictators. Trump is making it clear that, as president, he would allow Russia to advance its hegemonic interests across Europe and the Middle East. His election would immediately trigger a wave of global instability—much worse than anything we are seeing today—because America’s allies understand that Trump would likely dismantle the post-World War II U.S.-created international order. Many of these countries, feeling abandoned, would likely pursue nuclear weapons programs on their own, leading to a nightmare of proliferation.
As the Democratic National Convention prepares to kick off, a massive leak of hacked emails renews old questions about how the Clintons and their associates operate.
PHILADELPHIA—What’s with Hillary Clinton and email? The Democratic presidential nominee who shattered her credibility over a rogue email system while serving as secretary of state now must deal with an electronic snafu at the Democratic National Committee.
Among 20,000 DNC emails posted by WikiLeaks on the eve of Clinton’s nominating convention, there are scores in which party employees criticized and mocked Bernie Sanders during his primary campaign against Clinton. (Caveat: We don’t formally know the emails are authentic).
The email dump jeopardizes Clinton’s ability to unify the party in Philadelphia and avoid the public fratricide that spoiled Donald Trump’s convention in Cleveland. While some of the DNC emails criticized Clinton, the overwhelming number of anti-Sanders correspondences create an indelible impression that the DNC violated its oath of neutrality.