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.
Lip service to the crucial function of the Fourth Estate is not enough to sustain it.
It’s not that Mark Zuckerberg set out to dismantle the news business when he founded Facebook 13 years ago. Yet news organizations are perhaps the biggest casualty of the world Zuckerberg built.
There’s reason to believe things are going to get worse.
A sprawling new manifesto by Zuckerberg, published to Facebook on Thursday, should set off new alarm bells for journalists, and heighten news organizations’ sense of urgency about how they—and their industry—can survive in a Facebook-dominated world.
Facebook’s existing threat to journalism is well established. It is, at its core, about the flow of the advertising dollars that news organizations once counted on. In this way, Facebook’s role is a continuation of what began in 1995, when Craigslist was founded. Its founder, Craig Newmark, didn’t actively aim to decimate newspapers, but Craigslist still eviscerated a crucial revenue stream for print when people stopped buying newspaper classifieds ads.
When my wife was struck by mysterious, debilitating symptoms, our trip to the ER revealed the sexism inherent in emergency treatment.
Early on a Wednesday morning, I heard an anguished cry—then silence.
I rushed into the bedroom and watched my wife, Rachel, stumble from the bathroom, doubled over, hugging herself in pain.
“Something’s wrong,” she gasped.
This scared me. Rachel’s not the type to sound the alarm over every pinch or twinge. She cut her finger badly once, when we lived in Iowa City, and joked all the way to Mercy Hospital as the rag wrapped around the wound reddened with her blood. Once, hobbled by a training injury in the days before a marathon, she limped across the finish line anyway.
So when I saw Rachel collapse on our bed, her hands grasping and ungrasping like an infant’s, I called the ambulance. I gave the dispatcher our address, then helped my wife to the bathroom to vomit.
The preconditions are present in the U.S. today. Here’s the playbook Donald Trump could use to set the country down a path toward illiberalism.
It’s 2021, and President Donald Trump will shortly be sworn in for his second term. The 45th president has visibly aged over the past four years. He rests heavily on his daughter Ivanka’s arm during his infrequent public appearances.
Fortunately for him, he did not need to campaign hard for reelection. His has been a popular presidency: Big tax cuts, big spending, and big deficits have worked their familiar expansive magic. Wages have grown strongly in the Trump years, especially for men without a college degree, even if rising inflation is beginning to bite into the gains. The president’s supporters credit his restrictive immigration policies and his TrumpWorks infrastructure program.
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Radical longevity may change the way we live—and not necessarily for the better.
“So, you don’t want to die?” I asked Zoltan Istvan, then the Transhumanist candidate for president, as we sat in the lobby of the University of Baltimore one day last fall.
“No,” he said, assuredly. “Never.”
Istvan, an atheist who physically resembles the pure-hearted hero of a Soviet children’s book, explained that his life is awesome. In the future, it will grow awesomer still, and he wants to be the one to decide when it ends. Defying aging was the point of his presidential campaign, the slogan of which could have been “Make Death Optional for Once.” To (literally) drive the point home, he circled the nation in the “Immortality Bus,” a brown bus spray-painted to look like a coffin.
He knew he’d lose, of course, but he wanted his candidacy to promote the cause of transhumanism—the idea that technology will allow humans to break free of their physical and mental limitations. His platform included, in part, declaring aging a disease. He implanted a chip in his hand so he could wave himself through his front door, and he wants to get his kids chipped, too. He’d be surprised, he told me, if soon “we don’t start merging our children with machines.” He’d like to replace his limbs with bionics so he can throw perfectly in water polo. Most of all, he wants to stick around for a couple centuries to see it all happen, perhaps joining a band or becoming a professional surfer, a long white beard trailing in his wake.
On Saturday, the president slipped away from the doubters in Washington to address a Florida crowd filled with loyal supporters.
MELBOURNE, Fla.—After four miserable weeks of being locked up in presidential prison—starved of affection, suffocated by bureaucracy, tormented by the press—Donald Trump made a break for it Saturday.
Touching down just before sunset here in the heart of Trump Country, the president was greeted as he emerged from Air Force One by an adoring crowd of 9,000 super-fans, many of whom had stood in line for hours to see him speak. Trump made no effort at masking his gratitude. “I’m here because I want to be among my friends,” he told them, adding, “I also want to speak to you without the filter of the fake news.”’
The rally was widely trumpeted in the press as a return to the campaign trail, and it’s easy to see why. The event had all the trappings of Trump-style electioneering—he deployed the same slogans, recycled the same stump-speech rhetoric, and walked out on stage to the same soundtrack. What’s more, the White House made clear earlier this week that the rally was being funded not by the federal government but by his campaign, making this perhaps the earliest launch to a reelection bid in history.
On the Internet, search queries are used to target vulnerable consumers.
Google knows the questions that people wouldn’t dare ask aloud, and it silently offers reams of answers. But it is a mistake to think of a search engine as an oracle for anonymous queries. It isn’t. Not even close.
In some cases, the most intimate questions a person is asking—about health worries, relationship woes, financial hardship—are the ones that set off a chain reaction that can have troubling consequences both online and offline.
All this is because being online increasingly means being put into categories based on a socioeconomic portrait of you that’s built over time by advertisers and search engines collecting your data—a portrait that data brokers buy and sell, but that you cannot control or even see. (Not if you’re in the United States, anyway.)
Moscow grapples with a strange week in Washington.
Well, that didn’t last long. As President Donald Trump wrapped up his fourth week in office, the romance between him and Russian president Vladimir Putin seemed to have cooled suddenly. The week began with the resignation of National Security Adviser Michael Flynn amid revelations that he lied about his phone calls to the Russian ambassador. Then came reports that members of the Trump team had been in repeated contact with Russian intelligence agents. It ended with Vice Admiral Bob Harward declining to replace Flynn, and Trump giving a press conference in which he said his administration is “running like a fine-tuned machine;” toyed aloud with the idea of firing on a Russian spy ship in international waters off the East Coast; and dismissed allegations of collusion between his aides and the Russian government by saying, “Russia is fake news.” It was a performance that raised eyebrows in Moscow, with one Kremlin-friendly paper saying Friday that “you need to be drunk to understand the U.S. president’s true position.”
A man who will literally have life and death power over much of humanity seems not to understand or care about the difference between truth and lies. Is there any way for democratic institutions to cope? This is our topic in the post-Thanksgiving week.
Being back in China in the U.S.-election aftermath naturally leads to thoughts about how societies function when there is no agreed-on version of “reality,” public knowledge, or news.
We take for granted that this was a challenge for Soviet citizens back in the Cold War days, when they relied on samizdat for non-government-authorized reports and criticisms. Obviously it’s a big issue for China’s public now. But its most consequential effects could be those the United States is undergoing, which have led to the elevation of the least prepared, most temperamentally unfit, least public-spirited person ever to assume the powers of the U.S. presidency.
Viewers who watched it themselves saw a rambling, misleading performance. But those who relied on conservative cable newscasts or talk radio hosts got a very different impression.
On Thursday, Donald Trump gave a press conference that was rife with untruths and evasions. Let’s begin with specific examples of demonstrable falsehoods, so that readers who are favorable to the president won’t have to trust my characterization:
Bragging about all the electoral votes he won, Trump said, “We got 306 because people came out and voted like they've never seen before so that's the way it goes. I guess it was the biggest electoral college win since Ronald Reagan.” That is false. As CBS News notes, “In 2012, President Obama defeated his GOP rival, Mitt Romney, with 332 electoral votes. In 2008, Obama won the election against Sen. John McCain, R-Arizona, with 365 electoral votes. In 1996, President Clinton defeated Republican Bob Dole with 379 votes. In 1992, Clinton won against President George H.W. Bush, the incumbent, with 370 electoral votes. In 1988, Bush won the presidency with 426 votes.” And Trump even misstated how many votes he won. It was 304.
“Let me tell you about the travel ban,” Trump said, referring to the executive order that his press secretary, Sean Spicer, heatedly said wasn’t a travel ban. “We had a very smooth rollout of the travel ban. But we had a bad court. Got a bad decision.” Even apart from multiple unfavorable court rulings, the roll-out was anything but smooth. There was massive confusion about whether the surprise policy would affect permanent U.S. residents with green cards. Many were detained or turned away as protesters flocked to airports. Later the administration reversed itself. Ben Wittes went deep in the weeds on the rest of the incompetent, dysfunctional implementation of the order. Trump later said, “the only problem that we had is a bad court. We had a court that gave us what I consider to be, with great respect, a very bad decision. Very bad for the safety and security of our country. The rollout was perfect.”
Trump was asked, “Can you say whether you are aware that anyone who advised your campaign had contacts with Russia during the course of the election?” He said aside from Mike Flynn, the answer is no. In fact, he went even farther. “Russia is a ruse. I have nothing to do with Russia. Haven't made a phone call to Russia in years. Don't speak to people from Russia. Not that I wouldn't. I just have nobody to speak to. I spoke to Putin twice. He called me on the election. I told you this. And he called me on the inauguration, a few days ago. We had a very good talk, especially the second one, lasted for a pretty long period of time … I have nothing to do with Russia. To the best of my knowledge no person that I deal with does. Now, Manafort has totally denied it. He denied it. Now people knew that he was a consultant over in that part of the world for a while, but not for Russia. I think he represented Ukraine or people having to do with Ukraine, or people that—whoever.”
In doing so, Trump effectively denied the veracity of a recent New York Times report asserting, “phone records and intercepted calls show that members of Donald J. Trump’s 2016 presidential campaign and other Trump associates had repeated contacts with senior Russian intelligence officials in the year before the election, according to four current and former American officials.”
I don’t know if Trump or his team are guilty of any wrongdoing with regard to Russia. But Trump’s statement that he has “nothing to do with Russia” elides the fact that Trump made millions partnering with a Russian billionaire, Aras Agalarov, to host the Miss Universe pageant in Moscow in 2013. And in April 2016, when his campaign hosted an invitation-only campaign speech in Washington, D.C., that focused on foreign policy, Russian ambassador Sergey Kislyak attended Trump’s speech and sat in the front row.
As for people that he deals with, Rex Tillerson, his new secretary of state, was longtime director of a U.S.-Russia oil firm, and was awarded the Russian Order of Friendship by Vladamir Putin. “Carter Page, an early foreign policy adviser to Donald J. Trump who was scrutinized by the F.B.I. on suspicion of private communications with senior Russian officials over the summer, was back in Moscow on Thursday,” the New York Timesreported in December. Page, Flynn, and Manafort all resigned over murky Russia ties.
Perhaps this is all a series of innocent coincidences. But Trump misleads Americans into thinking there is no valid reason for suspicion when he falsely claims outright that neither he nor any person he deals with has ties to Russia.
During the late 19th century, blacks and whites in the South lived closer together than they do today.
CHARLOTTE, N.C.—Growing up here in the 1940s and 1950s, Sevone Rhynes experienced segregation every day. He couldn’t visit the public library near his house, but instead had to travel to the “colored” library in the historically black area of Brooklyn, a neighborhood that used to be in the center of Charlotte. He attended a school for black children, where he received second-hand books, and where the school day was half the length of that of white schools, because the black school had too many children and not enough funds. Sixty years later, he says, Charlotte is still a segregated city. “People who are white want as little to do with black people as they can get away with,” he told me.
This is, unfortunately, not a surprising account of North Carolina, or of the South more generally. The South of the 1950s was the land of fire hoses aimed at black people who dared protest Jim Crow laws. Today, schools in the South are almost as segregated as they were when Sevone Rhymes was a child. Southern cities including Charlotte are facing racial tensions over the shootings of black men by white policemen, which, in Charlotte’s case, led to massive protests and riots.