Two days after publication, Zoltan Pozsar’s latest “dispatch” was still circulating and otherwise prompting discussion in market circles.
It wasn’t so much that Pozsar said anything new or novel. Rather, the combination of his “brand” (if you will) and the unapologetic cadence he employed while suggesting the Fed should deliberately deflate asset prices in a bid to bring down inflation without running afoul of the Committee’s implicit social justice mandate, amplified the message.
“The decisions of central bankers are always redistributive,” Pozsar wrote, before asking a series of pointed questions. “For decades, redistribution went from labor to capital. Maybe it’s time to go the other way next. What to curb? Wage growth? Or stock prices? What would Paul Volcker do?”
Read more: Zoltan Pozsar Has An Idea…
Pozsar suggested the Fed is likely to incorporate “some version” of a controlled demolition strategy into their decision calculus going forward, where that means withdrawing transparency to engineer volatility, the opposite of central banks’ post-GFC modus operandi.
On Friday, in his daily, Rabobank’s Michael Every put Pozsar’s note into a (much) wider context.
Nothing is as simple as specialists make it sound. And nearly everybody is a specialist, whether they realize it or not. A long time ago (in a galaxy far, far away), I was an undergraduate student at one of America’s largest universities. The school’s otherwise formidable political science department had but one lonely theorist left — everyone else had succumbed to the siren song of leveraging probability and statistics in an ill-fated bid to turn an inherently qualitative discipline into a hard science.
That lonely theorist had tenure, though, and as such was free to lament the extent to which his colleagues were inclined to narrow their focus to the point of absurdity, a situation exacerbated by a slavish adherence to statistical methods not designed for the problems they were trying to solve. He’d bemoan, for example, pervasive instances of gifted academics becoming “experts” on the intricacies of legislative arcana in far-flung locales, efforts which produced tedious peer-reviewed research that nobody, including the reviewers, really cared about. The tragic irony of choosing a career in academics is that almost every rite of passage involves spending years of your life researching something wildly esoteric and writing papers scarcely anyone will read. You end up being an expert on voting patterns among left-leaning, trilingual lawmakers whose favorite color is orange in a South American municipality that only you can identify on a map.
That’s an extreme example, but we all fall into that trap — even when we purport to be “macro-focused.” It’s exceedingly rare that economists and analysts endeavor to leverage a cross-disciplinary approach to their work. In the academic world, that’s due in no small part to the necessity of producing the very type of peer-reviewed articles mentioned above.
The end result is policy mistake on top of policy mistake, because no one can see the big picture. Eventually (and ironically), the big picture becomes one giant policy mistake, which is where we are in 2022. Nobody has any answers because everyone assumes their theories were (and still are) at least partially viable. What nobody is willing to admit is that ultimately, we’re all the hypothetical expert on voting patterns in some obscure South American township. We can’t see very far beyond our own cherished body of work, and it doesn’t occur to us that our work is narrowly construed.
“Our current economic paradigm doesn’t work because neoclassical and neoliberal economics are full of holes,” Rabobank’s Every wrote Friday, after attributing at least part of Thursday’s risk-off mood to Poszar’s note. He cited a recent paper that suggests global capital flows into the US are detrimental to the country and to global productivity, before noting that at least some government officials in advanced economies now seem to believe that economists “underestimated the downward pressure on wages from free movement” while overestimating the assumed benefits of free-flowing labor and capital.
“So, some credentialed experts say free capital flows are bad; and free trade is bad; and free movement is bad,” Every wrote, on the way to asking, “What is there left then?” He answered his own question as follows,
Free money! [But] free money does not provide any solution to structural problems: It papers over the cracks at best and exacerbates them at worst. We all agreed around 18 months ago, and ‘went fiscal’ again. Yet if you add ultra-loose fiscal policy on top of ultra-loose monetary policy you end up with inflation unless: 1) You are the only one doing it — and why should you be the only one doing it?; or, 2) you have excess physical capacity — which we off-shored according to neoclassical and neoliberal economic theory.
Logically, we stay where we unhappily are right now, with high inflation and fading growth; or rates stay ultra-low to finance the government boosting physical capacity via industrial policy, subsidies, and forced onshoring of supply chains — so MMT; or you have to raise rates to make it more attractive to invest in physical production and supply chains rather than speculation in financial assets. Yet MMT then means the need for protectionism/decoupling; and raising rates means your exchange rate soars if only you do it — and why should anyone else do it if you are?– so again, implies the need for more protectionism/decoupling.
It’s not paranoia — the underlying illogic of how we have built things is out to get you.
Yeah, but how long til this realization percolates down into the ‘common sense’ rhetoric of west virginia?
And realistically, politicians are now representing two distinct classes of legal citizens — corporate and human. Rhetorically its always been that way, but the scotus’s arcane bestowing of natural rights upon the unnatural has solidified their grip. Corporations have become creatures of borderless capital and free trade in a way that would shock even Volcker, and their economic power now comes with immense legal weight.
When a country has two classes of citizen, one which hoards the wealth and one which labors in the field, what hope is there for emancipation?
And among the two classes of citizens the actual human ones are treated as second class citizens because they don’t possess the capital to fund political campaigns or grease the wheels of government.
The rust belt wants to bring back the manufacturing jobs they lost to outsourcing and they want protectionism for American industry because overseas labor is just too cheap. West Virginia is way ahead on this, although their reasoning for this desire is probably more rooted in nostalgia for the past rather than a product of concern for the future.
If you want to look at the “big picture” then consider the effects of planned deflations like those of the Fed and BOE in 1920; read Chapter 19 (“The Great Deflation”) of Adam Tooze’s “The Deluge” for example.
One of the best descriptions of the way of the academic world I’ve seen. Thanks and don’t be afraid to keep reminding us. What you have pointed out is why I quit teaching and doing pointless research in finance to focus on learning and teaching what we can discern from studying the successes and failures of real firms.
One of the main flaws occuring over the last 20 years related to our current economic conditions, is the fact that financial markets evolved away from reality into speculative fantasy. The markets have always been casinos, but in the past, a far larger percentage of cash flow was directed at building ridiculous stuff like infrastructure or the stuff that created more jobs and thus more sustainable growth.
The GDP stagnation of the past two decades can be attributed to a lack of long-term fixed investments, which is caused by the Fed gaming the casino’s.
Taking away the punchbowl at this late stage is like giving cancer patients electroshock therapy and studying mortality statistics.
A whole new generation of investors see the casino game as a non-stop cocaine bing, with the Fed waiting in the shadows to bail out any overdose complications related to excessive stupidity. The world is addicted to stupidity and fantasy while Rome burns.
Pozsar’s Volker Shock perhaps opens a miniscule door to realizing the markets are broken, but a more substantive thought experiment may be to ponder the government/treasury to create a new class of debt structure that pays a high yield on an instrument that actually builds real stuff.
Instead of worthless Treasury bonds being used as trading sardines, bouncing around with high frequency, for microsecond gains, why not find ways to excite people about long-term rewards that connected to infrastructure growth?
I vaguely recall Brady bond history but the concept of war bonds seems appropriate after the global pandemic shock. The nonlinear chaos we’ve been experiencing isn’t going to vanish with Fed jawboning or insane political polarization or absurd ideas like Pozsar’s bond crashing madness…
I need to add, that one of the main reasons that we have so much interest in housing by investors, is the obvious long-term prospect of being rewarded by future cash flows. The Fed, in 30 years has basically destroyed the concept of saving money in a long term commitment, like a savings account, CD or bond. That framework has paved the way for people to increasingly ignore old fashioned investments and move towards greater speculation, specifically, home ownership and investment in rental property.
The incentive choice between a treasury note and return on a rental is crystal clear for many and as the government becomes less efficient in terms of providing future returns, that will eventually be a cancer. Investors need incentives, but unfortunately the cancer is growing.
How can treasury crash bond prices in order to excite people that are chasing higher yields, but in so doing, treasury sells their hoard of treasure at losses? It can’t work, but the cancer will grow ..
The basic issue here is that we (commenters on this forum) want to apply logic and principles of fairness and eficiency to a situation where that doesn’t apply. In other words, we are where we are not because of incompetence, but because of deliberate policy choices (or noon-choices) favored by the powerful.
When the Long Big-Easy Trend ends the surfeited have time again to reexamine the accumulated lint in their bellybuttons while they bemoan and groan about the consequences of excesses on the toilet. These mucus plugs to shall pass, one hopes, or are the afflicted going bottoms up Elvis style now that Putin Called? It is absolutely freaking amazing how quickly the regimes that instinctively maintained the one way flow of power in the ‘Information Age’ can now punch above their weight once information went from scarce and difficult to acquire to the opposite. Whereas, the permissive/free US is a fragmented barely governable mess tearing itself apart in Great Red Spot sized digital free-speech shitstorms.
I recall the organizing principle of the US government was oppostion to a foreign threat as opposed to the financializaition of the country.(An economy designed to maximize asset prices and the financial services sector.). I would sell it this way Deal with Russia and China by addressing our climate techonology security hunger etc. or pretend we can ignore the world and retreat into serving the rich, the extremely religious and the irrationally angry.