‘Act Big’ (Tequila In The Blender)

Janet Yellen had no trouble with her confirmation hearing on Capitol Hill Tuesday. 

I imagine once you’ve shouldered the burden of the entire global financial system while simultaneously engineering a short vol bubble in the face of a populist uprising across nearly all major western economies, a Zoom chat with a handful of lawmakers who came in woefully short on reasons not to confirm you, is a veritable walk in the park.

At the risk of overstating the case (or perhaps “at the risk of stating the obvious” is better), Yellen had all the “right” answers. The scare quotes are there to acknowledge the fact that not everyone agrees with her answers. They’re “right” in the sense that the chances of Yellen saying something to seriously derail or otherwise jeopardize her confirmation were essentially zero, and no such missteps occurred.  

Note the orange square in the chart. Yellen engineered an absurd disconnect between reality and market-based measures of volatility long before that disconnect became front-page news during the pandemic. 

Take a moment to recall what went on during the period denoted by the shaded area in the visual. Donald Trump rose to power, the Brexit vote went “wrong,” Marine Le Pen made a serious run at the French presidency, the August 2015 yuan devaluation sent a deflationary shockwave through the global economy, and on, and on. Yellen, undaunted, put her foot on the throat of the VIX and kept it there until it nearly smothered to death. 

During her Senate hearing Tuesday, Yellen delivered the pitch for more fiscal stimulus, in-line with Joe Biden’s proposal unveiled last week. She emphasized (repeatedly) the necessity of acting fast. In the absence of swift and forceful action, the economy could incur more structural damage, leading to further “scarring.” Lawmakers, Yellen exhorted, should “act big,” and deliver relief to the jobless and small businesses, where Congress can get what she described as the “biggest bang for the buck.”

The pushback from Republicans was predictable. There were references to the national debt and to the notion that Biden’s plan may be too broad and insufficiently “targeted.” 

Yellen cited low rates as a compelling reason to act now. “There is an advantage to funding the debt especially when interest rates are very low by issuing long-term debt,” she remarked.

While that’s the orthodox justification (and the crutch everyone knew she’d lean on while selling Biden’s plan) it didn’t go down well with the Modern Monetary Theory crowd who, generally speaking, isn’t amused when ostensibly intelligent people resort to what I’ll generously call “spurious” notions about how currency-issuing governments in developed economies with sufficient monetary sovereignty “fund” themselves.

Stephanie Kelton, for example, posted a looped video on Twitter of a woman pouring what appeared to be a liter of tequila into a blender while Yellen spoke.

For what it’s worth, the latest edition of BofA’s closely-watched Global Fund Manager survey showed investors believe the “solution to higher debt under Biden will be higher taxation, inflation, and/or Modern Monetary Theory,” in that order.

You can be absolutely sure that the majority of folks who participated in the survey couldn’t tell you much about MMT. Usually, the crucial point that’s lost on folks is that MMT is more descriptive than prescriptive. I’d go so far as to say it’s totally descriptive.

But, as noted here over the weekend, nobody should expect Treasury, the Fed, or Congress to drop the charade anytime soon when it comes to perpetuating the notion that government spending must be “funded.” That revolution is years away, and it won’t be led by Yellen or Biden, let alone Chuck Grassley. (This is where you laugh, dear reader.)

Yellen brushed aside criticism of Biden’s proposed minimum wage hike, and she was similarly dismissive of the notion that now is a good time to fret about spending. She called it “essential” that the US get back on a “sustainable” path for the federal budget eventually, but noted that trying to do so now would chance a deep recession and ultimately be self-defeating (or worse).

One Republican senator (Rob Portman) suggested the US “shouldn’t get too comfortable” with low rates. That is totally absurd. Bond yields are a policy variable, just like the fed funds rate. If you don’t believe that, just ask Japan or Australia, where yield-curve control is in place (ironically in this context, the BoJ is currently mulling allowing yields to fluctuate in a wider range). Sometimes, lawmakers act as though they’re unaware that the US has capped yields before.

In any case, it doesn’t matter. Yellen “predicted” that yields will be low for an extended period. Somehow, I imagine that “prediction” can be taken more as a promise. As I’ve said repeatedly over the past two months, the idea that Yellen won’t exercise de facto control over the Fed going forward is laughable. There is no chance (none) that Jerome Powell would do something Yellen advised against. 

“The world has changed,” Yellen told Congress on Tuesday. “I believe the future is likely to bring low interest rates for a long time.”

She added a caveat: “But of course it is a risk that interest rates can rise.” 

She’s right. They can. If she Powell lets them.