Tuesday, October 24, 2017

Impossible Mission -- Finding a New Fed Chair

I just wrote a piece about monetary policy and choosing the next Fed Chair. It was kinda cute and like all my posts, it was pretty brilliant in my own opinion. But alas, I ditched it. I deep-sixed it. I trashed it. I crumpled it up and threw it in the hopper. Actually, I just hit the delete button.

Monetary policy is the most misunderstood topic I ever write about. It’s not even that 
hard. The main confusion is that monetary policy is about every-day things that we think we know something about. So people blab on and on about it. But the truth is that most of us know almost nothing about it. It’s like climate change. I love climate change. Or is that season change? Anyway, I love it when the leaves turn color and fall off the trees and scream at me to rake them into piles.  I have a lot of opinions about climate change (and seasonal change which happens to be late this year) but I don’t know squat about molecules, CO2, H20 or the FBI.

So I can be very dangerous talking about climate change among real scientists since I don’t know a thing about chemistry or physics. But it is truly amazing how many people like me have very strong opinions. I know that because I see the veins on their neck pop out when they drink JD and talk about climate change. Why? Because they trust the scientists. Scientists are great.  My physicist friends – yes I have physics friends and an odd chemist or two – really understand what is going on with respect to weather, and climate, and how many angels can dance on the tip of a pin.

Scientists don’t have opinions. Okay maybe they have opinions about the things like the World Series and what color to paint the hall bathroom. But unlike most of us scientists have theory-based predictions. Scientists are famous for saying things like – based on my assumptions and my model (if you don’t like the word model replace it with theory) I predict that a chain reaction that started a jillion years ago in outer space will cause a blue light in a telescope in 2017. Now that is cool.

Scientists give us driverless cars, a nice lady named Alexa, and JD. But here is the thing about science. Science is not just about the past. It is about the future. And there is where the party and the gumbayas end. When we are dealing with new insights and the future we can use our models all day and all night – but not all models and not all approaches will be the same. Are all developmental driverless cars the same? As scientists develop batteries that will store solar energy, are they using the exact same technologies? Are all biologists and chemists using the exact same approaches to curing cancer and athlete’s foot?

When it comes to new things and to the future, we realize that scientists will use different approaches. We usually like that. This competition of ideas routinely produces better results than if Lee Corso was orchestrating research along one theory.

And thus we get to monetary theory. Money is simple. It’s stuff we use to make final payment. If you have a fist-full of money your bookie has to accept it. But that is where the simple part ends. How much money does the US economy need on October 24, 2017? Or more pertinent, how much money will the economy need between October 24 and December 31, 2017? The answer to that question depends on many things – things which will unfold between now and the end of the year.

Will the economy explode in a fit of growth or will it suddenly slow? Will events abroad cause a flood of foreign investment into New York and Seattle causing US interest rates to decline? Will productivity decline causing lower wages and inflation? How much money we need in the future depends on all those things and more.

Monetary scientists – people who have spent their lives memorizing monetary theories and egg foo young recipes – had similar training and know all the models. But because they could have different visions about the future, they might come away with very different prescriptions for monetary policy. Of course, much also depends on what I call their basic potty training. Some monetary scientists are perennial optimists who believe in Adam Smith’s invisible hand and conclude that we hardly ever predict the future accurately. They are conservative about monetary policy because they worry that they’d have to change it every two weeks as their view of the future changes. All that change causes uncertainty for buyers and sellers.

For every one of these conservative monetary scientists there is one of the opposite potty training. They do not have faith in the resiliency of the economy. They believe it takes an active hand of government to keep us from horrible consequences. They stand ready to alter monetary policy every time the economy twists or turns. They are like helicopter parents who believe they should room with their child in college or else they turn into monsters or professors.   

This has gone on long enough. I like this one better than the last one I wrote and deleted. I am truly a genius (in my own humble opinion). But what have I concluded? Basically nothing. Or maybe I made a prediction that despite the millions of words that will be said about this or that candidate to run the FED – all of it will sound very understandable but essentially will be a gobbly gook of opinions about which candidate has the proper potty training and which one can predict the future course of the economy better. Good luck with all that. Let's just pick one with some common sense and perhaps some real experience with money and financial markets.


  1. E.E. Bortel must be shaking his head about now.

    1. It was cookbook physics. What goes up must come...................down!

  2. Dear LSD. I have an indisputable common-sense practicable methodology for pick’n the next Fed Baby High Chair. Elegant in its simplicity. Foolproof. Bulletproof. Completely apolitical and void of any issue pertaining to education, job experience, positions held, age, sex, hair color, or intelligence. Drumroll please.

    Gather all candidates in the Oval Office. Set up six chairs (even though only four candidates remain); three facing one way—the other three back to back facing opposite. Turn on the surround sound (I’m sure the Donald has the latest, greatest, best set up.) Put on a 45 rpm of Chubby Checker’s Peppermint Twist. Have the candidates do their best version of the P-twist twisting around the six chairs. Abruptly stop the music. The last candidate to sit is out. Repeat two more times. The remaining candidate is the new Fed Baby High Chair.

    1. Thanks Tuna. I think I prefer Fat's Domino's Blueberry Hill.