Ray Dailo has been thinking about this idea for most of his life. He has had the resources and status to access any scholar on the topic he would like. Smart and motivated to understand the answer, he has written a book about this topic that is coming out soon, but is also available in full on-line for free[1]. I'm half-way through and it is very good so far.
Everybody in the industry is making predictions (with 0 dollars on the line) constantly, so cherry-picking different credentialed people to support a narrative is pointless. Especially in the field of macroeconomics where a few individuals are making decisions behind closed doors that can radically alter the economy.
I do tend to put more weight on the predictions of people who statistically understand markets. By that, I mean people who beat the market in the long term without exceptional drawdown. Ray Dalio is one of those people, whose mastery of macro trading is on display across a number of different projects in his career, often with relatively low measured risk and volatility [0][1]. Paul Krugman is not. Unfortunately, many of the loudest voices in the field of economics wouldn't have made it in a career in which compensation is directly tied to understanding of markets.
I know who Dalio is. I've read his Principles. He's a smart cookie. I think he's wrong.
The inflationists have been squawking about since QE started under Ben Bernanke way back in 2010:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
Can you point me to the theory(-ies) that Dalio uses in his predictions for inflation? He may end up being right, but unless he can explain why, then he's just throwing darts. Show me the math you base your predictions on: at least with Krugman/Keynes, if they are wrong, models can be examined and improved on (like they were with stagflation in the 1970s).
While Dalio has publicly anticipated cash and bonds being poor investments in 2020, I'm making a blanket statement regarding appeals to authority (similar to you). But when authorities are to be invoked, economists are generally just sideline-experts with no skin in the game, who are unable to translate their understanding of markets into alpha. This is in response to you stating in your first post that economists are the true experts (intuitive, but I think incorrect. It's like interviewing a sports commentator (who wasn't formerly a coach or player) instead of an actual coach).
While I don't know Dalio's full position or rationale, I have another comment on this post that explains when and why I personally expect inflation. I am curious though -- can you expand on what you believe Krugman's position to be here, and why it makes sense? He doesn't seem to worry about inflation from open market operations because it works until it doesn't. There has been inflation since 2008, but most of it went to wealthy people who hold the majority of their net worth in equities and real estate. These asset classes are severely under-represented in the CPI. Because these are mostly unrealized gains enjoyed by so few, there aren't that many more people competing to buy milk and eggs, which would actually affect CPI.
Many progressive economists don't seem to realize their policies contribute to massive wealth inequality just as much as America's poor attempt at graduated tax brackets. Granted, Krugman has his moments, and for all his faults his recommendations don't seem to be purely ideologically motivated.
> While Dalio has publicly anticipated cash and bonds being poor investments in 2020, I'm making a blanket statement regarding appeals to authority (similar to you).
Sure. But my appeal-to-authority has peer-reviewed models behind him. Does yours? [citation needed] :)
> I am curious though -- can you expand on what you believe Krugman's position to be here, and why it makes sense? He doesn't seem to worry about inflation from open market operations because it works until it doesn't.
I've heard the explanation (probably more than once), and it made sense to me when I heard it, but it was not important enough to me to bother retaining. I think this is a decent blurb on it:
> Under these circumstances, normal monetary policy, which takes the form of open-market operations in which the central bank buys short-term debt with money it creates out of thin air, have no effect. Why?
> Well, the reason open-market operations usually work is that people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process.
> But if rates are zero, there is no cost to liquidity, and people are basically saturated with it; at the margin, they’re holding money simply as a store of value, essentially equivalent to short-term debt. And a central bank operation that swaps money for debt basically changes nothing. Ordinary monetary policy is ineffective.
> The flip side of this, by the way, is that all those fears about how “printing money” in this slump would lead to runaway inflation were predictably wrong. If you paid attention to the Japanese story from the last decade, you knew that simply expanding the central bank’s balance sheet did little, and certainly wasn’t inflationary:
So as long as rates are at/near zero, 'printing money' won't be a problem. If, however, rates are in a 'normal' range, then yes, increasing money supply can lead to inflation at that time.
Krugman first wrote about this in 1998 when Japan first experienced what the rest of us are now seeing (it asks for registration, but you can skip it):
> These asset classes are severely under-represented in the CPI. Because these are mostly unrealized gains enjoyed by so few, there aren't that many more people competing to buy milk and eggs, which would actually affect CPI.
It has not been "under-represented in the CPI". It is not the purpose of CPI to look at asset prices, but rather (roughly) cost of living via a basket of goods. For home, the CPI generally includes either rent or mortgage carrying costs.
To home prices, Michael Batnick and Ben Carlson discuss this in light of Ben's weblog post:
> Many progressive economists don't seem to realize their policies contribute to massive wealth inequality just as much as America's poor attempt at graduated tax brackets.
Want to reduce wealth inequality? Increase taxation/redistribution. Top marginal tax rates are half of what they were during Eisenhower's administration and the (adjusted) minimum wage is below what it was during Nixon. While you may need an economist to get the "right" / "optimal" number, you don't need one to know that they're probably too low.
While it’s true that the maximum tax rates in Eisenhower’s time were much higher compared with our own, they also only phased in at almost 10X more income - to hit the max tax bracket back then you needed to have an inflation adjusted income of over four million a year versus the $518,401 for today.
Moreover, such taxes seem terribly unfair for a person who works hard to get a single payout one time, versus a steady high income for many years - someone who makes ten million one time and then nothing else for nine years gets FAR more taken from them that a person who earns a million a year for ten years, despite the same total earnings.
Why should the first person have to pay so much more than the second?
You should read my other post to get the full context. Surely you don't believe the Fed could buy $100 quadrillion worth of low interest government bonds tomorrow without consequence (although that distortion would peg the interest rate to whatever low rate they bought at). While Krugman is technically right that the CPI does not increase, it is for the wrong reasons, and he does not seem to be aware or care that other assets inflate as a direct consequence. Take a look at the increase in GDP adjusted equities and population adjusted real estate indices over the last two decades [0][1].
The point is that we have been experiencing inflated asset prices from these operations, another form of inflation. Because these benefit a relatively small proportion of the US population, it doesn't spill into staples as much as if it were helicopter dropped. Whereas when the Fed prints money for a stimulus check, it is more directly inflationary. We will see that with the $2000 stimulus checks, although that will be a drop in the bucket compared to Social Security once it becomes insolvent, assuming the Fed starts printing money to fund it.
> Want to reduce wealth inequality? Increase taxation/redistribution.
It seems we are in agreement if you read the last part of the sentence you quoted. Long term capital gains on 20 billion dollars of realized income is less than the effective rate paid by a doctor or engineer who made $400k. However, just because tax brackets are a problem, doesn't mean Fed market interventions aren't also creating problems.
From your "inflation truthers" link, it seems to be shut down pretty effectively in the discussion you also linked. If you want to understand why in a more quantitative way than Carlson's ramblings against a straw man, see this graph: https://fred.stlouisfed.org/graph/?graph_id=532320&rn=290#0. This is the approximate percentage of household paper wealth tied up in equities. Monetary policy has changed substantially since record keeping began, but we can see that higher highs and higher lows are being sustained over time as the Fed becomes more trigger happy with open market operations and low interest rates.
I agree. Dalio’s mission is to make more money for Bridgewater. Taking advice from an interested party whose interests you don’t understand is never a good idea.
I would want to understand how influencing thinking on the topic benefits Dalio. Then evaluate in that context.
We’re basing the prediction of inflation on the notion that there’s more money “sloshing around out there”.
I’m not convinced that more of it is sloshing. Wage growth has been largely absent for many people in the 12 years since the crisis, and as a result those people haven’t had more money to spend.
The money clearly exists of course given that it’s been printed, but there’s a good chance it just isn’t finding it’s way into people’s pockets.
A lot of the 'inflationistas' only look at the quantity/supply of money (M1/2), and don't bother examining what it is doing. The velocity of money is an important component:
> This view can also be represented by the so-called “quantity theory of money,” which relates the general price level, the total goods and services produced in a given period, the total money supply and the speed (velocity) at which money circulates in the economy in facilitating transactions in the following equation:
Yep, people keep conflating growth of the money supply should lead to rising CPI inflation. But money isn't neutral, you need to pay attention to the Cantillion Effect.
When money enters into the economy through the wealthy, they buy stocks and it gets trapped. You can track this trapped money by looking at the velocity. When you increase the money supply by dropping interest rates, its essentially given according to whom is already wealthy. So if interest rates drop, you should expect the money supply to rise, velocity to drop, and assets to rise, but CPI should barely be touched. Therefore the more wealth inequality you have, the less that money supply increases through interest rates affects the CPI.
The CPI tracks how the common person spends their money. On the other hand if you were to institute a UBI, this would barely touch the money supply, but the CPI would sky-rocket. Disentangle the two concepts.
I've built up an intuition that the money supply should match changes in productivity, and that if it doesn't it will eventually lead to problems. But it's also notable that the trend is extremely important. If you do match, everything should be fine and this can last forever. If the money supply rises faster than productivity, you see what we've seen these past 50 years since we've been off the gold standard, a huge surge in asset prices. And if productivity rises faster than the money supply, people flee assets and into money. This is called a Deflationary Spiral. But the opposite state is basically an Inflationary Spiral, with people unwilling to spend their assets.
Dalio in his "Explaining the Economic Machine" video talks about a "Beautiful Deleveraging". My thought currently is that such a thing isn't possible. If you wait for the debt to get so bad that you have to do something, you can't match productivity anymore. Therefore the only thing you are left to do is grow the money supply less than productivity. And that changes everything. Suddenly the trend is to money. And once the money managers work that out, they all rush out of assets and into cash. This triggers a crash. So it's the trend that dominates, and there is no way to balance the deleveraging.
The 1960's is a fascinating decade to me for the economy because everything turned out backward to what was expected and it seems that nobody learned anything from it.
Check the statistics in the 1960s. Inflation was out of control. And yet curiously, the stock market was down. How can everything be rising in price except stocks?
Why was this? Well take a look at my previous comment. The 60s were under the era of the gold standard. That means that the money supply was roughly constant. Back in the 60s we had 5% productivity growth. So money was growing slower than productivity. Now we see the picture, cash was the bottleneck so it was the treasured asset. Governments used this cash for welfare starting with the new deal and continued to spend, and so people had money to spend. The economy was vibrant, the companies were actually flourishing. And so companies earnings were higher than ever, but their price was down which caused their PE to drop by a lot. This PE drop is a result of deflationary spiral.
So in 1971 we flipped the script. Money supply grows, and for a decent amount of time we were cautious and grew the money supply slowly. This cautiousness ended up being that balance I mentioned. But as we grew the money supply, the fears that inflation would come back never appeared. But that is because we grew the money supply in a completely different way this time. Not through government debt but though interest rates.
We keep growing the money supply, and as wealth inequality grows, we notice we can keep growing the money supply further. Drop those interest rates! All the while productivity is dropping like a rock as money managers are out-competing entrepreneurs for capital. But there's a problem. And that's today. Interest rates are at 0%. We've run out of runway.
Suddenly we have to rise the money supply not by lowering interest rates, but directly though government debt. And so this is the argument that you are hearing right now between economists and in the linked article. "Well, we've increased the M2 by 4000% since 1971, so I guess that means the government can borrow just as much". They are conflating. That are assuming the perfectly spherical cow of neutral money is the system. You. Need. To. Track. Who. Gets. The. Money. Money flows.
What happens when the government starts spending? Exactly what happened in the 1960s. CPI Inflation rises because people are spending it. What's happening to the money supply? Well, it's getting bigger because the government is spending, but it's getting bigger at a slower rate than we are used to and it might even match productivity. That slower growth might cause some growth stocks to take a hit, but the economy should be fine. It's possible that we slow the growth of the money supply to match our 1% productivity, and that the beautiful deleveraging occurs.
But what is the FED thinking of this? They are terrified. Oh no! The inflation is back. They are thinking through the neutral money state, so they know what they have to do. To stop inflation, we rise interest rates. This is exactly what they did in the 60s. And so what we have is an economy where the money supply is shrinking, but the CPI keeps rising until the government stops spending. But the stock market is dropping, which only causes the government to spend more! The trend has reversed, the stock market crashes, interest rates spike back to 20%, and homes are going for 10% of the current prices so people are underwater, which cases them to default, and deleveraging has decimated the money supply. But due to the welfare, happiness is up. People are doing just fine.
What should have happened? Well, the money supply should match productivity. This means that interest rates should not determine the money supply, the money supply should determine interest rates. If productivity is rising at 1% and the money supply is rising at 5%, well, interest rates should rise until the amount of new debt created is back down to 1%. If productivity is rising at 5% and the money supply grew at 1%, we should lower interest rates until the cheap money stimulates people to take out loans. What rate will that be? Only the economy at the time can discover it based on their biases and fears.
So how much should the government borrow? People see comparison between Capitalism vs Communism as a scale, but it's just as important to track Centralized vs Decentralized. The government has a freedom to think big and long-term, but that makes them less efficient at the small stuff. People need to care about the small stuff and are punished if they do so poorly. If you have wealth inequality, you end up with a Centralized system no different than Communism, but power is granted through wealth not politics. This is what limits how much debt the government should take out.
Advocates of empowering local communities talk about increasing the number of times a dollar is used within the community. Just to make up an example: Before WalMart a dollar is used 10 times before leaving, after WalMart a dollar is used 2 times.
What's that measure called?
And that's microeconomics, right? If it's important for microeconomics, why isn't it important for macro too?
Also:
Big money has to chase big investments. Probably because of transaction costs and limited attention.
So while there's innumerable small opportunities, they remain uncapitalized.
How do we (society) get these things done? Find a way to scale up. Empower more people to make more investments. So instead of a billion dollar fund looking at 10 large investments, we have 1,000 million dollar funds looking at 10,000 modest investments.
At least the first ten minutes of that (hour-long) video should be mandatory viewing before someone is allowed to post about inflation on the Internet (or write a op-ed in some big name newspaper).
I think this is going be a go-to video for me to post when anyone says "printing money" or "money supply". Thanks.
Yeah, Mark is a PhD and teaches the CFA which is obviously no-bullshit. His channel is fantastic, and half of the time it really is him talking about CFA prep.
Hard to find a purer source of financial information than analysis from someone who makes analysts. He sometimes talks about markets and how he's positioned and that's a gold mine as well.
>Wage growth has been largely absent for many people in the 12 years since the crisis,
Median real household income [1] since the bottom of the crisis has risen over 20%.
Median real personal income [2] is up over 15% over the same time (a younger demographic).
If you dig more you find similar income gains across every quintile and breakdown. The vast majority of groups from what I can find have seen decent wage growth.
Which group and how large is it that has largely absent wage growth? Citation?
Just because many people haven’t seen wage growth, doesn’t mean money isn’t sloshing around out there.
Remember 20% of Americans own ~80% of all the wealth in the US. So if your looking for sloshing money you should look at what they’re doing, not what “most” people are doing.
I think it’s fair to say that those a big chunk of those 20% probably have more money than they know what to do with, which probably means money is sloshing somewhere.
20% is 1 of 5, hardly easy to miss. A lot of that money goes toward expenses in HCOL areas, where more people live, and the salaries are higher. A lot goes into consumer goods. People buy stuff, a lot of it. A lot of the rest is in the stock market in retirement accounts because nobody has pensions anymore. Americans don’t save a lot of money, and are not particularly fiscally responsible, that money is not hiding in slosh it’s being spent. Now start talking the top 1-2% and the story changes dramatically. A few of those people are wage slaves who spend a lot, but the majority are not, and really do live different lives.
Personally, my issue with the term "sloshing" is that it implies the money is floating around in liquid form ready to tick up inflation. It's not.
There are a lot of places where this money has gone that are illiquid though. One would be American property; for most households a good chunk of their wealth is their house. In high-COL, high-property areas the main thing preventing a fall in house price is the lack of supply.
Another part of it is China and other countries with large amounts of USD. China has tight capital controls though so none of that money is about to leave suddenly any time soon. but if a big chunk left at once it would probably make the 1998 Asian capital flight look like child's play. Some countries like Saudi Arabia are trying to figure out how to spend it; Vision Fund literally created (and destroyed) very big companies in very short order. When Japan had this problem the hangover lasted for a decade, and depending on your view may even be continuing to this day.
Of course, the market can stay irrational longer than you can stay solvent, so these things are mostly theoretical until they're not. But no use holding your breath trying to wait for it.
A lot of people (myself included) are just kind of nervously waiting for the other shoe to drop. That the money exists but isn’t moving through the economy means that we’re essentially building more pressure in a system that is already at 0% interest rates. This should be concerning to everyone.
The absence of velocity will encourage central banks to print more money in the belief that it will encourage spending when it clearly hasn’t done that.
If in the future we start exiting our homes and going on vacations again the velocity could shoot up sharply - at which point a lot more money is moving into the system all at once. By then, there’s a good chance the horse has bolted for capping inflation.
> That the money exists but isn’t moving through the economy means that we’re essentially building more pressure in a system that is already at 0% interest rates. This should be concerning to everyone.
I use a carbon / global warming metaphor instead of pressure, but same intuition. You're taking actions today that will play out in the future.
Assuming most excess money supply has gone into (a) stocks, pushing valuations up, & (b) real estate, pushing valuations up, what would cause a freeing of that money? Because until it's liquified, it's not impacting inflation.
The only way substantial amounts of money move out of stocks is if the Fed raises rates and bond yields improve. It has to go somewhere, and that's the only sink big enough to swallow the flow.
Real estate is trickier. There's only so much volume that the (at least in the US) inefficient process can handle, which means there's a fundamental process against a flash liquidation.
At one point China had aspirations to turn CNY into a reserve currency, which would almost certainly necessitate releasing their capital controls. But now I think they've gone back to the viewpoint that there's no safe way to do that (even a trickle of dollars from China would be a deluge elsewhere due to sheer numbers) and that being a reserve currency is more trouble than it's worth.
Heck, I'm sure if they could Switzerland and Japan would like to cease being a safe haven currency overnight; the role comes with a lot of things that have lots of downside and no upside domestically.
---
The other thing might be an increase in housing supply. Housing supply increases are now firmly out of the realm of wonky think-tank policy with real advocacy happening at a grassroots level. Already Minneapolis has removed exclusive single family zoning. But this would probably take the better part of a decade or two to start showing real progress.
> That the money exists but isn’t moving through the economy means that we’re essentially building more pressure in a system that is already at 0% interest rates.
You're not wrong, but it's a problem I'd "like" to have: too much economic activity. I'd rather worry about inflation and things running hot, with low unemployment (or high participation rate), than the opposite.
Remember late 2019, when the US unemployment rate was 3.5%?
> The absence of velocity will encourage central banks to print more money in the belief that it will encourage spending when it clearly hasn’t done that.
When the central bank's rate is zero, they're flooding the market with liquidity, and bond yields are zero (or negative), then that's a signal for governments to open the taps:
> I would summarize the Keynesian view in terms of four points:
> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
When rates are non-zero and bond yields are high(er), then it is dangerous to print money, and government spending could 'crowd out' private economic activity.
The Fed can increase its overnight rate to 20% or 200% in one meeting. There is no situation ever where inflation of the sort you're talking about can't be instantly and completely killed.
Supply shock inflation (oil embargo) is a different matter.
The Fed had twiddled it's thumbs with half measures to let it get that way. So while not hyperinflation, I'd say it supports the Fed usually being cautious.
I mean, they were cautious before the first time they ever hiked rates that high, which would make sense; very few people are going to put their neck on the line for novel policy.
Now that we have pretty much direct cause and effect of what such a rate hike in the US would do, we probably wouldn't spend a decade and a half waffling on it.
> Now start talking the top 1-2% and the story changes dramatically.
Probably the top 5-6%. The numbers are lower but the behavior is similar. You’d be surprised how soon you hit the “More money than I know what to do with” line.
Make 150 to 200k/year (not uncommon on HN) and what are you gonna do, buy a new car every year? Rent is paid, food is paid, clothes are good, 1 or 2 vacations per year, go out to eat whenever you want, one-off nice purchases aren’t a big concern ... it’s cushy. Not enough to buy real estate cash or anything like that, but def more slosh than you need.
My ex...liked to spend money. We made 300k combined in 2019 in a MCOL area, and I still have no idea where it all went. Mortgage, nice cars, eating out, a couple vacations - all gone! I’ve heard of people making 7 figures and can barely afford their lifestyle. Rule of thumb, people spend what they make. Some spend on saving/investing. I think that’s what sets apart the top percentage with a few exceptions, they make money work for them, not the other way around.
Most people just ramp up their lifestyle when they make more money.
I've been petty conservative about doing that and living below my means since the start of my career. In the beginning I was saving 80% of my income. That dropped over time as I got married and had to accept ramping up my expenses, but I've saved enough over the years to be about halfway to financial independence by my mid thirties. I strongly recommend intensely saving as the only fiscally responsible way to live. I don't think it's affected my happiness negatively at all. I couldn't buy everything I wanted, but having that safety net was well worth it in exchange.
The trouble with this approach (although rational for an individual) is that if everyone who can does this, we end up with even more of a global savings glut than we already have, and interest rates go even more negative.
As an aside, it's very odd to me that we have so much money sloshing around, and yet we're not spending it on infrastructure that would help us get off the fossil fuel treadmill and towards a more sustainable system.
Eh it’s not really odd. You are mistakenly believing that your goals (and mine here are the same) align with others and that it is an obvious course of action. For most Americans “drive my SUV down the 10 lane highway” is normal and ideal. They don’t give a shit about anything else. Sorry to say.
The biggest predictor of future economic growth is the amount of savings the people have. Not a huge surprise there. So I don't think it's bad even at a societal level.
You'd be amazed how easy it is to spend $10m a year.
Real-estate, private jets, yachts, trophy cars, trophy alimony payments, security, art collections, horse breeding, interior design, fashion, private islands, expensive educations for the kids, bequests, public philanthropy, legal fees covering both public and personal disputes, investment management fees, political sponsorship and activism...
I'm not suggesting anyone needs this level of spending - just pointing out that the people who operate in that bracket wouldn't necessarily consider themselves completely secure and comfortable, even though they're spending sums that are unimaginably huge for most of the population.
Oh for sure. But there’s this wide spot in the mid 6-figure range where you can’t afford any of that and have way more than you can spend. Typical middle class trappings aren’t a concern, upper class trappings are inaccessible.
So what do you do? Personally I’m dumping it into index funds and business ideas. Maybe thinking about buying a house soonish.
Boy, I don't understand this scenario at all. At 150-200k/year, a lot of people are just going to try and save like crazy. CAPE is high, financial planners are saying that "safe withdrawal rates" are no longer 4% or even 3.25%, but below even 2.5% - even if you're not in the very HCOL areas, you're looking at needing to save more than three million dollars to retire, which can take a very long time when expecting muted market returns in the future.
(2) Life expectancy. People who retire at a young age, should use a lower withdrawal rate. But a person age 75, expecting to die before age 100, could have a withdrawal rate of roughly 4% (reciprocal of 100-75) in a zero-interest-rate environment.
It’s pretty easy to find the 20%. You look at the neighborhoods with new construction in suburban areas for 35-45 year olds with kids. Or the urban neighborhoods with new property and 25-40 DINKs or same sex couples. That’s the cohort that’s prospering.
Problem is the wealth is mostly house. Once you hit the groove, house value keeps you going. Those folks get derailed by layoffs at the wrong time or divorce.
Economists as a whole don't have a great track record of predictions here, either. You know the saying, right? Economists have successfully predicted 9 of the last 6 recessions.
> You know the saying, right? Economists have successfully predicted 9 of the last 6 recessions.
You know that the person who said/wrote that was Paul Samuelson, one of the most important economists in the 20th Century, right?
> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[20]
My time in finance has led me to believe that traders and investors are far more prone to groupthink than they’re willing to admit to. “Hedge fund manager predicted inflation after QE and was wrong” is very low on my list of things that surprise me.
Yeah, they have an incentive to appear overconfident since their job is also largely a sales role, in order to prevent redemptions and encourage new fund inflows.
They are still the number one domain experts insofar as Central Bank policy goes, as that's one of their primary preoccupations. Perhaps aside from economists that actually work at the Fed.
They’re not the number one domain experts though. As you said, those who work at the Fed are probably number one. I’d put academic economists at number two. That leaves the relevant traders/hedge fund managers in third at best.
Fundamentally, trading an instrument doesn’t necessarily make you an expert in all aspects of it, only in those aspects related to making a buck on it. Exactly how much a trader ends up knowing seems to vary. While a bond trader might understand how bonds work very well, chances are that a grain trader would make a pretty bad farmer.
It seems in passing that fixed income traders have a moderate level of expertise on how government debt works, with their long, loud, and so far wrong predictions about catastrophic inflation undermining any claim they have towards total expertise.
I put them above most academic economists. Economics is a broad discipline and even macro specialists are most often not experts on monetary policy. Their research focus is likely distinct and tangential, and their understanding of central banks is theoretical and abstract with little understanding of the actual goings-on in the real Fed right now(1). Fixed income managers are experts on it since they need to understand the yield curve, to which Central Bank policy is one of the most important variables. Most importantly they are practical experts and know the minutae of the actual decision making variables being considered right now by the current Fed.
Yes there's some fixed income trades (in the short term quant space) that don't require such expertise, that's Taleb's Green Lumber problem, but that doesn't apply to PIMCO. Especially if we're talking about the lead at PIMCO. It's harder to get that job than it is to be a staff economist even at the Fed, so I would put him as close to number one in terms of expertise in understanding and especially predicting monetary policy.
(1) I've published papers with academic economists. I have to say, they really don't know the practical details of central bank policymaking, and nor do they have to in order to publish more papers. That's not their job.
The Robinhood impact on the US market makes me incredibly nervous, as it should others. That Cathie Wood can mention CRISPR in a YouTube video and gene therapy stocks rocket that same afternoon should be a fairly sizeable red flag I would have thought.
Yeah, especially when a very common scenario is fund manager predicts the same thing every day for twenty years, is right once per market cycle, attracts attention and profits when his broken clock is correct, and is largely ignored the rest of the time.
As opposed to the people who are wrong and don't admit it:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
> And so during the 1990s a number of economists, myself included (Krugman 1995), tried to assess the role of Stolper-Samuelson-type effects in rising inequality. Inevitably given the standard framework, such analyses did in fact find some depressing effect of growing trade on the wages of less-educated workers in advanced countries. As a quantitative matter, however, they generally suggested that the effect was relatively modest, and not the central factor in the widening income gap.
> Meanwhile, the political salience of globalization seemed to decline as other issues came to the fore. So academic interest in the possible adverse effects of trade, while it never went away, waned.
> In the past few years, however, worries about globalization have shot back to the top of the agenda, partly due to new research, partly due to the political shocks of Brexit and Trump. And as one of the people who helped shape the 90s consensus – that the income distribution effects of rising trade were real but modest – it seems appropriate to ask now what we missed. What aspects of rising trade did we either fail to see at the time or fail to anticipate?
Thanks, but these citations don't at all support the GP's sweeping assertion that "Krugman recently came out and said almost all of his advice about globalism was wrong. The man can't be trusted."
Krugman's cited gc.cuny.edu paper is titled, "Globalization: What Did We Miss?" It concludes, not that economists were wrong per se, but that they didn't adequately take into account the pace of globalization: "Basically, the big problem with surging globalization wasn’t so much changing demand for broadly defined factors of production as the disruption caused by rapid change. And that rapid change appears to be largely behind us ...." (Emphasis added.)
The summary in the University of Melbourne piece (the third cite) is to basically the same effect.
(I don't have time to watch a one-hour YouTube video, but thanks for the link.)
"wrong per se", do you really want to bicker over the meaning of wrong. It was his advice/predictions/theory (call it what you want), that when followed turned out vastly different than predicted, that is wrong in my opinion. Look how many years it took him to come out and say "the pace" was not adequately (incorrectly) taken into account. He was even awarded the 2008 Nobel Prize in Economics and 1.4 million dollars for this theory that played a large part in tearing apart the middle class.
My comment was indeed too hyperbolic but basically true. A mistake that affected our country so negatively cannot be forgotten or forgiven.
But, as always, predicting the future is not possible, even when looking at the past.
But we can, to some extent, predict the outcome of things that are already happening. Not too hard if someone jumped out of a plane without parachute, and even then you'll need an error margin.
[1]https://www.principles.com/the-changing-world-order/#introdu...