CCCLXIX – Economic Weather Forecasting

I just read a headline that reads “Economist puts recession risk at 80%” and mentally appended: “partly sunny through the weekend, with highs in the mid 60’s…”.

There are two errors, as I see it, with this kind of economic forecasting.

First, it treats the Economy like some unpredictable force of nature. Second, it is not designed to educate the public, but instead spooks them. Imagine if a weather forecaster said there was an 80% chance of a “Spooky Doom-storm” and all it did was rain?

Before I get too ahead of myself, let me back up.

The first error is in treating the economy like an unpredictable force of nature. The economy is not a force of nature and it is predictable on the macro-scale just not on the micro-scale. Inflation is a predictable outcome of the COVID stimulus and other MMT behaviors of our government. How inflation will affect people–micro-scale stuff–is hard to predict, but it was foreseeable that inflation would occur. Recession is a predictable outcome of the anti-inflationary measures being undertaken right now by government. They are intentionally trying to slow down the economy to rein in inflation, and that is a good thing. Given the irrational stimulus (free money for everyone!) we are behaving rationally with respect to its consequences (interest rate hikes, inflation).

This gets at the second error, that claiming there’s an 80% chance of recession. The recession is both logical, unavoidable, and good. People sometimes get the mistaken impression that recessions are always bad–they are certainly always unpleasant but in our present case it is healthy because it will course-correct our economy, so it’s not all bad. The headline itself seems to me to be designed to scare people. “The Spooky Doom-storm is a-comin!” says the economist. But really the spooky doom-storm is a few days of wind and rain and it will relieve the drought and moderate the forest fires.

An ounce of prevention would have been worth a pound of cure, but seeing as we didn’t undertake any prevention, it looks like we have to put up with the pounds of cure. That sucks–but isn’t the end of the world.

Part of the problem with how the Government responds to economic activity is it looks at the 2008 credit crisis as a sequence of bad headlines that will really harm their election prospects. So they manage to the bad headlines and make bumbling errors like Quantitative Easing and bailouts and innumerable other economic policy failures.

Just some quick thoughts.

AMDG

CCCXXXIII – A Grumpy Ramble About Inflation

I have written about inflation before but that was more about how to think about it than what it is. I saw another headline that the Fed is considering a 1% interest rate hike and my thought was–what does that even mean? Why is that significant?

So here are some quick thoughts since I can’t muster the effort to write a complete essay. It’s my blog and I do what I want.

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• We know from the previous article and from perhaps basic education that inflation means there’s too much money floating around.
• The interest rate does two things:
  • Rewards savings by incentivizing keeping your cash still and for the love of God will you stop moving it around
  • Punishes borrowing by increasing the cost of borrowing, i.e. FOR THE LOVE OF GOD WOULD YOU STOP MOVING YOUR MONEY AROUND.
• We had a HUGE regime of money inputs in the form of Covid Stimulus and now again we have the war in Ukraine to finance so woohoo spend like the economy is imaginary
• We did not have a reciprocal regime of money outputs, so that’s what this tries to do. This is great news for savers and bad news for everyone else.
  • OH and by the way, because interest rates have been so low for the last decade or two, nobody is a saver. We as a society are up to our eyeballs in debt because we get better value for our dollar by borrowing than by keeping it still.
• That rushing sound in your ears is the economic dynamo grinding to a halt because shifting gears is very difficult.

Other signs of the times:

• Corporate Bankruptcy
  • When the cost of borrowing increases by some marginal rate then some marginal number of firms will become insolvent because they cannot afford their debt supply. Many firms are optimized for a low-interest-rate environment, only conservative, cash-rich firms can weather the storm because they have, well, cash.
    • Lookin’ at you, Apple
• Corporate Layoffs
  • Before bankruptcy, many firms will seek to restructure their cost profile and the easiest thing to do is cut staff. Staff are expensive and are huge liabilities. One person has probably a 2 or 3x salary multiplier in terms of financial impact on a company–not even counting experience and other value-adds. Their presence alone is a big expense and a big liability. Layoffs–clean up the books.
• Price Hikes
  • High prices are a natural consequence of a high inflation environment, and I’m only listing it last because it’s the most obvious.
  • Blaming any single one commodity on inflation is stupid. Gas Prices are not driving inflation, they are a consequence of it. Flooding the oil market with gas will help the gas prices go down but see my previous bullets about BANKRUPTCY and LAYOFFS to see what the gas companies will think about low gas prices in an inflationary environment.

But Scoot, Inflation is Bad! How do we get rid of it? Can’t things go back to the way they were?

Inflation is healthy–just like exposure to germs is healthy as a kid. Its a natural part of the economic balancing act our government is trying to accomplish, and inflation SUCKS but it’s how we reap what we sow.

If we were smart we would eat dirt for a few months and get through it quickly. Trying to pull a Sullenberger with the economy is probably going to cause more damage. We never fixed the deep structural problems in our economy from the last time around so there’s a lot of deeply entrenched problems that we are going to have to deal with.

By my (experiential) understanding of human behavior and my (Smithfield Hams™ Pig Ignorant) understanding of economics, if we let go of the reins a bit prices will peak in a few months, a few companies will go out of business, but the economy will be allowed to re-adjust itself to a high interest rate environment.

The important next step is that we stay there for a while and maybe, you know, stop giving money away for free.

But money is imaginary so, who cares, right?

AMDG

CCCXX – Inflation

Ed Feser has an interesting article up about Economic and Linguistic Inflation. It’s mostly about linguistic inflation but it begins with a point about economic inflation. Here’s the beginning of Feser’s article:

F. A. Hayek’s classic paper “The Use of Knowledge in Society” famously argued that prices generated in a market economy function to transmit information that economic actors could not otherwise gather or make efficient use of.  For example, the price of an orange will reflect a wide variety of factors – an increase in demand for orange juice in one part of the country, a smaller orange crop than usual in another part, changes in transportation costs, and so on – that no one person has knowledge of.  Individual economic actors need only adjust their behavior in light of price changes (economizing, investing in an orange juice company, or whatever their particular circumstances make rational) in order to ensure that resources are used efficiently, without any central planner having to direct them.

Inflation disrupts this system.  As Milton and Rose Friedman summarize the problem in chapter 1 of their book Free to Choose:

One of the major adverse effects of erratic inflation is the introduction of static, as it were, into the transmission of information through prices.  If the price of wood goes up, for example, producers of wood cannot know whether that is because inflation is raising all prices or because wood is now in greater demand or lower supply relative to other products than it was before the price hike.  The information that is important for the organization of production is primarily about relative prices – the price of one item compared with the price of another.  High inflation, and particularly highly variable inflation, drowns that information in meaningless static. (pp. 17-18)

We have the tools to solve this problem! There’s two points worth making:

• What inflation is & what information it conveys
• What information is conveyed in any price whatsoever?

Let’s start with the second question first, because I like thinking backwards.

What’s In A Price? A Rose By Any Other Name Would Cost Twice As Much

I will make two mutually counterintuitive claims about Price. First: Price contains perfect information about the world at the moment of every transaction. Second: Price contains imperfect information about the market because it simulates but does not convey an expression of value.

Price contains perfect information about the world at a moment in time because of the equilibrium it achieves between supply and demand. If we are talking about oranges, the supply side of the market equation includes the substitutes and replacements, the derivative products and trades–every possible orange and every possible thing like oranges is represented by perfect knowledge of the supply side of the market. The demand side of the market equation includes every person for whom it is possible to buy oranges, every person for whom it is not possible, every currency they can buy it in, every conceivable purpose for oranges, and every conceivable derivative product from oranges. In short: the price of oranges includes who is supplying oranges and who is not. It includes who demands oranges and who does not. Every price includes this information, because if demand was infinite price would be infinite too. A market cannot just be an expression of who wants something, it has to factor in who doesn’t want it, and why. I am not in the market for oranges at this very moment because I ate grapes a few minutes ago. That decision is included in the price of oranges. If two minutes from now I get an idea for a way to make unlimited clean energy out of orange peels then two minutes from now my demand for oranges will increase dramatically, and that will affect the price of oranges.

(Kristor wrote an article and made this point in the comments, or i made this point, or I was learning it from him–anyway I can’t find it on the Orthosphere yet but I will link here if I can find it).

There’s a whole other side to this equation, that does not get a lot of consideration. What can oranges be exchanged for? This is a good point to pivot into inflation.

Inflation Makes Me Want To Blow Up

Inflation typically refers to the increase in prices of goods due to an increase in the money supply. Typically, inflation is treated like weather–it is a thing that happens to economies, and it is hard to predict. Inflation is a quality of markets. In fact, a more sensible way of discussing economic inflation would be an increase of supply for a resource available for barter. Remember the Zippy rule: All exchange is barter. So what makes it that I am willing to trade a sack of oranges for a few sheets of paper?

The core of this idea is the fact that the paper represents the delegated authority of the sovereign to provide for my needs. The sovereign issues a paper which says “I would buy this citizen one dollar’s worth of goods, but I cannot, so I trust this citizen to buy it for himself.” When the sovereign issues a LOT of these papers, they become worth less and less in barter. If the total economy is just me and my friend Joe the Orange Seller, and our total savings is $10,000 between us, and I go and offer to buy one orange from Joe for $10–that is a substantial amount of the total economy being spent on this one transaction.

If Joe the Orange Seller and I have a sum total savings of $10,000,000 between us, and I offer $10, that is less substantial of an investment. The sovereign needs to carefully manage the money supply or else there will be an over abundance of the resource. This makes sense if we were to use another resource.

If where I live, Guinea Pig husbandry is rare, then offering Joe a Guinea Pig in exchange for an orange would be a pretty big deal. If where I live there is an infestation of Guinea Pigs and they have become a pest, such that you cannot walk outside without stepping on one, then offering Joe a Guinea Pig would be a joke–he could step outside and fill a basket with guinea pigs right now, for free–why would he give me an orange for one?

Managing money as a resource is the key. Price is the twofold equilibrium between the supply and demand of the product being sold and the thing being traded for it.

This means you should be able to make a model for price that includes the supply and demand of oranges and the supply and demand of barterable resources and set the price in [resource] for oranges given both. I’m imagining two intersecting graphs with supply and demand on it and price being the point at which both graphs are in mutual equilibrium.

Price as twofold equilibrium is the new idea for me. Maybe economists realized this a long time ago but I’ve just realized it so I will probably write more on this topic.

AMDG

CCLXXXVIII – The Ideal Money Supply

Authors Note: I went back and forth on whether to publish this. It is a half formed thought without a strong justification, but I think the core idea is sound and I would be interested in feedback from readers, so ultimately that is why I am posting this. Please let me know what you think!

I have asserted that money is the delegated authority of the sovereign to provide for our necessities. Providing for our necessities is a responsibility of the Sovereign, as head of state, analogous to head of household. Because the purpose of money is to provide what we need, and the source of money is the sovereign, and the exchange rate for money is dependent upon the amount of money in circulation, we can use these ideas to estimate the ideal money supply.

Lets create a scenario that is extremely simple. King Alfred is King of a nation with one subject, and that subject is Bob the Peasant. Bob the Peasant works for King Alfred as his gardener, and Alfred gives Bob a wage for his work. Bob’s only need is bread, so the King pays him in loaves of bread–one loaf per week. The money supply in this scenario is zero, and everyone’s needs are met.

If King Alfred did not have a ready supply of Bread, then Alfred could pay Bob a wage of 1 Alfranc per week, which is enough for Bob to buy a loaf of bread from another supplier. The supplier receives the money, and pays a tax since they have no other needs, and the Alfranc returns to King Alfred. Money supply is zero, everyone’s needs are met.

We can keep growing this scenario ad infinitum. The principle I wanted to hammer home is that the ideal money supply is, after some arbitrary period, that the money in circulation is zero, and everyone’s needs have been met. Property is real “wealth”, not money. A surplus of money means you have satisfied all your needs and are able to provide for much of your future needs. A deficit of money means you have not satisfied all your needs, you need more to bring everything home. A balance of zero money means you have satisfied all your needs and you have no provision for future needs.

Some might call that short sighted, others might call that abandonment to divine providence.

This is not investment advice: You need savings to live in the modern world, and if you are going to give up all your possessions and abandon yourself to divine providence, do so under intense prayer and the supervision of a spiritual director. It can be exceedingly fruitful to do: Matthew 19:21-23

What I think would be a good takeaway from this is that real wealth exists in real property, and real financial security comes from having a means of providing for your needs and preserving your real property. If all your bills are paid and you have no money in the bank, you are satisfied–you have everything you need.

AMDG