Open

Equities generally up, e.g. NDX futures up 1.4%. How long this will last … Bonds flat: we are in a fairly torrid possibly-starting bear market in equities and bonds are bouncing around as though there is nothing happening. I can’t help thinking this is bearish for bonds. Commodities: meh. Food creeping up. Oil and gold down, still, but it’s before the US opens.

Worth listening to

George Selgin appeared on “Macro Musings” podcast again. Some of this stuff is very technical (too technical for me!) but the takeaway I got from listening to the podcast was that J Powell was not going to let any Taylor type rule bind his hands. The weasel words he used in the Average Inflation Targeting suggested that he would retain a huge amount of discretionary control over policy. That’s the problem with fixed rules for policy formation. The economic arguments for them may be compelling, but the humans whose power is threatened by adopting them are the same humans who have the power to veto (or cripple) them.

The podcast is mainly Selgin talking about his book, The Menace of Fiscal QE.

Chart for the day

When I was a kid, the evening news on TV would often lead with the latest figures for the UK current account deficit. This was probably a legacy of Wilson’s “pound in your pocket” devaluation of 1964. Dominic Harrod, son of Roy Harrod the famous economist, would solemnly intone the latest figures, which seemed always to be implicitly bad.

In retrospect, we never had it so good. We’re heading for a deficit of £100e9 at the current rate. It’s only the weakness of the dollar and the money creation of the Fed that is keeping the pound where it is!

Can central banks actually create money?

This brilliant post says “no.” Money creation is endogenous. Money is created when there are profitable opportunities for commercial banks to make profitable loans. There may be none, so money creation might crash, along with GDP, which will push inflation down to zero. Banking is a funny business, and there is a lot of misunderstanding about the role of commercial and central banks, but I think that this piece goes some way to explaining how the system really works, rather than how the central bankers pretend (or maybe even believe) it works.