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I first got into economics and finance while working in the woods of Westport, CT for Bridgewater Associates in 2008-2010.

One of the many things I learned there was that I find it more satisfying to explain the markets than actually work in them. So I ended up leaving to help out with research for this biography of Alan Greenspan, which involved, among other things, reading every single Fed meeting transcript from the middle of 1987 through 2006.

After that, I was fortunate enough to get a Marjorie Deane Financial Journalism Internship at The Economist. My writing has also appeared in Bloomberg View and the New York Times.

While studying diplomatic history at Yale might not seem like the best way to prepare for this career path, there are some surprising similarities between the ways governments determine their foreign policy and the ways central banks go about setting interest rates. (Lots of arbitrariness, personality conflicts, people making things up as they go…)

Originally from Chicago, I’m currently an economic migrant in New York.

Podcast: our chat with Sebastian Mallaby on Alan Greenspan

Alan Greenspan’s reputation over five decades in public life has gone through wilder swings than the value of technology stocks or Las Vegas real estate during his tenure as Federal Reserve chairman. Sebastian Mallaby has produced the definitive account of Greenspan’s life, career, and the context in which he operated: The Man Who Knew. Mallaby recently came by the FT office to record a wide-ranging conversation about this accomplishment. Read more

Yes, the early 1990s really were bad

If you remember the early ’90s, other than, I would say, 1928, there was nothing even close. The conditions facing real estate developers in that early ’90 period were almost as bad as the Great Depression of 1929 and far worse than the Great Recession of 2008. Not even close.

— Donald Trump, via Vox

This statement has gotten some (undeserved) criticism. Here’s the Associated Press with a “fact check”: Read more

Recalling the OK/TX housing bust of the mid-1980s

Compared to other assets, houses are tough to sell at short notice (unless you’re willing to offer a huge discount), they require constant maintenance to avoid losing value, and they’re extremely exposed to their local economy. Yet many people put the vast majority of their savings into the equity of a single home.

Tax policy, differences between the quality of what you can rent and what you can buy, and the desire to hedge against the risk of rent increases all help justify this seemingly perplexing financial decision. But simple ignorance of the risks must also be a major factor.

We were reminded of this by a recent conversation with Jed Kolko, the chief economist of Indeed and an expert on housing. He pointed out that house prices in much of the oil-producing regions of Texas and Oklahoma have yet to recover from the bust in the mid-1980s. Read more

Sweden’s job market isn’t working for non-EU migrants

Compared to most rich countries, Sweden handled the twin challenges of the 2007-8 crisis and the never-ending euro crisis with aplomb.

The share of people in Sweden with a job is at all-time highs. Real output per person is at all-time highs, and has grown much more than in most other rich countries over the past ten years. Underlying inflation is essentially at its long-term average. The trade surplus remains massive. And Swedish house prices continue to float into the stratosphere.

Yet despite all this, Sweden’s central bank has been unusually aggressive in trying to stimulate its economy by cutting interest rates far below zero, buying assets, and cheapening its (already undervalued) currency.

We recently had the chance to talk to a former Swedish central banker about this. He suggested the Riksbank could potentially justify its behaviour as an attempt to heal structural problems in Sweden’s jobs market. Read more

The euro crisis and the French Revolution

There are lots of good reasons to study history, but perhaps the best is to avoid being misled by people who claim to have “learned the lessons” from the past when they don’t actually know what they’re talking about. For example, the policy mistakes exacerbating the euro crisis may have been partly caused by a profound misunderstanding of the causes of the French Revolution.

The thought occurred to us while reading The Euro and the Battle of Ideas, an intriguing new book we reviewed in this weekend’s FT. Two of the authors, Markus Brunnermeier and Harold James, are academics at Princeton. The third, Jean-Pierre Landau, was Deputy Governor of the Banque de France from 2006-2011 after a long career in the French Treasury and the International Monetary Fund. Consider the following passage, from pages 256-7 in the hardcover, emphasis ours: Read more

How would a Fed rate hike affect consumers?

We don’t really understand how changes in the level of short-term interest rates affect things we actually care about, such as growth and employment. There are too many moving parts and leaps of logic required, many of which are based on bogus assumptions about how the world works.

So it’s always nice to find new research into a small piece of the monetary transmission mechanism that’s grounded in facts. Researchers at TransUnion, the credit reporting company, looked at which American consumers would be exposed to an increase in the Federal Reserve’s policy rate corridor and the dollar magnitude of the impact of different tightening paths. We recently had a chance to discuss their findings with Nidhi Verma, who led the project. Read more

Banks have a dubious business model and markets have noticed

The tendency toward restriction that runs through the tone of the presentation seems to me to be quite problematic. It seems to me to support a wide variety of misguided policy impulses.

–Larry Summers, Jackson Hole 2005

You might think Summers had changed his mind in the eleven years since he called Raghuram Rajan a “Luddite” for daring to suggest the financial system had gotten riskier since the 1970s thanks to competition and the rise of performance-based pay. After all, in a new paper, Summers and graduate student Natasha Sarin not only cited Rajan’s work approvingly, they concluded lenders are still too vulnerable to panics. You would, however, be wrong. Read more

Least productive sectors only thing keeping inflation going

Central bankers think steady price increases are a good thing. After all, inflation makes it easier for employers to cut real labour costs and helps monetary policy boost the economy without having to lower (nominal) interest rates below zero.

Whether or not you agree, we thought it would be interesting to look at which products explain the rise of American consumer prices since 1990. As it turns out, just as the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88 per cent of the total rise in the price level boils down to four sectors of the US economy: Read more

The great American make-work programme

People enjoy work. Even those who don’t enjoy what they do enjoy the feeling of agency and being able to provide for others. For a world to work where a universal basic income accounts for the bulk of the consumer spending for many people, something else needs to account for the social side of work. It is disappointing to think that we’d have to create make-work for people, but it may be the hard truth.

–Ryan Avent, September 6, 2016

Disappointing indeed, but the reality is rich countries have been dealing with this problem for decades. A staggering 96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity (construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth) and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques (healthcare, education, government, and finance explain the remaining 50 percentage points):

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Monetary policy: it’s mostly fiscal

Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation.

–Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original)

Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes.

So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials: Read more

Yellen on negative rates: we do not speak its name

Janet Yellen opened the festivities at this year’s Jackson Hole economic symposium by musing on what central bankers had learned since the crisis and how they can deal with future recessions in a world where interest rates are far lower than in the past.

Unsurprisingly, bond-buying and “forward guidance” featured prominently in Yellen’s narrative of successful new tools. (On the other hand, scholars have estimated the combined impact of these measures was an unemployment rate a mere 0.13 percentage points below where it would have been using purely conventional instruments.) Read more

Richard Koo’s chart to explain the past 200 years

It may take a few minutes to wrap your head around it, but this chart from Richard Koo, borrowing heavily from the insights of W. Arthur Lewis, is a pretty good framework for understanding the history of the world since the start of the industrial revolution:

For most of human history, technological progress was achingly slow, especially when it came to agricultural productivity. Unable to boost yields, populations couldn’t expand unless additional farmland were brought under cultivation. There were about as many people alive on Earth in the age of Caesar as there were more than a thousand years later. When that finally changed, farmers moved to urban factories and joined the proletariat. Read more

Could immigration controls be the solution to New Zealand’s frothy housing market?

Here’s an interesting thought from Grant Spencer, the Deputy Governor in charge of financial stability at the Reserve Bank of New Zealand:

While boosting the capacity for development and housing supply is paramount, it is also important to explore policies that will keep the demand for housing more in line with supply capacity…We cannot ignore that the 160,000 net inflow of permanent and long-term migrants over the last 3 years has generated an unprecedented increase in the population and a significant boost to housing demand…There may be merit in reviewing whether migration policy is securing the number and composition of skills intended. While any adjustments would operate at the margin, they could over time help to moderate the housing market imbalance. Read more

Stop pretending America’s housing boom had nothing to do with lending standards

Why did Americans (and Spaniards and Irish) borrow so much against housing in the 2000s, only to find themselves stuck with more debt than assets? It sounds like a simple question, but it’s surprisingly difficult for economists to agree on an answer.

The standard approach is to attribute the excesses to changes in the behaviour of lenders, who, for whatever reason, became much more eager to give mortgages to people they previously would have avoided with terms they previously would have considered reckless. (For more on the European cases, see here.)

For example, about a third of all mortgage debt originated in 2005 and 2006 was either subprime or “alt-A”, according to data from Inside Mortgage Finance, compared to the stable 1990-2003 average of about 10 per cent. Subsequent experience tarnished these product segments so badly they effectively disappeared. Read more

If Spain didn’t need capital controls, why would anyone?

Until relatively recently, academics and Western policymakers overwhelmingly supported the official position of the European Union. Nowadays we live in a world where the head of the International Monetary Fund — who also happens to be the former Finance and Economy Minister of France — publicly says the “inherent volatility” of cross-border capital movements is a problem. Read more

Placing Ireland’s economic “recovery” in context

Being a corporate tax haven can do strange things to your national accounts.

Consider the Republic of Ireland, which just reported that its economy expanded by somewhere between 19 and 26 per cent in 2015, depending on whether you count the value of what’s produced in Ireland (gross domestic product) or the value of what’s produced by Irish citizens and companies domiciled in Ireland (gross national product). Read more

Are vehicle sales warning of a US slowdown?

American interest rates imply the economic outlook has worsened considerably in the past eight months. Optimists think the markets are wrong, pointing to the continued improvement of the job market and the rebound in consumer price inflation. But other data corroborate the pessimism of the fixed-income markets.

Recall the world five months ago, when fears of a downturn were far more pronounced than today. Back then, plunging industrial commodity prices, yawning risk spreads, and sharp declines in stock prices led many to worry a downturn was imminent. When we looked at the data we were cautiously optimistic, noting previous recessions had been mostly attributable to sharp contractions in residential construction and spending on motor vehicles, which in turn were often associated with big changes in credit conditions: Read more

If the EU is a sinking ship and the UK should leave, then most of the UK is a sinking ship and London should leave

The European Union’s economy is a “sinking ship” and Britain would be better off “detaching itself” from the bloc, Michael Gove, the U.K.’s Justice Secretary and prominent leave campaigner told CNBC on Tuesday.

“By voting to leave we can not only take back control of hundreds of millions of pounds that we send to the European Union, we will also be detaching ourselves from the sinking ship that is the European Union economy,” Gove, who is hoping for a Brexit vote on Thursday’s referendum, said.

Britain needs to jump from EU’s ‘sinking ship’: UK lawmaker (June 21, 2016).

We would never defend the economic management of the euro area, which is often conflated with the policies recommended by the European Union as a whole. But it’s worth noting most of the UK is actually quite poor compared to large areas of Western Europe, and particularly deprived relative to greater London. Read more

Greece’s depression is forcing dis-saving on an epic scale

The collapse of the Greek economy is almost without precedent. Real household consumption has dropped by 27 per cent since the peak. During the global financial crisis, this figure “only” fell by 6 per cent before rebounding:

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Gold is back to where it was in March, 2013 (in GBP, anyway)

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What markets think Brexit means for the Bank of England

If you’d asked any observer four or five years ago which country would be the first to leave the European Union, few would have guessed it would be the UK. Of all the countries in the EU, the UK is probably the one with the least to gain from meaningful changes in its economic relationships with its neighbours. Yet here we are.

London’s stock markets, priced in sterling, probably understate the expected impact on the UK economy given the sectoral and geographic earnings mix of the listed companies. So we looked at the short-term interest rate markets to get a sense of how traders think the Bank of England will react to the vote. Read more

Why is the Netherlands doing so badly?

It’s been eight lean years for residents of the euro area:

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Markets keep fighting the Fed, will the Fed keep letting them win?

A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:50pm to cover the release of the FOMC statement and subsequent presser.

Back in December 2015, Federal Reserve policymakers expected they would raise the policy interest rate band to 1.25-1.5 per cent by the end of 2016, implying a cumulative increase in short-term rates of 1 percentage point, or four separate decisions to raise rates by 25 basis points. At the time, the prices of overnight index swaps implied an 11 per cent chance this would happen, according to Bloomberg’s WIRP function. Read more

What if Greece got massive debt relief but no one admitted it? (Part 2.5)

The replacement of market funding with increasingly concessional loans from the “official sector” may have reduced the Greek government’s balance sheet debt by as much as €200bn, yet the headline numbers haven’t captured any of this alleged gain.

In our previous post we looked at whether this was reasonable, focusing on several sets of accounting guidelines to see how they might apply to Greek sovereign obligations: International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAS), the European System of Accounts (ESA 2010), and Eurostat’s Manual on Government Deficit and Debt (MGDD). Read more

What if Greece got massive debt relief but no one admitted it? (Part 2)

We’ve raised the possibility Greece’s sovereign debt burden is far lower than the headline figures — and the potential significance of this — in previous posts. Now it’s time to dig in.

(The idea was brought to our attention by Paul Kazarian, whose Japonica Partners has a position in Greek government bonds and would stand to profit from a compression in risk premiums. His interest in the outcome doesn’t necessarily mean he’s wrong.) Read more

What if Greece got massive debt relief but no one admitted it? (Part 1.5)

After years of failed attempts to stabilise the Greek economy, the Greek government finally got debt relief in 2012. As we explained in our previous post, interest payments fell by more than half between 2011 and 2013. Since the 2012 modifications, Greece’s sovereign debt service costs have been significantly smaller as a share of total output than in Italy or Portugal.

Yet it hasn’t helped much. The economy continues to contract and Greece’s depression since 2008 is among the absolute worst of any country in the world since 1980. Investment spending had already plunged by 60 per cent in real terms between the peak in 2007 and the end of 2011. Since then, it’s dropped another 13 per cent. Overall, Greece has had no economic growth since the beginning of 2013:

Part of the reason: the debt modifications failed to convince private investors to return to Greece, despite having “solved” the problem of government debt service costs. Read more

The IMF and the Greek government’s financial assets, part 2

Last week, we revealed a significant discrepancy between the Greek government’s net debt as reported by the International Monetary Fund’s World Economic Outlook database and what you’d get if you replicated the IMF’s standard methodology for netting out “financial assets corresponding to debt instruments” using data published by the Bank of Greece.

Neither the IMF nor the Bank of Greece had responded to our requests for an explanation of the discrepancy at the time we wrote our original post, nor did either institution respond in time for our follow-up discussion of the Greek government’s equity portfolio. Four days after we’d emailed our original question (while we were on holiday) we finally got some responses. Read more

Our look at the latest Fed survey of US household “well-being”

For the past three years, the Federal Reserve has surveyed thousands of Americans about their finances, their hopes, and their fears. We wrote about the first version of the survey when it was released in August, 2014. The third iteration came out this week. Unsurprisingly, the answers to the repeated questions haven’t changed much. But there are some new questions compared to two years ago, which means a few new interesting things to learn about the American economy.

Some highlights: Read more

The Greek government’s equity portfolio

According to data published by the Bank of Greece, which follows common standards set by the European Central Bank and Eurostat, the general government sector of the Greek economy owned financial assets worth about €86bn at the end of 2015.

Of that, about €18bn consisted of claims by various levels of government on each other, specifically about €3bn in T-bills, €7bn in Greek government bonds, and €8bn in short-term loans from local government to the central government. Net out those claims and the general government sector of the Greek economy held financial assets of about €68bn at the end of 2015. Read more

Is the IMF under-counting the Greek government’s financial assets?

According to the International Monetary Fund, the Greek government’s financial assets were worth around €3bn in 2015, or less than 2 per cent of GDP. That’s what you get if you take the difference between general government gross debt and net debt, as reported in the latest version of the World Economic Outlook Database.

Yet according to our independent analysis of data from the Bank of Greece — and using the IMF’s preferred definitions of what should and shouldn’t be counted — the Greek government’s financial assets appear to be worth around €30bn in 2015, or about 16 per cent of GDP. Read more