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.
“Look, Sessions gets the job. Right after he gets the job, he recuses himself,” Trump said. “So Jeff Sessions takes the job, gets into the job, recuses himself. I then have—which, frankly, I think is very unfair to the president. How do you take a job and then recuse yourself? If he would have recused himself before the job, I would have said, ‘Thanks, Jeff, but I can’t, you know, I’m not going to take you.’ It’s extremely unfair, and that’s a mild word, to the president.”
When it comes to health care and entitlements, the party’s policies don't always align with its coalition’s beliefs.
The Senate Republican health-care bill has been repeatedly crushed in a slow-motion collision between the party’s historic ideology and the interests of its modern electoral coalition. Yet congressional Republicans appear determined to plow right through the wreckage.
Even as the Senate’s latest effort to repeal the Affordable Care Act collapsed on Tuesday, the House Republican leadership released a 10-year federal-budget blueprint that points them toward a similar confrontation, between their dominant small-government dogma and the economic needs of their increasingly blue-collar and older white base.
John F. Kennedy famously said that failure is an orphan. But the failure, at least for now, of the GOP drive against the ACA has many parents. One was a distracted and ineffectual President Trump. Even higher on the list sits Senate Majority Leader Mitch McConnell, who displayed a blinding hubris that will forever cloud his previous reputation for legislative wizardry. Operating with unprecedented secrecy and insularity, McConnell degraded Senate tradition by refusing to hold any public hearings or committee votes on the legislation. His closed-door process provoked not only unified opposition from Democrats, but also every major medical stakeholder. He sought to pressure dissenting senators with unrealistic vote deadlines—then retreated as they repeatedly called his bluff.
A new study explores why the latter are far more likely to opt for an elite college where they'd struggle than a so-so one where they'd excel.
There’s a saying in China that it’s better to be the head of a chicken than the tail of a phoenix. The premise of the aphorism—it’s better to be over-qualified than under-qualified relative to one’s surroundings—is so widely accepted that similar versions of it exist across cultures. In Japan, they tend to say that it’s better to be the head of a sardine than the tail of a whale. Americans and Brits often declare that it’s better to be a big frog (or fish) in a small pond than a little frog in a big pond.
Extensive research supports these axioms, particularly in the realm of education. Longitudinal studies have consistently shown that high-performing students at less-selective schools feel more competent, have higher GPAs, and have more ambitious career aspirations than low-performing students at more-selective schools.
Paul Behrends, a controversial staffer associated with the California congressman’s pro-Russia stances, was pushed out of his role on a subcommittee after questions were raised about a recent trip to Moscow.
Paul Behrends, a top aide to Representative Dana Rohrabacher, has been ousted from his role as staff director for the House Foreign Affairs subcommittee that Rohrabacher chairs, after stories appeared in the press highlighting his relationships with pro-Russia lobbyists.
“Paul Behrends no longer works at the committee,” a House Foreign Affairs Committee spokesperson said on Wednesday evening.
Behrends accompanied Rohrabacher on a 2016 trip to Moscow in which Rohrabacher said he received anti-Magnitsky Act materials from prosecutors. The Magnitsky Act is a 2012 bill that imposes sanctions on Russian officials associated with the 2009 death in prison of lawyer Sergei Magnitsky, who had been investigating tax fraud. Natalia Veselnitskaya, the Russian attorney and lobbyist who met with Donald Trump Jr. at Trump Tower last year, reportedly brought up the Magintsky Act during the meeting.
Many point to unromantic 20-somethings and women’s entry into the workforce, but an overlooked factor is the trouble young men have in finding steady, well-paid jobs.
TOKYO—Japan’s population is shrinking. For the first time since the government started keeping track more than a century ago, there were fewer than 1 million births last year, as the country’s population fell by more than 300,000 people. The blame has long been put on Japan’s young people, who are accused of not having enough sex, and on women, who, the narrative goes, put their careers before thoughts of getting married and having a family.
But there’s another, simpler explanation for the country’s low birth rate, one that has implications for the U.S.: Japan’s birth rate may be falling because there are fewer good opportunities for young people, and especially men, in the country’s economy. In a country where men are still widely expected to be breadwinners and support families, a lack of good jobs may be creating a class of men who don’t marry and have children because they—and their potential partners—know they can’t afford to.
The story of a duel between two men, one who dies, and the nature of the quest to build artificial intelligence
Marion Tinsley—math professor, minister, and the best checkers player in the world—sat across a game board from a computer, dying.
Tinsley had been the world’s best for 40 years, a time during which he'd lost a handful of games to humans, but never a match. It's possible no single person had ever dominated a competitive pursuit the way Tinsley dominated checkers. But this was a different sort of competition, the Man-Machine World Championship.
His opponent was Chinook, a checkers-playing program programmed by Jonathan Schaeffer, a round, frizzy-haired professor from the University of Alberta, who operated the machine. Through obsessive work, Chinook had become very good. It hadn't lost a game in its last 125—and since they’d come close to defeating Tinsley in 1992, Schaeffer’s team had spent thousands of hours perfecting his machine.
Senator John McCain’s glioblastoma diagnosis revives a longstanding debate over the safety of wireless technology.
Senator John McCain’s brain cancer diagnosis is likely to revive a persistent and complex question about the safety of wireless technologies, like cellphones, that emit electromagnetic radiation.
For years, researchers have explored whether cellphone use can increase a person’s likelihood of getting cancer. And for years their findings have been mixed—and in many cases controversial. The consensus, if there is one, is that the health risks of regular cellphone usage are probably quite small, if they exist at all. But it’s hard to prove a negative, so the question remains open-ended.
Doctors discovered McCain’s glioblastoma after the 80-year-old senator underwent a procedure to remove a blood clot, his office announced in a statement from the Mayo Clinic Wednesday night. Glioblastoma is one of the most common and also one of the most aggressive kinds of brain tumor. Senator Ted Kennedy received a similar diagnosis in the spring of 2008. He died from the disease about 15 months later, in August 2009. Could there be a connection between the aggressive form of cancer in Kennedy’s brain and his cellphone usage? U.S. senators tend to do a good deal of business by phone, especially when they're in Washington and away from their constituencies.
Some focus on the largest figures, like total student debt ($1.3 trillion) and average debt ($30,000.) So why is the most dangerous student loan number less than $5,000?
"I feel I kind of ruined my life by going to college," Jackie Krowen said. She first took out student loans at 19, to go to community college in Oregon. She borrowed more when she transferred to Portland State University, and even more to go to nursing school at the University of Rochester in New York. Now, more than $150,000 in debt, Krowen toldConsumer Reports that she cannot buy a house and fears the specter of her non-dischargeable debt will follow her for the rest of her life.
I read Jackie’s story earlier this summer, and I thought about it constantly while reading the student debt report from the White House's Council of Economic Advisers, which was released today. There’s no doubt that Jackie’s situation is disturbing and sad. It’s not unique: There are many students for whom college is not that promised ticket to the middle class, but rather an albatross that punishes their early adulthood. They are tens of thousands of dollars in debt, in jobs paying half what they expected to earn after college. They cannot buy a home, start a business. They are even afraid to get married and have a kid.
Twenty years ago, Luc Besson’s visually stunning film hinged its story not on action or violence, but on love.
The most radical element of Luc Besson’s 1997 space opera The Fifth Element is not the absurdly opulent future-costumes designed by Jean Paul Gaultier. It isn’t the bizarre Southern twang of the Hitler haircut-sporting villain Zorg (Gary Oldman), nor is it Chris Tucker’s performance as an intergalactic sex symbol who hosts a radio show. It’s that Bruce Willis cries at the opera. In budget, in scale, and in casting, The Fifth Element feels like any other big Hollywood sci-fi movie, featuring popular English-speaking actors running around a high-concept world, complete with lavish sets and CGI effects. But not many blockbusters would let its male star weep at a musical performance.
That set piece comes in the middle of the film as Willis’s character, Korben Dallas, a gun-wielding space cowboy with spiked, peroxide-blonde hair, takes in a show by the blue alien singer Diva Plavalaguna (Maïwenn). Besson’s film has, up until now, been a relentless blitz of action, as Korben follows the mysterious Leeloo (Milla Jovovich) across the galaxy to help retrieve mystical stones that will help her save the world from a great, encroaching evil. But for a second, the movie grinds to a halt, letting Korben take in the extraterrestrial songstress’s solo with tears in his eyes.
No matter what the subject, the president finds someone to compare himself to. And in every comparison, he comes out the winner.
The transcript of Donald Trump’s interview yesterday with the New York Times runs over 7,000 words. But you can boil down its essence to two words: I’m better. No matter what the subject, Trump finds someone to compare himself to. And in every comparison, he comes out the winner.
The Times reporters start the interview by asking Trump about health care, where the Senate—by refusing to even vote on a bill to repeal and replace Obamacare—has handed him a major defeat. Trump doesn’t admit any mistakes. He barely mentions the substance of the bill. Instead, he immediately compares himself to Hillary Clinton and Barack Obama. In the fourth sentence of the interview, he declares that, “Hillary Clinton worked eight years in the White House with her husband as president and having majorities and couldn’t get it done.”