Lesson 23 The Hidden Bond Market

The market approach was very popular when I learned macroeconomics. A macro model was composed of several markets – for goods and services, labor, money, and financial markets (bonds and stocks). By studying those markets we would learn about changes in things such as output, unemployment, wages, prices, and interest rates.

While each market could be studied separately in isolation, the trick of macro was to study them as an interconnected system of markets. What fun. We learned that something that first disturbed one of the markets, for example, the goods & services market, could subsequently affect outcomes in the other markets. Not everything was obvious by looking at one market. You had to study the whole system. 

Think of the US economy as being composed of a bunch of lily pads. A frog lands on one of those pads and impacts that one pad. But then the change in that one pad may affect the whole pond and all the other pads. The impact of those pads then reverberates around until that dang frog leaves the pond. That’s the way we think about macro. Something might disturb the labor market but before all is done, all the markets will have been impacted and therefore that one initial change might affect output, employment, wages, price, interest rates and more.

Isn’t macro fun? Lily pads! Frogs!

An economist named Leon Walras (pronounced vall rah) was diddling around with macro systems of markets and decided that one could focus on all the markets except one. You would always know the results for the “dropped” market because it was totally determined by looking at all the other markets. It became traditional to “drop” the bond market via Walras’ Law. That does NOT mean there is no bond market. It does not mean that the bond market is unimportant. It means only that one can learn all one needs to learn about all the markets without directly addressing the bond market.

The bond market is, therefore, hidden in macro models. It is lurking in the background but generally not in direct view. (Many of us learned something called the IS-LM model in macro. The IS curve represented goods & services and the LM curve was the money market. The bond market was "dropped" and we just looked at goods, services, and money.)

Aside from silly macro modeling, why would a normal human care about any of this? The answer is that sometimes the hidden bond market is forgotten, yet sometimes the bond market is very important. Today, this is especially important given all the focus on the Fed and its impacts on interest rates. 

People mistakenly think the interest rate is determined in the money market and is very much impacted by the Fed’s policy decisions. That belief oversimplifies the truth. The interest rate is the rate of return on a bond or other similar credit instruments. Changes in the supply and demand for bonds, therefore, have fundamental impacts on interest rates. To forget the bond market is to leave out critical factors impacting interest rates.

Today, we are concerned that Fed policy is going to raise interest rates. Our eyes are peeled for Fed policy meetings and the resulting impacts of their decisions on interest rates. But wait, there is much more to it. The Fed might influence interest rates, but much depends on the other factors in asset markets. For example, because the government is going to have large deficits in coming years, the Treasury is going to sell a bunch of government bonds to finance those deficits. Call that a large increase in the supply of bonds. Without a corresponding increase in the demand for bonds, that launch of new bond sales puts upward pressure on interest rates. One could argue that the Fed need do very little to raise interest rates since the Treasury is going to do a nice job of lifting them anyway.

Think about other borrowing in the economy. Firms will need to borrow more to permanently raise the amount they spend on plant, equipment, and innovation. Students will likely borrow more, too. There seems to be no end to how much we want to borrow for new cars. In a strong economy, all of that borrowing combined with the Treasury’s borrowing could be putting strong pressure on rates to rise. What if the Fed pushes rates even higher?

What I am suggesting is that ignoring the “dropped” bond market could result in interest rates rising too much too soon. If rates rise too much, this could trigger the next recession. Interest rates are returning to more normal higher levels due to the usual impacts of a growing economy that is reliant on debt. The Fed seems overly worried about inflation these days and is very willing to push rates upward. But they should also be worried about the bond market’s impact on interest rates and instead be focused on not letting interest rates rise too much.

The Fed is always somewhere between a rock and a hard place. The Fed finally decided that interest rates were too low. Sadly, it might be true that the real worry is that rates may be already rising too much. Why is the Fed always a day late and a dollar short?

Lesson 22 The Phillips Curve

Below is something called the Phillips Curve. I thought it had expired but I read an article in the Wall Street Journal last week and realized it is back to haunt us. So I am on a mission today.

Like the Laffer Curve, the Phillips Curve is one of those graphical devices named after an economist that is misunderstood and totally abused. Like a good training bra, these curves have their time and place but can easily be misapplied.

I'll save Art Laffer and his curve for another time. A.W. H. Phillips studied wage change and unemployment in the UK from 1861 to 1957. I am not sure why his parents gave him so many initials and that deserves a lot of study, but I won't go into that today either. To make a very long story short, we Americans who wanted to be great again in the 1950s decided to steal Mr. Phillips' curve and apply it to our study of inflation and unemployment in the US.

The result of this study is to think that there might be a stable relationship between inflation and unemployment. Thus we draw the curve with a negative slope and pretend that it sits there until hell freezes over.  For you friends who are not mathematicians, this means that any reductions in the unemployment rate should cause the inflation rate to increase. Or, in other words, when the economy grows rapidly enough to reduce the unemployment rate this puts pressure on markets. Tight labor markets mean that wages rise faster. Tight goods markets mean that prices rise faster. That doesn't sound so crazy, does it?

In our current context in the US, we recently saw the unemployment rate decline to 3.9%. Applying the Phillips Curve means that inflation should be rising. Applying the Phillips Curve to the future means that if the unemployment rate remains low or heads lower -- then surely inflation will rise even more. Again, that doesn't sound so crazy. Of course, we wonder why inflation has not already soared given the tremendous declines in the unemployment rate.

The confusion is that economists are used to models that focus on supply and demand. And while discussions of the Phillips Curve often involve throwing around those words, the Phillips Curve is neither a supply curve nor a demand curve and this drives us crazy. What is it? Basically, it is a useful construct that amalgamates supply and demand but in ways that satisfy only the user. One user says one thing; another user says another.

This lack of consensus arises because we are using this construct as a proxy for an inflation forecasting equation. An inflation forecasting equation stems from a model. This explicit model has two components -- the aggregate demand for goods and services (AD) and the aggregate supply of goods and services (AS). To understand changes in the inflation rate, you must examine all the major things that impact a country's AD and AS. One of those things is the unemployment rate.

Did I underline the word one? I should have. Only one of the zillions of important things that impact inflation is the unemployment rate. Don't get me started because a zillion is a lot of things to discuss. But consider some of the important ones. Oil prices are starting to rise again these days. Might that impact inflation in the USA? What about when prices of mobile phone services fell? Would that impact the national price level? Declining productivity? Global competition? Agricultural surpluses?

Some economists understand that when any of these other inflation-causing factors change, then the whole Phillips Curve shifts. Things that cause inflation to rise cause an upward (leftward) shift. Things that cause inflation to fall cause a downward (rightward) shift. The Phillips Curve is not an immutable object nailed to the floor. It bounces around like Nolan in a bounce house. Thus, pretending that the Phillips Curve just sits around all the time is bound to lead to errors in one's inflation forecast.

Notice what we are saying these days. As the unemployment rate falls we are pulling our hair out about rising inflation. We are sure that the Fed will, then, more aggressively fight inflation. And because the Fed will react like Pavlov's pup, many are already forecasting a recession. While all that might be true, it ignores a lot of other things going on that might preclude the inflation rate from rising. Maybe the global economy is slowing down? Maybe we have plenty of workers ready to jump into the labor market or at least switch their status from part-time or from underemployment. Maybe tax reform will improve productivity and facilitate more competitive pricing. Maybe continued innovations and competition in IT products will reduce prices we pay for all sorts of products. Maybe Alexa will wash your car for free.

The Phillips Curve is a pedagogical device. It doesn't sit still for anyone. Focusing on the impact of unemployment on inflation is like trying to forecast how your kid will behave after eating a cookie. While the cookie might  have one impact, myriad environmental and emotional factors should not be ignored. Give the kid the cookie!

Lesson 21 Macroeconomic Fuzziness

I had another one of those chats with a nice person who reads my blog. It always starts out with a nice compliment but then winds its way around to the fact that some people cannot understand one thing I say. They count the number of times I use the word JD and then go back to their usual productive lives.

This is both frustrating and understandable. I started learning macro from Professor Bill Shaffer at Georgia Tech in 1965. Since that first course, I have taken an embarrassing number of econ courses in college and graduate school, and I've taught an even larger number of econ courses since starting my career. While some of my econ colleagues were rocket scientists, I always loved the idea that you could help people understand the world better by studying econ.

Because some of my blog friends don’t have a lot of background in econ, I wish I could help them better understand what is happening “out there”. And there is a lot happening. The economy is or isn’t about to implode. The Fed might raise interest rates three or four times in 2018. The Federal government is planning to make its very large debt position even larger. Inflation is going to rise, the value of our stocks is going to fall, and we will all soon be panhandling on the sidewalk in front of Nick’s English Hut.

There is plenty “out there” to discuss. And that’s the problem, or should I say that’s the challenge. Economics has three parts. First, economics wants to provide answers about what is going to happen in the future. Second, to do that, economics must have some basic fundamentals that can be applied to the future. Third, economists are always checking the reliability of these fundamentals by looking backward. If they seemed to hold in the past, then maybe they can be used to think about the future.

Fundamentals? There are lots of them. For example, we believe that if you give a person an extra dollar that person will spend some of it. The marginal propensity to consume (MPC) tells us how much of an extra dollar received will be spent. (Some of the extra dollar goes to taxes and some goes into saving. The rest is spent.) This fundamental is used, among other things, to estimate how much extra spending will be done by people receiving tax breaks in 2018 and beyond.

The MPC is a potentially useful idea but we don’t want to apply this idea if it isn’t true. So we look backwards. Economists do studies to inquire how people really act. Give a dollar to Nolan. Let’s see what he does with it. Here’s a dollar for Ashley, let’s see what she does with it. We won’t all do the same thing with an extra dollar. But studies of the usefulness of the MPC in macroeconomics look to see if it is a reliable indicator of what all of us did when given an extra dollar. Thus, the past can be very useful. How have Americans behaved when given tax cuts in the past? When Americans were given a tax break of $1 billion, did they spend more on goods and services? If so, how much? Looking at more than one tax cut over time and over many families, did they have a reliable spending response?

Fundamentals can be argued about in terms of basic intuition. Focusing on income and spending might be too narrow. And history might find that tax cuts have had different impacts at different times. Thus, we might have a lot to argue about the past. If we can’t all agree about the nature of an economic fundamental and its reliability in the past, then clearly we will have a lot to argue about its application to the future.

Atoms don’t behave like humans. Apply heat to an atom and it behaves according to physical laws. Physical sciences, therefore, are more useful for predicting the future. Social sciences have fundamental laws of behavior but because they involve human behavior, they have less predictability.

We don’t give up trying to predict the future, though, just because Nathan doesn’t act like an atom. People are very curious about the future and are willing to tolerate a less than 100% accurate economic prediction. This underscores why macroeconomics always seems so iffy and controversial and why economic predictions are often off the mark. We spend a lot of time arguing about fundamentals and even more time disagreeing about whether a given fundamental was accepted or not accepted by a given past historical period.

To complicate matters further, we have ideologies mucking up our discussions. If macroeconomics sounds precarious based on past behaviors of fundamentals, this apparent unsoundness is compounded by the fact that we have extreme camps of economists who differ almost as radically as Catholics and Baptists. Conservative economists believe government is an evil that disturbs the natural and good order of things. Liberal economists have faith that the government is necessary to restore order and save us from the greed and stupidity of mere mortals.

This ideological split taints every fundamental and every economic prediction and ensures that each camp will totally disagree with the other ones about everything from peanut better to BB guns.  

This brings us full circle. It is fun and challenging to help some of you understand current macroeconomic issues. To do that takes blog posts that can never lack at least a few ifs, ands, and buts. A discussion of any topic worth writing about will be full of definitions and theories along with attempts to verify them with historic episodes. But history never proves anything perfectly, and ideology always provides ample grounds for near-theological disagreement. So I will ask for your patience and hope that this little post today helps you understand why things always have to sound so complicated.

Lesson 20 Taxes (Tower of Babel)

I am sitting at my desk reading all the articles about the latest proposal for tax change in the US. What a mess. Despite it being morning, it makes me want to reach for the extra-large bottle of JD. Have you ever tried JD on Honey Monster Puffs? Wow.

So I scratched my head hoping for some sort of stimulation in brain activity and decided it was time to start at ground zero with a lesson on taxes. Imagine us regular folks trying to decide the best route to Mars. I could begin by wondering about rocket fuel, sun spots, and billboards. And that might lead to discussions with neighbors and perhaps heated arguments, but the truth is that we amateurs might never converge on a realistic answer about the best way to get to Mars. There are so many issues! Better to argue about landscape issues.

So how does any of the above relate to taxes and recent tax proposals? The answer is that while the main idea of a tax is pretty simple, it is the use of taxes that makes the topic so complex. What is a tax? A tax is a way for the government to raise money so it can buy its citizens things. We take for granted that cities, states, and the nation should provide things to their citizens. 

Our Bloomington mayor wanted some shiny, new trash collection trucks so he added a new tax for that purpose. He already gets lots of our money for silly things like fire and police protection but he needed a wee bit more for these pretty new trucks. Each house got equally attractive new garbage cans that come in three sizes so it all made sense and none of us complained.

I think I already got off track. The main idea so far is that governments provide for their citizens, and they need money to do so. So they tax us. Taxes come in all shapes and sizes. In the USA, the main taxes the federal government collects are based on our incomes. State and local governments tend to tax incomes as well as goods we buy. Regardless of the source, these governments use the proceeds to take care of their citizens. That seems pretty simple. If the government wants to spend more, it has to tax more. So why are our friends in Washington, DC, so wild and crazy about the recent tax proposals? Have they been watching too many Steve Martin reruns? 

I can see at least three reasons beyond Steve Martin why the tax proposal generates so much commotion. First, the Federal government is allowed to go in debt. So we have a choice when we want to spend more. We can raise taxes or we can incur more debt or we can have a little more of both. Second, we not only raise most tax revenues based on income but we have a progressive tax system that charges higher rates on higher incomes. Third, the tax system is “holier” than Swiss cheese. No offense to Roger Federer implied. These holes are there for a purpose. Most of us are the recipients of at least one tiny little hole. For example, realtors love it when people can write-off the interest they pay when they borrow to buy their new tiny house. It makes it a lot easier to sell a house when the buyer is being subsidized. The same goes for electric cars and pain pills. Geez, how many of these so-called loopholes or deductions are there? Please don’t count them all up – you have better things to do today.

So what have we learned?  Taxes are pretty simple in principle but in practice they are more complicated than a mission to Mars. It is not simply a matter of government raising taxes so it can buy us shiny new garbage trucks. It becomes a series of questions about how every single person – dare I saw every voter – will react to any given specific way to raise those taxes.

            Tax increase or debt increase?

            Tax high-income people or low-income people?

            Tax young people or old people?

            Tax workers or retired people?

            Tax savers or spenders?

            Tax students or professors?

            Impact housing industry or stockbrokers?

            Tax heirs or new children?

            Tax sexy persons or economists?

            Should I go on?

If you answered yes to the last question, then you need help. If you thought the above stuff was fun, keep reading. It gets even more complicated. We blandly assumed that the tax increase is about raising the resources to spend more. But that is never the whole truth. We use the tax system to cure everything from male impotency to invasive Asian carp.

Think of all the hidden tunnels in our discussions today. Some of us want to use the tax change legislation to reform the tax code so it will create more growth. Others want to use it to address the distribution of income. Still others want to use it for short run stabilization of national spending. While all these goals are laudable, a tax change that improves growth might not immediately improve the distribution of income. A tax program that favors more short-term spending might damage sustainable economic growth. And of course, many of us worry about how these tax changes will affect the price of JD.

I am getting close to my word limit so I better sum up. I can do that with two words – Tower of Babel. Okay, that’s three words. That’s not many words compared to the number you will see and hear in the next days about tax reform. And I bet you this: Few if any of the authors of those words will explain what taxes are and what they should be used to accomplish. Each of these selfish people will take the easy road and will loudly point out how one group is to be favored over another. Having a realistic and thoughtful approach to taxes is beyond them. They would rather achieve star status by fussing about the low hanging fruit. Inasmuch, it is difficult to see any proposal that would have any beneficial impacts passed by the mental institution we call Congress. No one wants to be a loser, and no one will admit what goals they hope to accomplish. 

Even if a proposal is passed into law, we will accomplish no national goals, and we will end up pointing more fingers at each other after the tax change than we did before it. 

Lesson 19 Tax Reform and Simultaneous Organization

Who is up next? I am. My name is Tax Reform. My friend healthcare already struck out. Budget, debt limit, and immigration will be up in future innings or maybe in future games. I don’t know.

No, government policy is not a baseball game. But it sure seems like one as policy deliberations and decisions flow sequentially from one month (inning) to the next. 

What other choice is there? While it seems almost crazy to mention, a better choice is to do it all at once – simultaneous instead of sequential.

We seem to be focused now on tax reform. But we are already hearing that you can’t do tax reform until you settle healthcare. Or you can’t get much accomplished with tax reform until you settle the budget or change the debt ceiling. It’s all related. Who came first, the chicken or the egg?

There must be a prize in government that is awarded to the people who make simple things impossible. People make budgets all the time. So do companies and churches and drug dealers. We plan and make budgets because this activity produces better results. Instead we could wake each morning and make a new decision. It’s Tuesday so maybe I will buy a TV. It is Wednesday so I might sell some shares of stock. It is Thursday, and I will get a job and earn some money.

Sound stupid? It should. But this is the way government works each year. The main reason that sequential budgeting does not work in government is that each policy affects many aspects of our lives. A given policy helps Nolan while is hurts Jenny. Of course, Jenny and her friends scream bloody murder. The next policy helps Jenny but not Nolan. Nolan organizes his kindergarten buddies, and they throw rotten eggs at guilty politicians. The upshot is that sequential decision making gets nowhere because EACH decision has a natural resistance.

Better would be a more simultaneous approach. Let’s take five different areas of policy and find the best solutions. Policy 1 helps one group. Policy 2 helps another group. Policy 3 might help both groups. If you decide and then announce all five policies at once, it is harder for resistance to form. For one thing, figuring out the net effects on people might not be easy when summing up all the pluses and minuses of all the policies. For another, it might be the truth that most of us benefit from the whole package, warts and all.

The above is too abstract. Think next how this might play out in the real world. Good planners begin with a statement of problems. Once the problems are known they can then think about the remedies. What are our national problems?

Low labor participation
Low capital spending 
Slow economic growth
Unequal distribution of income
High government debt
Inefficient tax system
Too little/too much government spending
Too much/too little government regulation of business
Healthcare
Pimples, JD, and other

We can argue about these problems and their order of importance but it seems possible that a fruitful beginning step by national policymakers would be to list these problems according to some definition of priority or importance. Ties are permissible. Just rank them, damn it.

Then they would produce a list of policies that might address one or more of those problems. Such policies would include tax reform, tax cuts, government spending changes, reforms to healthcare, immigration policies, and so on.

Assign every policy a positive or negative number as to how that policy might impact each and every problem listed. Note that a tax reform policy might help the rich more than the poor in dollar terms. A government spending policy might do the opposite. Do not try to make every policy help every problem and every person. Each policy should have an intended benefit though with side effects.

Summarize the positive and negative impacts of each policy on each problem area. The first round of this simultaneous approach will find some policymakers do not approve of the results. Go back at it and adjust each policy so that the net result of all the policies is acceptable. No set of policies will make everyone happy. This approach has a chance of finding a solution that recognizes that not every policy will make everyone happy but that the sum of all the policies generally improves things.

Every major organization works this way. The board approves a comprehensive plan whose purpose is to best meet the goals of the organization – be they marketing, finance, or human resources. They do not go from day-to-day making decisions willy-nilly. Call me a dreamer for believing that government can be thoughtful and goal focused. But that just shows how we have come to accept idiotic and failed approaches to our very important problems and goals. Or maybe, like watching a good fist fight, we revel in the blood and guts. Government policy is pure entertainment. In that case, we deserve what we get. 

Lesson 18 Inflation

The posts in my blog space named “lessons” are meant to provide some background on concepts I throw around like fish at a Seattle fish market. Some of my readers are not economists, and they often send me emails requesting that I try to better explain macro concepts. I sometimes direct them to my online resource called MacroNotes (http://macronotesmba.com/ ) but that’s a little like sending someone who wants to taste a little pho to Hanoi when our local Vietnamese restaurant, Rush Hour Station, has perfectly good pho. So instead of going to MacroNotes for more information about inflation ( http://macronotesmba.com/lessons/inflation-and-unemployment/ ), I will post today on that topic.

Inflation isn’t an easy topic and therefore deserves some attention. And inflation is a very important topic these days for several reasons. First, it is growing slower in the USA and that makes us wonder about it. Second, it seems to be associated with economic growth forecasts that are less than rosy. Something is going on out there that makes lower inflation a sign and maybe even a cause of slower economic growth. And third, our policymakers see the lower inflation rates as a reason to keep pouring fuel on the economy.

Inflation will never be as exciting as a Confederate War Memorial or an Indiana University football game, but inflation is pretty interesting these days. So what is inflation?

Let’s begin with this definition: inflation is the rate of change of prices. For you math buffs, this definition is basically an equation. I can talk about the inflation rate of weed prices in Colorado. Suppose a sack of weed went from $2.00 to $2.20 in the last month. Applying the formula, we can say that the inflation rate of weed during that time period was 10%. Anything that has a price has an inflation rate associated with it.

Applying this concept of a rate of change means that inflation of something could be positive, negative, or zero. If it is negative then we call that deflation as it means prices are falling. If the calculation is positive then we simply call that inflation. If the calculation is zero we have no name for that. We would say inflation is zero. Once a teacher called me "zero" but that had nothing to do with inflation. 

We also have terms to describe how the inflation rate is changing over time. If the inflation rate goes from 2% to 1% we say inflation in decreasing or we say we call this disinflation. A rising inflation rate is called reflation.

The inflation rate we are discussing today is the inflation rate of a nation. In the USA each day, we not only buy weed but we buy silly things like cars and doctor visits and Uber rides. Our Labor Department defines someone called the typical Urban Consumer. Let’s call her Jaden. Jaden buys stuff each month at Target, Kroger, and of course Amazon. Since she is the typical Urban Consumer, the Labor Department tracks what she pays for all the goods and services she buys. She hides this information from Chuck but that is another story. 

The idea is that the Labor Department can get a number that represents what she paid for all the stuff she bought in any month, say for example, December of 2016. We would call that number the CPI for December 2016 for the USA. Let’s say that number is 200. We collect that same price information in January of 2017. Suppose the number for January turns out to be 210. We would use our formula and conclude that the inflation rate in January was 5%. If that rate kept up for every month in 2017, then we would say the annualized rate of inflation in January was 60%. But the inflation probably won’t keep up at that rate and the 60% is just a way to express what happened in one month.

Suppose you don’t spend exactly like Jaden. Perhaps you really like Cuban black beans and you eat that with rice a disproportionate number of times per day. Aside from certain gastrointestinal issues that we won’t cover here, your own personal inflation rate might be different from the national rate. But us macro people do not care about you – we are more interested in how much the average of all of us is paying for goods and services. So when you read something about the CPI in the USA you need not feel concerned about your own cost of living, as it tells you only about the cost of living of the average person.

The CPI is not the only measure of prices in the USA. So sometimes you will hear about inflation as measured by the Personal Consumption Deflator or the GDP Deflator. Maybe you will read about Producer Prices. The truth is that there are many indicators of inflation but here is the main takeaway. For most of us, the CPI is just fine. And second, while the others are different in various ways they usually tell a similar story about inflation.

One more fun fact. Food and energy prices are notably erratic. They bounce around like a 4-year-old in a bounce house. To get a better reading of all prices, the Labor Department publishes the CPI without food and energy prices. If you are trying to understand the general trend of all prices over time, this CPI Less Food and Energy is your baby. Finally, stocks and bonds and other financial assets are not goods or services -- and therefore the prices of these assets are not included in the usual measures of inflation. 

So why is inflation of so much interest? For one thing it might have relevance to your own situation. For another it might tell you something about the national economy. It might influence your optimism or pessimism about future inflation, jobs, and income.

Here is where it gets a little complicated and even controversial. When inflation is high, the immediate message is that prices are rising at a faster pace. Most of us frown when that happens. But prices do not rise in isolation. Prices are part of a bigger macroeconomic scene. It depends very much on some of those other things as to how a rise in inflation impacts you and me and the nation.

Suppose we are living through a time of great optimism and growth. Jobs are plentiful and wages are rising. In that environment, a rise in the inflation rate doesn’t seem ominous. Okay the price of eggs went up, but I have a great job and my earnings are growing faster than prices. In that case, inflation is just part of a very positive economic situation.

Instead, suppose we are living through a time in which inflation is rising but people are losing jobs and/or wage growth is stagnant. That is the kind of time when inflation really hurts. Such times are not frequent but do happen and are usually the result of business productivity rising at a slower pace than business costs. Some of us geezers remember the 1970s when the price of energy was rising so fast that business costs were crippling many companies. Stagflation is a term coined to describe this kind of inflation.

Inflation can be part of a successful economy or the result of a very negative scenario. Since the national economy is not simple, different experts can look at the economy and come away with different opinions. Today the inflation rate is very low and some policymakers see this as a very negative sign. They want to use policy to bring the rate up. Others believe the macro economy is not so bad and attempts to engineer a higher inflation rate will come back to haunt us. So stay tuned.  

Lesson 17 Interest Rates

Everyone knows what an interest rate is. But today the interest rate is more talked about than Howard Stern’s new personality. The Fed has a new policy to increase interest rates, yet interest rates go in the opposite direction. Is this a Putin plot to control the US economy? Maybe, but it is also true that most of us don’t know squat about interest rates, so let me waddle into the fray and try to make us all experts. I also explain why I think US rates will rise, and the prediction is not mainly the result of Fed policy.

There are more interest rates out there than new expensive bourbons. Dang, even Washington State is making bourbon. That should really infuriate our Kentucky friends. Interest rate is a phrase that means if you let someone have some of your money for a while, they will give it back with a little bonus. Consider my savings account at the local credit union. I gave them several thousand dollars, and I got 18 cents back in interest this month. Not all financial assets are that crappy thankfully, but in today’s financial scene, we talk about interest rates being very low. You can earn interest on savings accounts, short-term government bonds, long-term government bonds, private bonds, and so on. 

In macro, we talk about things like national output, the price level, the wage level, and so on, even though we know there are many different goods and types of labor. So it is with interest rates: we often refer to “the interest rate” even though we know there are many of them out there. So my first order as macro blogger-in-chief today is to say that the 10-year US government bond is often used as a statistical indicator of the US interest rate. Today that rate is at about 2.3%. To put that rate into perspective, it achieved a high in the early 1980s at 15% and as recently as 2007, it peaked at more than 5%. So it is pretty clear that at 2.3% interest rates are very low today. If you buy a bond for $100 then you would expect to receive roughly $2.30 in interest over the course of a year. That will not buy you one espresso mocha at Peet’s.

So why is the interest rate so low today? Why is the Fed having trouble raising it? And what explains the future course of interest rates? Wow – lots of questions.

Let’s address the various things that impact interest rates. If you lend money to a company, they are going to use it to improve the company. So if prospects are good for companies, they are very apt to be borrowing. Suppose a company borrows money to expand the capacity of one of its manufacturing plant. If prospects suggest a 5% return on money they borrow, then they don’t mind paying 3% to borrow the money. So a major factor affecting interest rates is optimism about the future economy. The more optimistic firms are, the more they are willing to pay for funds. The more pessimistic they are, the less they are willing to pay to borrow.

A second factor is inflation expectations. Paying back a loan takes time. The lender receives these payments and that constitutes their return. If the prices for goods and services rise during the payback period, the lender receives dollars that are worth less in terms of goods and service. Thus, at the beginning of the loan, it behooves the lender to anticipate future inflation. Imagine if they think inflation will reach 100%. A 4% interest rate would be lame. Maybe 104% would be better and would protect them from the expected inflation. So we say that today’s interest rates have an inflation premium. The higher expected inflation is, the higher is the interest rate.

What else affects the interest rate? A third factor is risk. Risk relates to the expectation of the lender receiving no payments. That is, if the economy tanks sometime in the future, then the lender gets nada. The riskier the economic environment is, the more the macro risk rises and the more lenders want today in the way of an interest rate.

That’s a long list of factors affecting the interest rate – optimism about business prospects, inflation expectations, and risk. What else? The general idea of supply and demand as it impacts bonds points to other factors like returns in the stock market, real estate, insurance policies, and foreign assets. One has choices in holding assets. Instead of owning bonds which give you a rate of return, you could also choose to have stocks, real estate, savings accounts, and similar assets from other countries. Thus, anything that makes these other assets relatively more attractive will reduce the demand for bonds and raise the interest rate. For example, if interest rates begin to rise in Europe, investors might sell US bonds so as to buy more European bonds. This would lead to a rise in the interest rate in the US.

Finally there is the Fed. Usually the Fed tries to impact short-term interest rates but quantitative easing suggests they attempt to influence the entire term structure of rates from short to long-term.

I probably have forgotten something but you can see the list of things that could impact the US interest rate is pretty long.

Anyone who wants to think about the interest rate today or in the future has to grapple with all these factors. What do you think about these?

US business confidence?

Inflation expectations?

Macroeconomic risk?

Stock market gains?

Relative desirability of real estate, life insurance products, banking products?

Interest rates abroad?

Fed policy ?

Price of JD?

Here is my quick outlook. As the distance from the great recession widens, the world economy is going to continue to slowly improve. Along with these improvements will come more optimistic assessments of US economic growth.

Worries over long-term changes in labor force participation and productivity will remain but will be lessened. As these worries recede aggregate demand will get even stronger and the result will be higher employment, wages, and inflation.

While I am not predicting a resumption of very high economic growth, I am projecting a more positive response than is now envisioned. With the Fed slightly more worried about inflation, their policies combined with the more sanguine macroeconomic outlook will produce a clear cycle of rising interest rates. Since the US will likely be leading this global parade, our higher interest rate will spill over to higher rates abroad and will create international impacts that will raise US rates even more. 

I hesitated about going further but no economist makes a prediction without covering his butt. Nations are prone to making horrible policy choices. It will take some doing but a general recognition that new policies will be inherently bad for economic growth could lock us into interest rate purgatory for a long time. The US, China, the EU, and several other places need to keep their collective foot on the growth pedal. Stupid stuff will keep it all low --  interest rates, economic growth, investment spending, productivity growth, and labor participation. Focus on the growth ball, guys. Plain and simple. Interest rates will go up and we will enjoy it. 

Lesson 0. Why Study Macroeconomics

Recently a friend who reads this blog blurted, "I like the blog and all that, but what am I supposed to get out of all your words?" Apparently I have been putting the proverbial cart before the horse. So I am creating one more lesson-style post and numbering it zero to communicate the idea that this is supposed to be the beginning of one’s journey with macro. This is supposed to be the equivalent of those first paragraphs of a first book on macro. And, of course, it is the hardest one to write. But I do have a full glass in front of me. 

One place to start is with the phrase forest from the trees. Macro has a lot of parts, or trees, but macro is bigger than the sum of its trees. Wikipedia defines macro as “the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.” I read that and almost fainted. It breaks every rule of definitions. About the only words I understand in that definition are large and scale – and even those words are misleading. There are lots of large things (e.g. the Goodyear blimp and Refrigerator Perry) but not all of them are macro.

So let’s start over. First, macro is a science. Macro is a science because its main goal is to explain stuff and thus improve our lives. Physics is a helpful science because it tells you that after you throw a sharp dart up into the air, you should move or it might land on your head. Astronomy helps us to understand why the sun “comes up” each morning. Biology explains why eating too many extra-large Big Macs might not be a good idea. Science is our friend.

Macro is our friend too. It takes the economy of the country as its focus. While biology might focus on the whole body, macro asks questions like: How is the German economy doing? What’s up with Greece’s economy? While the concept of a body is very specific, the idea of the economic system of a whole country is less tangible. And thus macro is already in trouble. The doctor can touch your arm but the economist cannot touch the national economy. It is a figment of our imaginations. It exists only in our minds. And some of us have some pretty whacked-out minds. 

That sounds pretty bad. But the truth is that we use such counterfactuals for much good. You read fictional stories to your children hoping they will learn important lessons about life. Scientists stick millions of thingies on semiconductors that are so small that you can’t see them, and yet we are able to do amazing things with cellular phones and their apps. In biology class we experiment on fetal pigs, and despite the fact that they are not human beings, we learn a lot about human biological systems.

With macro, we can learn how the economy impacts our lives. The economy is like a train with many cars. Each car might be very different but when the train goes forward all the cars go forward. We might not be able to touch the national economy but we can try to improve its outcomes. At the heart of macro is something called GDP. GDP is not a tangible thing. It is an idea. It is defined as the nation’s output of goods and services. Think of a huge pile of goods and services and that is what GDP measures for given quarter or year. 

Every nation produces tangible goods like autos and JD. Every nation produces services that disappear the second you consume them, like when the Uber pulls away or the bartender moves on to serve another customer. Your drive in an Uber's Prius is over the second you step out. Okay, you might have a nice memory. In the bartender case you do have a lovely Old Fashioned but that drink is a good. The act of the bartender delivering it was the service.

In 2016 the US produced about $18.6 trillion dollars of goods and services. That's quite a pile! Can you touch that $18.6 trillion? No! You personally bought parts of that amount but the “whole enchilada” is the macro concept. GDP is like a basketball team. We cheer for it. Go GDP! Sure we have favorite players, but it is the team that we focus on year after year. In that sense, a basketball team is definitely not a tangible you can touch. It is a concept (and to many people, a very important one).

When GDP falls in a year, we call that a recession. We frown during a recession because we get less goods and services – and we dislike the fact that many people lose jobs as part of the contraction in output. We smile when GDP rises, and we clap when it rises faster than normal. Just as a basketball coach is expected to produce good results for the team, we expect our government leaders to create the right policies for growth of GDP. And like basketball coaches, even the best leaders win some and lose some. No one is a winner all the time.

  

I am just about down to the ice cubes. But I think I am almost finished. Macro is a science and as such is supposed to help us improve our lives. Macro uses concepts that are not always tangible but which are developed to help us think more productively about how to improve the nation’s economy. Macro devises policies and sometimes they succeed and sometimes they don’t. But like the meteorologist who missed the exact speed and location of a hurricane that came on land near Sanibel Island, the macroeconomist is constantly evaluating our macroeconomic science and policies with an eye toward learning from one’s mistakes.

Finally – since macro is about a whole nation – it is not about you or me specifically. Macro is not about Hoosiers versus Coloradans. Macro is not about workers versus owners. Macro is not about girls versus boys. Macro is not about JD or corn or oak barrels. Macro is not really about the rich versus the poor. The field of economics has categories to investigate each of those things, but macro tries to focus on the whole economy of a nation. When macro policy starts trying to be everything to everyone, it always fails at doing the one thing it is intended for – helping the economy to grow more so we all have jobs and more goods and services to play with!

Lesson 1. International Trade Ignorance

Those of you who can count will recognize that my last lesson was Lesson 16 and therefore you were expecting Lesson 17 this time. Unfortunately I checked the records and I never had a Lesson 1. I started with 2. Sheesh. So I am naming today’s main plate Lesson 1.

This lesson is about international trade. International trade is a lot like pho, the Vietnamese soup. A lot of people really like it but almost no one knows how to prepare it. Otherwise Campbell’s would have canned it already. We're similarly ignorant about international trade. When my fifth grade teacher called me ignorant, I was very hurt. But later I realized it did not mean I was terminally stupid – only that I didn’t know very much. I was willing to go with that.

I fear that our President-Elect is a bit ignorant about international trade. I also fear that he will read this post and ask me to be Secretary of Doggie Bags, but the truth is that most of us are ignorant about international trade. So no insult is intended.

One of my professors once talked about international trade in terms of the tail that wagged the dog. Unless you have a really small dog with an unusually large tail, you expect the dog to wag its tail. So saying international trade is like the the tail wagging the dog ought to have your ears perked and your tail wagging.

What my professor meant is that there used to be a day when trade pretty much meant one thing – countries selling goods to each other. "Goods" implies a tangible, e.g. a manufactured product or an agricultural product. You can imagine a time when much of world trade was coal or corn or clothing or cars. Countries loved to export goods because it expanded their ability to sell. The more they sold, the more incomes and employment grew.

So exporting goods was really cool. It was the big dog. You were the coolest kid on the continent if you could export your goods to other countries. That’s what many people think is what international trade is all about. Exports of goods! In 2015, the US exported $1.5 trillion of goods. Go team.

The interesting thing about an export of goods is that a bunch of foreign currency comes into world markets to pay for your goods. What do we do with all those foreign currencies? They are pretty but papering your walls with it can only go so far. Then some bright bulb thought, "Hey, with all this foreign money, maybe I could buy things from other countries!" So export countries would use the foreign currency to buy goods from other countries. Imports go hand in hand with exports. And more important, imported goods can really help your country – especially if you import things that help you to be happier and more productive.

So exports of goods imply imports. While exports have an important role for national goals, imports of goods are also part of that equation. If a country imported only Twinkies, then maybe you might want to rethink the value of the imports. But countries often import vital things they can’t get at home.

Nowadays most of the world has discovered services. Services are intangibles which essentially disappear once they are consumed. A float down the Rhine might cost you $20k but on your way home all you have left are some nice memories and the JD bottle you stole from your room fridge. Travel, tourism, entertainment, communications, utilities, healthcare, etc. are services. In the US today, about 70% of what we spend goes for services. So whatever I wrote above about goods adheres equally to services. Services exports augment a nation’s output and employment; services imports fill in what we don’t or shouldn’t make ourselves. In 2015, US services exports were $743 billion.

When people subtract national imports from exports, they are doing a legitimate operation. For example, if exports are less than imports of goods and services, we call that negative number a trade deficit. That causes frowns. We don’t like deficits. But in reality the negative number is telling you only one thing directly – currency going out exceeded currency coming in. What this negative number tells you – for example, a deficit of goods and services of $500 billion in 2015 – is that $500 billion did not return to the US via imports of goods and services. So what? It does NOT tell you that the US is in a half-billion dollar hole. In fact, what we know is that the nation got benefits from the exports AND it got benefits from the imports. Adding them together, we got about $5 trillion of benefits to the country in 2015.

I see you are tiring. Give me 10 burpees. The best part is coming.

What we have left out of all this is a huge part of trade call financial stuff. Okay, there is a more technical term but for now remember that the trade deficit left $500 billion of dollars around the world that people did not want to use for US goods and services. 

Notwithstanding wallpaper, foreigners who hold all those dollars can use that money and more if they want to buy financial stuff in the USA. They can open up an account  at the IU Credit Union. They can buy corporate or government bonds. They can buy shares of Apple or shares of an index fund. They can also acquire or merge with Apple or the Crosstown Barber Shop.

Wow. And they are not limited by that $500 billion left over from the trade deficit. They can invest all they want. And I don’t have to convince you that when foreigners buy US assets, it is a good thing. It is good because US firms find it easier and less costly to raise capital for investment. It is good because it lowers US interest rates. It is good because it can infuse the latest technology and innovations into American companies.

In 2015, foreigners increased their ownership of US companies (what we call foreign direct investment or FDI) by around $350 billion dollars. That’s not how much they owned – that’s how much they INCREASED their ownership in that one year. They increased FDI by around the same amount in 2014. In those two years, foreigners increased their ownership of portfolios in America by about $736 billion. Money is gushing into the USA. Between this portfolio investment and the FDI, we are talking about an increase of dollars buying US assets of more than $1.4 trillion.

Here’s the point: Trade includes cross border transactions of goods, services, foreign direct investment, portfolio investment, and more. Anyone who focuses on one of these to the exclusion of the rest is not telling you the full story. International trade is great for the USA. Yes, we have a trade deficit. But we also have a pile of very valuable imports of goods and services flowing in and a waterfall of the world’s savings wanting to invest here. Anyone who suggests that we should jeopardize the latter so as to remediate the trade deficit in goods is not understanding the meaning of international trade.  

Lesson 16: International Investment

Those of you with post-kindergarten training may or may not know that governments keep international trade statistics. Even some of our current presidential candidates know that.  These statistics are found in something called the Balance of Payments Accounts and are found at bea.gov . 

While there are two equally groovy parts to the BOP figures most politicians only know about one part of it, the Current Account. The Current Account is on the top and we wouldn’t expect those people to actually read all the way down to the bottom, right? They are busy people. Also the history of the world and the solar system has emphasized the Current Account so it would be unfair to criticize our politicians for only knowing about the Current Account.

This Current Account is where we publish statistics that have to do with exports and imports of goods and services. We sell Chevys to China and they sell rice and replicas of the Great Wall to us. It’s a cool deal. Some of our political leaders have noticed that our dear country almost always has a deficit in our Current Account. And that burns them. After all – the word “deficit” is not a nice word. If your teacher said you had deficits in your behavior, you would feel injured and probably never get a PhD in science or classical studies. This deficit in Current Account means that we are buying more stuff from other countries than they are buying from us. This is especially true of China and since we have a very long list of other issues with China, our politicians complain and sometimes cry that this deficit with China is worse than Dengue Fever and needs to be stopped.

I have written thousands of posts (I exaggerate all the time) which explain why Current Account deficits are not necessarily bad things and I don’t won’t to repeat all that minutia here. I see the Tuna is already starting to nod off.

This post is about the other part of the BOP Accounts – the part at the bottom that most people ignore. It is the part that our politicians don’t have a clue about. So you should feel very special that I am doing this for you today and send either money or JD to thank me.

The second part of the BOP account is called the Financial and Capital Account (F&C Account). What a name! Can you imagine being in the first grade and having a name like that? No wonder no one looks at this account. But this account is the coolest kid on the block and has a lot to tell us.

The F&C Account records all the financial trades between countries. We don’t usually call these import and exports – instead we talk about outflows and inflows. If China invests in America we call that an investment inflow. We like it when foreigners open up US bank accounts and when they buy our bonds, stocks, and companies. All of those financial inflows are recorded in our F&C Account. At the same time, we also like it when US citizens invest abroad. We usually call that diversification. You don’t want all your eggs in one basket and you don’t want all your investments in US bonds, stocks, etc.

When foreigners invest in America we call that an inflow. When US citizens invest abroad we call that a financial outflow. Globalization means that citizens around the world have become increasingly interested in investments both at home and abroad. 

So as a public service and hopefully for money and booze I will acquaint you with some of the financial flow numbers. Below I will refer to some numbers from a close cousin of the F&C Account called the International Investment Account or IIA (the F&C Account focuses on the one period flows between countries while the IIA reports the resulting total ownership positions). 

As it turns out, there are some looming risks associated with the IIA account that we should be worrying about. Unfortunately our leaders are playing with their bellybuttons and/or are unaware of these trends.

I went to the bea.gov web site and downloaded a spreadsheet of IIA information from 2000 to 2015. Here is some of the information from that download:

                                         2000   2007   2015

US Ownership of F. Assets   7.6    20.7    23.3   

F. Ownership of US Assets   9.2    22.0    30.6
Data is trillions of US dollars
F. stands for Foreign

This little table tells you the following:

·       Globalization of financial markets was very evident in the new century with foreign ownership more than tripling from 2000 to 2015.

·       Most of that increase came between 2000 and 2007.

·       Then the activity slowed – especially with respect to US ownership of foreign assets. After growing by $13.1 trillion in the first period, it grew by $2.6 trillion between 2007 and 2015.

·       Foreign ownership of US assets slowed as well but it still increased by almost $9 trillion between 2007 and 2015.

·       If we focus on the 2007 to 2015 time period we see a much wider gulf – foreigners owned $7.3 trillion more of us than we owned of them. Nearly all of that gap can be explained by what is called portfolio investment (in bonds and stocks). That gap was $1.6 trillion in 2000; $1.3 trillion in 2007; and then $7.3 trillion in 2015.

What’s going on? Why are foreigners so interested in our financial markets?

First, since the financial crisis, the US has done better economically than other countries. A relatively stronger economic profile means more confidence in our financial products. Think Greece, China, and Venezuela.  

Second, think US government deficits and debt that have supplied a lot of investment opportunities to both residents and foreigners. Foreigners gobbled up our huge pile of new government bonds!

Third, while foreign companies did increase their acquiring and merging with in US companies, most of the gap mentioned above came from investments in private bonds, government bonds, and equities.

Fourth, notice that despite the gap, US citizens have shown a strong and growing appetite for foreign bonds and stocks. Despite a financial crisis foreigners continued to buy US assets and Americans continued to buy foreign assets.

What do we make of all this? When the gap is favoring US assets, this implies two important things. First, people need dollars to buy US assets so this has strengthened the dollar. Second, when foreigners buy our assets this pushes our asset prices up and interest rates down. With the huge increases in national debt and the needs of firms to finance their investment projects, this asset demand from foreigners prevented our interest rates from rising/stocks falling and thus helped to keep the US economy growing.  

And this is what concerns me. What happens when things turnaround? What happens when other major countries strengthen and their assets look more desirable to global investors? What happens when our government increases its debt even more as foreigners desert US financial markets? Financial globalization made the US wealthier when the rest of the world was weak and uncertain. Financial globalization will have the opposite impact if the US grows weaker relative to Europe, Japan, China, and other countries. Our politicians have complained loudly about the Current Account Deficit. Just wait to see what happens when buckets of money leave the US to be invested elsewhere. Then we will be clamoring about deficits -- deficits in the F&C Account!  

Lesson 15 Money and Monetary Policy

Janet Yellen is the head of the Fed. She and her colleagues at the Fed determine the nation’s money supply. Much has been said about her management of money and lately she is being labelled a lackey of the President and Mrs. Clinton. I doubt she is lackey but I would say that she is guilty of drinking the same Kool-Aid as her liberal progressive buddies in government.

We grew up with Kool-Aid and I don’t mean to disparage that lovely and colorful drink with enough sugar in it to start a diabetic colony.  What I mean is that Yellen, Obama, Clinton and many others share a similar philosophy in general and in particular with respect to the magical qualities of money.

And that’s what makes this post today so much fun. Money itself is about as exciting as your Uncle Ed who rocks himself to sleep at 1 pm in the living room while you watch his cigar ash fall on his partly open bathrobe. Money is paper. Or money is electronic entries that get transferred from one account to another. 

This is not exciting stuff. You buy something – whip out a bill or a debit card – and the deed is done. Nothing to write home about there. It’s like your best friend Peter. You wear plaids and so does he. You wear stripes and so does he.

Although money itself lacks any real excitement, governments can turn it into Charlie Sheen on crack. There was a day when the world did not have money. We called that barter. A farmer would trade three carriage loads of corn for two dresses. That worked okay but corn farmers could not always find dressmakers and so pretty soon money evolved. If everyone carried money it made transactions much simpler.

Money went through a number of stages. Money needed to be around. At first it was commodities – stuff that most people already had and knew the value of – like corn or wheat. Then they were replaced by commodities that seemed to be more durable and held value better – like silver and gold. Silver and gold are pretty but those commodities are heavy or bulky and not easy to safeguard or carry to Sam’s Club. The next stage created paper money  wherein the paper money had to be backed by gold. Paper was essentially valueless but it represented an amount of gold.

Are you history-lovers still awake? Finally came the stage where money could be pulled out of a hat. Not really a hat but essentially the same thing. Central banks create money at will. They need nothing but a magic wand and an Internet connection. Money is “backed” by faith that the central bank will always create the right amount. Not too much and not too little. Like Goldilocks, we like just the right amount of money. The Fed pretends to give us what we want.

And here is where ideology comes in. The conservative school of thought sees the world as being very complicated and uncertain. The right amount of money is no easy thing to attain. Jim suddenly needs money to fix his roof. Dan swears money off when he decides to live in the forest. Imagine figuring out the right amount of money for a whole country day by day. Humbly, conservatives prefer a passive approach. Transactions usually grow by about 5% per year. So let the money supply grow by 5%. End of story. Go fishing.

But liberals always think they know more and apparently they are nervous people who don’t like fishing. They erect giant data collecting machines and try to measure the demand for money on a minute by minute basis. They take great delight and credit by measuring and the ups and downs of money and then trying to match those demand changes with more or less money. Think Whac-a-Mole. Liberals admit that sometimes they get it wrong. They admit that sometimes they even cause recessions when they get it wrong. But alas they are progressives and they are pretty sure that sometime in the future their models will be more correct and the world will be saved. Think Don Quixote.

If the above is not enough to make you reach for the JD pitcher there is more. Even though the infamous JM Keynes said that controlling money was like pushing on a string other modern liberal economists decided to give monetary policy a bigger role in society. Matching money supplied to transactions needs was way too boring for these moderns. So they decided they would match money to employment, prices, exchange rates, and hooker sales. If employment was too low then pump a bunch of money. If prices are too high take it back out. If exchange rates rise then blame China. If hooker sales go up or down call Charlie Sheen.

Talk about a way to guarantee that your name will get into the Bloomington Herald Times on a regular basis. The Fed now has so many balls in the air that it would take a multi-headed hydra to try to catch them all. But undaunted they collect data every day and they have serious discussions and then they go home to their mansions and foreign sports cars.

Yellen and her buddies at the Fed and in the government are not necessarily colluding. They simply have this faith that they know how to manage a 21^st century global economy. That they have been doing it badly never concerns them. They never question this faith that more active policy is better. They are modern and smart. They will learn from their mistakes and finally get it right. They will save us.

Their disease is incurable because failure begets more activism and then more failure. Nowhere in their playbook is taking a deep breath. Nowhere in their training is the idea that too much variance and activism creates uncertainty. Nowhere in their discussions is that it takes time to disentangle short-term noise from long-term trends. Nowhere in their arsenal is the knowledge that some problems are non-monetary in nature and require non-monetary solutions. 

Lackey? I don't think so. Misguided and dangerous? I think so.