Of bubbles, inflation, and economic uncertainty

 The world is a strange place.  In other news, water is wet.  Expect a post on Golden State, by Ben Winters, in which the post-truth dystopia is turned upside-down by a state that prohibits lying, and people greet each other with bland truths.  Fascinating book.  Also, I am easily sidetracked.  Where was I?  Oh, yes.  The world is a strange place.  Economically speaking, and otherwise, but today, I refer to the economy.  COVID has not only killed a lot of people, and caused long-term health problems for many others, it has wreaked economic havoc on millions.  For those of us capable of working remotely, how are we doin'?  Um... actually, I'm a numbers guy, and if you look at the numbers, you can paint a positive picture.  Those with stable employment and an investment portfolio have continued to get paychecks, watched their investment portfolios grow, and still seen remarkably little inflation, meaning we have maintained the purchasing power of the dollars we're still getting, and in fact, getting in increasing quantities thanks to the weirdness of that bizarre thing called "the stock market," even without playing stupid GameStop games.  Passively managed, diversified funds, people.  That's the way you do it.  You get your money for nothing, and a chicken in every pot, or something.  That's what Sting was saying, right?

Anyway, let's dig in.

First, to the stock market.  If you have an investment portfolio and you aren't an imbecile, you have seen your fortunes become more fortune-like.  Yay for you!  Um... how?  So here's the thing  In case you hadn't noticed, there are a lot of people out of work, and those people tend to spend less money, since they, like, don't have money.  Plenty of others have been nervous about losing their jobs, and hence have reduced consumption.  The effects have been uneven across the economy.  Restaurants and the like have been hit hard.  Other sectors have seen growth.  [Cough... cough... Zoom...]  So what does this have to do with stocks?  After all, if a bunch of idiots say that GameStop stock is worth X, is it worth X?  Long-term... no.  That's a bubble.  And bubbles burst.  A stock is part ownership in a publicly-traded business, and its worth, long-term, will converge to the worth of the business, according to the efficient markets hypothesis (one of the most misunderstood principles in economics).  How do we conceptualize this?  Often with the P/E ratio.  That's the ratio between the share price and earnings per share.  If that ratio gets really low, a fundamentals-based analysis says, buy.  If it gets too high... sell.  The stock is overpriced.  What is a proper value?  Um... well, how do you derive, mathematically, the correct ratio?  Therein lies the problem.  We can observe, empirically, where ratios tend to settle.  But of course, markets fluctuate.  $15 per share?  OK, sure, fine, whatever.  That's kind of what analysts say.  If you start seeing ratios of $30?  Watch out.  Where are we now?  Short version:  Danger, Will Robinson, danger!  Does that mean a stock market crash is imminent?  No.  It could mean that we get volatility for a while until earnings catch up to prices, or... it could all be bullshit.  The point is the oddity.  Warning signs.  After all, for those with money, what else do we do with it?  We could buy shit, but for those of us who don't have stupidly expensive habits, the question is, where do we park our money to get a return?  With low interest rates, it's the market, or nothin', and by, "nothin'," I mean, basically zero interest.  Which brings me to everything happening to help the economy along for those who have spent large chunks of the last year staring at a computer screen to look for a job rather than as their job.

As much as we all hate Zoom right now, wouldn't you rather be in a Zoom meeting than be out of work in this economy?  Perspective.  That said, we have two sets of tools to try to bring the economy to full employment:  monetary policy, and fiscal policy.  We are using both, to unprecedented extents.  Monetary policy is what the Federal Reserve does:  set interest rates, mainly.  And no, Kim Stanley Robinson, they don't issue stupid cryptocurrencies, nor are they all-powerful, generic "bankers" who rule the world independently of any legislative mandate, you economically illiterate, antisemitic asshole.  (Man, that book sucked.)  We're back to the zero lower bound, though.  Fed = out of gas.  But in the metaphorical sense, not the "yay for the end of carbon emissions" sense.  All they can do now is target a long-term average inflation rate of 2% rather than a short-term rate, but that means... bringing inflation somewhere over 2%.

Which also brings us to fiscal policy.  Here is where we enter truly unprecedented territory.  Deficit spending kind of increases the money supply, at least temporarily.  Mostly, it is on a scale that we wouldn't notice.  The stimulus packages we have passed... are big.  Should we notice?  We haven't.  Here are the potential consequences.  First, an increase in the money supply can-- emphasis on the potential rather than the mathematical determinism-- decrease the purchasing power of the dollar.  Inflation.  Has it?  No.  Does that mean it won't, at any point in the future?  Nope.

Second, that deficit spending?  It is financed with bonds.  Bonds mean interest.  That means a lot.  First, as debt goes up, interest on bonds may go up.  See previous comments on potentiality.  Why here?  Slight increase in risk.  If interest rates on bonds go up, that drives up all other interest rates, and slows growth.  Why?  If I get, say, 4% rather than 2% on bonds, then I need comparatively better returns on any other investment to justify the relative risk.  If people can't offer me that, I don't invest with them.  So, investment goes down.  We call this "crowding out."  So yes, deficit spending can-- again, intentional emphasis-- reduce economic growth.  Are we seeing this now?  Nope.  Does that mean we won't in the future?  Nope.

So, what's the point of all of this... speculation?  (I'll come back to that word in a forthcoming post.)  Inflation hasn't happened.  But it might.  Crowding out hasn't happened.  But it might.  So what?  We have an immediate problem.  And, we do.  That doesn't mean everyone should adopt short-sightedness as an ideological dictum.  And generally speaking, here is the crass point about inflation.  The Fed has a response.  If inflation spikes, raise interest rates.

But that comes with a cost.  A recession.  And if the point of inflationary policy is to defeat a recession, but you wind up creating enough inflation to require creating a recession... um...

Fuck.

And inflation kills.

You read that right.  Inflation fucking kills.  Unemployment does too, of course, which kind of means you're damned if you do, and damned if you don't, but we can go either way for our next observation.

Time for your occasional reference to one of my favorites-- Terry Pratchett's Going Postal.  Today, we consider the lovable scamp at the center of the plot, Moist Von Lipwig.  Moist (yes) is a con man, drafted into rebuilding the Post Office of the city of Ankh-Morpork by Havelock Vetinari, the ruler of the city, which is the most prominent metropolis on Pratchett's Discworld.  So... Moist.  He's not an honest person, but he isn't violent.  He's a nice guy!  He just talks people out of some money, on occasion, but he'd never actually, literally, hurt anyone!  Or so he tells himself.  You know who's having none of this?  My favorite character in the book, Mr. Pump.  Mr. Pump is a golem.  Honest, ethical beings, incapable of delusion.  He is sent to watch Moist, on behalf of Vetinari.  While Moist engages in some self-delusions about his supposed harmlessness, Mr. Pump does the math.  He calculates the death toll of Moist's schemes.  You see, when you take money, the knock-on effects will eventually lead to death.  Whether you notice them or not is determined by your attention.  Translation:  Moist is narcissistic, and deluded.  And in second-order, third-order terms, a fucking killer.  Mr. Pump is awesome, and the only one with any real moral clarity because moral clarity is provided by math and logic.

Gee... was that a pointed statement?  Hmmm...

So anyway, let's not be Moist Von Lipwig.  Let's not do the thing where we say, I can't literally see the dead bodies, so it doesn't matter, but hey, look, there's a flashy news story with a body count small enough to name the dead, so let's focus on that, completely missing the point that the body count is low enough for a news story to name them.  And you know what?  People mourn the dead, with lives and families destroyed even when the deaths aren't flashy enough to garner headlines.  Be Mr. Pump, not Moist Von Lipwig.  Mr. Pump is the one with moral clarity.

So let's be Mr. Pump here.

Inflation kills.  How?  Prices go up.  People on limited incomes make choices.  Unhealthy food, tradeoffs, food versus a doctor's visit, or medicine...  Pratchett pulled the math out of his ass, and I'm not going to do that.  A point estimate would have a large error term, but the process is real.  Healthy food is expensive.  Taking care of yourself is expensive.  As prices go up, health suffers.  Inflation ain't free.  Unemployment has costs too, of course, but if we start seeing inflation creep towards 10%... well, some of you have no concept of what that's like.  Because the Fed has been stopping it for four decades.  Because it's bad.  And stopping it meant creating the '81-'82 recession, which was a harsh one.

So where are we now?  In a weird place, economically speaking.  The stock market is "up," meaning that anyone with a portfolio has money.  "Real" money?  Well, you can sell those assets and spend it, so yeah.  But with the caveat of the valuation issue.  Does that mean a crash is-a-comin'?  Who the fuck knows, but it certainly isn't off the table, given the disjuncture between asset prices and valuation, which is the disjuncture you'd expect when so many are still out of work.  Which leads to all of the inflationary policies that aren't resulting in inflation, which is a book I've read before.  So, does inflation just not happen anymore?  Inflation alarmists have been ringing that bell since the financial collapse in 2008.  Um... well... these processes aren't deterministic.  But holy shit, these fiscal policies are unprecedented.  That doesn't mean, "wrong," but there is so much uncertainty.  And yes, lives are hanging in the balance.  More than you're seeing in other news stories.  In math that we'd need a golem to parse.  No, you don't have my permission to stop thinking about this in favor of flashier news stories just because you're not a fucking golem.

Be a golem, not a human.  Humans suck.

That's not gettin' me anywhere, is it?  Oh, well.

So I guess the lesson is to go buy a bunch of GameStop and bitcoin, right?  Oh, fuck it.  Nothing means anything anymore.  I'll pick this up again with Golden State, by Ben Winters.  Quick take:  read this one.  It's good.

And of course, music.  I swear, I didn't do the Pratchett interlude just for this, but Dayenu, it would have been enough.  One of my all-time favorites.  Gary Lucas, guitar virtuoso and absolute madman.  He played with Captain Beefheart, and has only gotten weirder.  Oh, yeah.  He played with a guy you may have heard of.   Jeff Buckley.  On Skeleton At The Feast, he did an entire suite on "The Golem."  Here's the conclusion, "Go Go Golem."  Gary Lucas is awesome.