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.
New presidents often err by either trying to impose their will on Congress or being too hands-off. Trump is on course to commit both errors on his top two legislative priorities.
Mucking up an interaction with Congress is a rite of passage for every new president—usually on health care, and especially for those with limited experience in Washington.
The twin pitfalls for a new president are the same ones the great Tommy Lasorda described in his approach to baseball: “I believe managing is like holding a dove in your hand. If you hold it too tightly you kill it, but if you hold it too loosely, you lose it.” A president can try to push his vision aggressively on Congress, risking backlash from members—let’s call that the Bill Clinton approach. Alternatively, he can try to hang back and let Congress act, risking the chance that without presidential leadership, members will come up with something he doesn’t like, or even worse that they can’t pass. We’ll call that the Barack Obama approach.
The MIT economist Peter Temin argues that economic inequality results in two distinct classes. And only one of them has any power.
A lot of factors have contributed to American inequality: slavery, economic policy, technological change, the power of lobbying, globalization, and so on. In their wake, what’s left?
That’s the question at the heart of a new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, by Peter Temin, an economist from MIT. Temin argues that, following decades of growing inequality, America is now left with what is more or less a two-class system: One small, predominantly white upper class that wields a disproportionate share of money, power, and political influence and a much larger, minority-heavy (but still mostly white) lower class that is all too frequently subject to the first group’s whims.
In 1985, Neil Postman observed an America imprisoned by its own need for amusement. He was, it turns out, extremely prescient.
Earlier this month, thousands of protesters gathered at Washington’s National Mall to advocate for an assortment of causes: action against global climate change, federal funding for scientific research, a generally empirical approach to the world and its mysteries. The protesters at the March for Science, as scientists are wont to do, followed what has become one of the established formulas for such an event, holding clever signs, wearing cheeky outfits, and attempting, overall, to carnivalize their anger. “Make the Barrier Reef Great Again,” read one sign at the March. “This is my sine,” read another. “I KNEW TO WEAR THIS,” one woman had written on the poncho she wore that soggy Saturday, “BECAUSE SCIENCE PREDICTED THE RAIN.” Three protesters, sporting sensible footwear and matching Tyrannosaurus rex costumes, waved poster boards bearing messages like “Jurassick of this shit.”
“Somewhere at Google there is a database containing 25 million books and nobody is allowed to read them.”
You were going to get one-click access to the full text of nearly every book that’s ever been published. Books still in print you’d have to pay for, but everything else—a collection slated to grow larger than the holdings at the Library of Congress, Harvard, the University of Michigan, at any of the great national libraries of Europe—would have been available for free at terminals that were going to be placed in every local library that wanted one.
At the terminal you were going to be able to search tens of millions of books and read every page of any book you found. You’d be able to highlight passages and make annotations and share them; for the first time, you’d be able to pinpoint an idea somewhere inside the vastness of the printed record, and send somebody straight to it with a link. Books would become as instantly available, searchable, copy-pasteable—as alive in the digital world—as web pages.
Will you pay more for those shoes before 7 p.m.? Would the price tag be different if you lived in the suburbs? Standard prices and simple discounts are giving way to far more exotic strategies, designed to extract every last dollar from the consumer.
As Christmas approached in 2015, the price of pumpkin-pie spice went wild. It didn’t soar, as an economics textbook might suggest. Nor did it crash. It just started vibrating between two quantum states. Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked. Nearly a year later, as Thanksgiving 2016 approached, the price again began whipsawing between two different points, this time $3.36 and $4.69.
We live in the age of the variable airfare, the surge-priced ride, the pay-what-you-want Radiohead album, and other novel price developments. But what was this? Some weird computer glitch? More like a deliberate glitch, it seems. “It’s most likely a strategy to get more data and test the right price,” Guru Hariharan explained, after I had sketched the pattern on a whiteboard.
Princeton freshman Tal Fortgang was right that "privilege" is a problem, but not about why.
Poor Tal Fortgang. (Well, perhaps “poor” isn’t the right word.) Not long ago, the Princeton freshman’s white male privilege was known only to those in his life. Then he published an essay about this privilege in a conservative student publication, arguing that because his ancestors had struggled, he personally doesn’t benefit from unearned advantage. If he’s not privileged, no one should be asking him to check his privilege, right? After all, some of his advantage was earned; he just doesn’t happen to be the one who earned it.
Because “privilege” is clickbait, Fortgang’s piece made the rounds, culminating in the New York Times interviewing his classmates about his privilege and whether he had, in fact, checked it. The consensus is that he did not. Fortgang’s privilege has now been checked not only by his classmates and Facebook friends but by the entire Internet.
Protesters entered parliament after lawmakers elected an ethnic-Albanian politician as speaker.
Protesters entered the parliament in the former Yugoslav republic of Macedonia following the election of an ethnic-Albanian lawmaker as speaker. Reuters described the protesters as nationalists angered by Talat Xhaferi’s election as the country’s first ethnic-Albanian speaker.
Video from the scene showed Zoran Zaev, the leader of the Social Democrats (SDSM), and other lawmakers bleeding after a fistfight. His party allied with ethnic Albanians to elect Xhaferi.
Here’s video of what happened:
Video of masked men breaking into Macedonia's parliament. Demonstrators now occupying chamber after the opposition elected a new speaker. https://t.co/QmJ75lJARe
Macedonia declared independence following the breakup of Yugoslavia in the 1990s. The country was wracked by unrest in the early 2000s following an armed insurrection by ethnic Albanians, who make up about a quarter of the population. A peace agreement, brokered by NATO, ended with the government agreeing to provide more rights to the minority and ethnic Albanians saying they will abandon their goal of a separate state. But tensions have lingered since then. Macedonia hasn’t had a functioning government since 2015 when the government led by the nationalists of the VMRO-DPMNE were brought down by a wiretapping scandal. The country has been in a political stalemate since last December’s parliamentary elections. VMRO DPMNE, the governing center-right party, won 51 of the 120 seats while the SDSM won 49. The rest went to ethnic Albanian parties. President Gjorge Ivanov, who is from the VMRO DPMNE, asked Nikola Gruevski, his fellow party member and outgoing prime minister, to form a new government, but Gruevski was unable to secure the 61 lawmakers needed to do so. The ethnic Albanian parties instead allied themselves with the SDSM.
The author of a new book explains the science behind the cringeworthy feeling—and how to overcome it.
It’s when a fist bump unwittingly meets a high-five. It’s when Ben Carson tries, unsuccessfully, to walk onto a stage. It’s trying to introduce an acquaintance to someone else at a party and then realizing you don’t actually remember their name. It’s awkward, and like so many other things, you know it when you see it.
We all experience awkwardness, of course, but some people seem chronically susceptible to it. In his new book, the appropriately titled Awkward, the writer and psychologist Ty Tashiro explores why certain people seem more prone to these cringe-inducing moments, and what they can do about it. I recently interviewed Tashiro; an edited transcript of our conversation follows.
Olga Khazan: Do you consider yourself awkward? What are some of the awkward things you do or used to do?
Cases of brain-infecting amoebae underscore the importance of purifying water before you pour it into your sinuses.
Allergy season is upon us once more, and for many allergy sufferers, that means it’s time to pull two crucial items to the front of the medicine cabinet: 24-hour non-drowsy loratadine, and a neti pot—a teapot-like device used to flush the nasal passages with saline in order to clear allergens and soothe sinus pressure. (It can be seen in action in this very popular gif.) The constant mockery of my loved ones doesn’t prevent me from using a neti pot to ease my congestion. It’s too effective to give up for the sake of pride. But I have also used my neti pot with considerable apprehension since 2011.
That year, a 20-year-old man from Louisiana died of encephalitis caused by Naegleria fowleri, an amoeba commonly found in lakes and rivers in the American South—but which rarely causes infection. More unusual still was the fact that the young man hadn’t had been swimming in freshwater lakes or rivers anytime recently. Then, a few months later, a 51-year-old Louisiana woman also died of encephalitis—primary amebic meningoencephalitis (PAM) to be exact, which is the condition caused when Naegleria fowleri infects the brain. Shortly before she passed away, her doctor learned that while she hadn’t had been swimming in freshwater either, she had recently used a neti pot. Researchers later learned that the other victim had also used a neti pot, and subsequent testing found Naegleria fowleri in both patients’ brain tissue as well as the tap water in their homes. Using a neti pot had allowed the amoeba to reach their brains.
In the age of the digital hermit, a psychologist explains what it means to avoid other people—and what to do about it.
People today might not actually be avoiding social interaction any more than they did in past decades, but they’re certainly more vocal about it. The rise of digital communication seems to be spawning a nation of indoor cats, all humble-bragging about how introverted they are and ordering their rides and groceries without ever talking to a human.
Sometimes reclusiveness can be a sign of something more serious, though. Social anxiety is one of the most common mental illnesses, but it’s still poorly understood outside of scientific circles. The good news is that it’s highly treatable, according to Stefan G. Hofmann, the director of the Social Anxiety Program at Boston University.
I recently talked with Hofmann about how social anxiety works and what people who feel socially anxious can do about it. An edited transcript of our conversation follows.