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Wednesday, August 3, 2011

A Decent Macroeconomic Filter

You will not find a lack of macroeconomic commentary in the media or on the internet. Numerous 'experts' (the supply of which now seem to be growing exponentially) are constantly offering prognostications and dire warnings. Topics discussed range from Government Debt to Money Supply Growth to the likelihood of QE (3,4,5, etc.) to the Federal Reserve, etc.

So many opinions that differ so greatly, how could they all know what they are talking about?

Here are my 'filters' to tune out the noise so that I don't waste time reading garbage, and can immediately skip to more useful pieces of analysis.


Filter #1: If the opening paragraph contains the line "The US debt debate reveals a nation living beyond its means" (or something substantially similar) ignore it and click on to the next reading item

Through a (non-rigorous) empirical study I have come up with the following approximations:

-- 70% of these articles are provocative / inciting that use a lot of rhetoric, backed heavily by ideology (as a substitute for analysis), written in very dire and immediate language, and rely heavily on CAPITALIZATION for EMPHASIS and likely has at least one string of three or more exclamation points !!!

-- 20% of these articles are calmer than the first group and seem like they are being reasonable. Technical economic terms will be used, such as: The debt situation is a severe problem because it is 'crowding out' private investment. As our Debt/GDP ratio escalates, we fill face a funding crisis as America finds tighter 'access to capital'. The more America spends the more 'upward pressure on interest rates' there will be in the 'loanable funds market', etc.. This inevitably leads to a citation of Reinhart and Rogoff and Debt/GDP thresholds.

-- 10% of these articles say that the deficit is a problem, but not an immediate problem. We have to deal with the economy first before we have to deal with the debt problem in the future.

If you have a chance to talk to the author or comment on the articles, ask this simple question: "If America faces a funding crisis (not able to sell 'debt' to finance its spending) then how did the non-Government sector (private domestic and foreign sectors) get the money to buy the debt in the first place?". Since they wrote the article that had the line The US debt debate reveals a nation living beyond its means to begin with, their answer is completely irrelevant. It will just reveal how much of a hack they are (a parrot repeating other peoples warnings) or if they give a reasoned (but incorrect) answer.

Filter #2: Ignore any article comparing the USA to Greece (or any other EMU country)

It doesn't depend on the argument in the slightest. If the author is a talking about Debt/GDP, entitlements, love of Ouzo (actually I rescind that one), whatever, it doesn't matter.

The USA and Greece (and any EMU country) operate under fundamentally different currency systems. The USA is sovereign issuer of the US Dollar in a fiat currency floating exchange rate monetary system and never issues debt not denominated in the US Dollar. All EMU countries have ceded monetary authority to the ECB and as such each EMU member country is a currency user of the Euro, not an issuer (in exactly the same fashion that US States are currency users of the US Dollar). As such EMU countries are revenue constrained.

Filter #3: If an article attempts to makes any reference to 'debt monetization' (other than to discredit it) skip it and move on to the next

Here is where the term 'debt monetization' comes from: Under the Gold Standard, US Dollars were convertible into Gold which made US Government bonds, which were convertible into Dollars, then indirectly convertible into Gold. So when the Federal Reserve would issue currency in exchange for those bonds, the debt would become 'monetized'.

We have not been on the Gold Standard since 1971. Today bond issuance serves one, and only one, purpose in US monetary operations: to drain reserves from the banking system to allow the Federal Reserve to manage the overnight lending rate (the rate at which banks lend reserves to each other in order to meet their reserve requirements) so that it is at their target rate (the Federal Funds Rate).


If you follow these filters, you will skip 90-95% of the articles out there and find the 5-10% that are doing some original thinking and analysis about our monetary system and the problems our economy faces.

I came up with these filters because I kept reading the same (incorrect) arguments over and over again. So I then remembered the truism: "If everybody is thinking the same thing, then nobody is thinking".
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