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.
We're all going to die and we all know it. This can be both a burden and a blessing.
In the heart of every parent lives the tightly coiled nightmare that his child will die. It might spring at logical times—when a toddler runs into the street, say—or it might sneak up in quieter moments. The fear is a helpful evolutionary motivation for parents to protect their children, but it's haunting nonetheless.
The ancient Stoic philosopher Epictetus advised parents to indulge that fear. “What harm is it, just when you are kissing your little child, to say: Tomorrow you will die?”he wrote in his Discourses.
Some might say Epictetus was an asshole. William Irvine thinks he was on to something.
“The Stoics had the insight that the prospect of death can actually make our lives much happier than they would otherwise be,” he says. “You’re supposed to allow yourself to have a flickering thought that someday you’re going to die, and someday the people you love are going to die. I’ve tried it, and it’s incredibly powerful. Well, I am a 21st-century practicing Stoic.”
People look to Amy Schumer and her fellow jokers not just to make fun of the world, but to make sense of it. And maybe even to help fix it.
This week, in a much-anticipated sketch on her Comedy Central show, Amy Schumer staged a trial of Bill Cosby in “the court of public opinion.” Schumer—her character, at any rate—played the role of the defense. “Let’s remind ourselves what’s at stake here,” she argued to the jury. “If convicted, the next time you put on a rerun of The Cosby Show you may wince a little. Might feel a little pang. And none of us deserve that. We don’t deserve to feel that pang.”
Her conclusion? “We deserve to dance like no one’s watching, and watch like no one’s raping.”
Ooof. This is the kind of thing that gets Inside Amy Schumer referred to as “the most feminist show on television,” and her act in general called, in a phrase that reveals as much about her craft as about Schumer herself, “comedy with a message.” But while Schumer’s work is operating at the vanguard of popular comedy, it’s also in line with the work being done by her fellow performers: jokes that tend to treat humor not just as an end in itself, but as a vehicle for making a point. Watch like no one’s raping.
Some spoiler-y speculation on the final three episodes
With only three episodes left to go, Game of Thrones looks as though it once again has a lot of ground to cover before wrapping up a season. And so, for the curious and impatient among you, I’ll do my best to offer some quasi-informed speculation about what we might reasonably expect in these final weeks.
Note: I haven’t seen any of the remaining episodes, but I have read the books. The first five items below are spoiler-y, but the predictions in them do not derive from the George R. R. Martin novels. Rather, they’re guesswork based on what’s already happened on the show and on tidbits scattered across the web: a behind-the-scenes photo here, a close-read of a trailer there. (They could all, of course, turn out to be completely wrong.) The last four items, however, are based at least in part on events that take place in A Feast for Crows and A Dance with Dragons, so non-book-readers may want to skip them. And obviously anyone, book-reader or not, who’d prefer to go into these final episodes without preconceptions—who doesn’t want to know at least some of what will (probably) happen—should stop reading now.
The former speaker of the House is charged with lying to federal agents and evading financial reporting requirements, reportedly while attempting to conceal past sexual misconduct.
Updated on May 29, 2015, at 4:05 p.m.
Former House Speaker Dennis Hastert has been indicted on charges of lying to FBI agents and evading federal financial-reporting requirements, reportedly while paying a man to cover up past sexual misconduct.
Hastert, an Illinois Republican, was speaker from 1999 to 2007. BuzzFeed’s John Stanton notes that there were several high-profile congressional scandals in those years. Illinois is also a notorious hotbed for political corruption, as Roland Burris, Rod Blagojevich, George Ryan, and Jesse Jackson Jr. can attest.
But Hastert’s indictment seems to involve a darker story than political corruption. In or about 2010, according to the indictment, Hastert—a former high-school teacher and coach—met with an unnamed individual from Yorkville, Hastert’s hometown. They “discussed past misconduct by defendant against Individual A that had occurred years earlier.” In effect, Hastert fell victim to blackmail, the indictment alleges: He “agreed to provide Individual A $3.5 million in order to compensate for and conceal his prior misconduct against Individual A.” (Since leaving the House, Hastert has become a highly paid lobbyist.)
Can a political system be democratically legitimate without being democratic?
The flaws in China’s political system are obvious. The government doesn’t even make a pretense of holding national elections and punishes those who openly call for multiparty rule. The press is heavily censored and the Internet is blocked. Top leaders are unconstrained by the rule of law. Even more worrisome, repression has been ramped up since Xi Jinping took power in 2012, suggesting that the regime is increasingly worried about its legitimacy.
Some China experts—most recently David Shambaugh of George Washington University—interpret these ominous signs as evidence that the Chinese political system is on the verge of collapse. But such an outcome is highly unlikely in the near future. The Communist Party is firmly in power, its top leader is popular, and no political alternative currently claims widespread support. And what would happen if the Party’s power did indeed crumble? The most likely result, in my view, would be rule by a populist strongman backed by elements of the country’s security and military forces. The new ruler might seek to buttress his legitimacy by launching military adventures abroad. President Xi would look tame by comparison.
An activist has made it so in France. Could he take his campaign global?
In 2010, U.S. supermarkets and grocery stores threw out 43 billion pounds, or $46.7 billion worth, of food, according to the U.S. Department of Agriculture (USDA). But if Arash Derambarsh had his way, that number would be zero. His goals are ambitious, but then again the municipal councilor from Courbevoie, France did manage to get a law passed in France last week that would accomplish just that.
The law bans supermarkets in France from discarding or destroying unsold food. According to Salon’s Lindsay Abrams, the law mandates that all unsold but edible food should be donated to charities for immediate distribution to the poor. Food that is unsafe to eat is to be donated to farms for agricultural purposes. Supermarkets that exceed a certain square footage are required to sign contacts with charities by July 2016; penalties for failing to do so include fines of up to roughly $81,600 or two years in prison. The legislation is one of the world’s first attempts to address the twin problems of food waste and hunger in this manner.
A challenge based on four words of the law amounts to little more than politics dressed up as a legal argument.
The Supreme Court is about to decide another blockbuster case arising under the Affordable Care Act (ACA). The specific issue is whether federal-tax subsidies are available to people who purchase health insurance from exchanges operated by the federal government or instead whether such subsidies are available only from exchanges established by the states. A decision in favor of the plaintiffs in King v. Burwell would most likely cripple the ACA in over thirty states and deprive millions of people of health insurance.
That the Supreme Court even agreed to hear the case is the result of an improbable conjunction of events. Two committed opponents of the ACA seized upon four words of the law out of almost 1000 pages, and through their persistent and energetic work, created a powerful soundbite that appealed to die-hard opponents of the ACA. They then took that sound bite and dressed it up in highly technical arguments about statutory interpretation that might well change how healthcare is paid for in the United States. But the soundbite is inaccurate, and the technical window dressing shouldn’t obscure the fact that the argument is based on a faulty reading of the text of the entire law as well as a misleading account of how and why the law was passed. At bottom, King v. Burwell is a political challenge to the ACA dressed up in legal garb.
Caves and tunnels have always been part of human life.
Caves and tunnels have always been part of human life. We've grown more adept at shaping these underground shelters and passages over the millennia, and today we dig for hundreds of reasons. We excavate to find both literal and cultural treasures, digging mines and unearthing archaeological discoveries. We use caverns for stable storage, for entertainment, and for an effective shelter from natural and man-made disasters. And as the planet's surface becomes ever more crowded, and national borders are closed, tunnels provide pathways for our vehicles and for smugglers of every kind. Collected below are more recent subterranean scenes from around the world.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
The danger of uploading one’s consciousness to a computer without a suicide switch
Imagine a supercomputer so advanced that it could hold the contents of a human brain. The Google engineer Ray Kurzweil famously believes that this will be possible by 2045. Organized technologists are seeking to transfer human personalities to non-biological carriers, “extending life, including to the point of immortality.” My gut says that they’ll never get there. But say I’m wrong. Were it possible, would you upload the contents of your brain to a computer before death, extending your conscious moments on this earth indefinitely? Or would you die as your ancestors did, passing into nothingness or an unknown beyond human comprehension?
The promise of a radically extended lifespan, or even immortality, would tempt many. But it seems to me that they’d be risking something very much like hell on earth.