Biden has made it across the line and what it means for markets
What the market thinks a Biden-Harris presidency will do is more important than what they will actually do.
It seems to me that the market expects Biden to borrow and spend, with the Fed as a willing accomplice.
The Green New Deal is one example of this, but I’m sure all the civil engineers who’ve been waiting four years for this moment will be dusting off their proposals for bridges and railways, especially in marginal states and districts.
Energy will fall a bit more, although it might rise on a “sell on the news” event. It wasn’t as though Trump stood much chance of winning last Thursday.
Bonds might fall a bit.
Although MMT has a lot of followers, most politicians, voters and mainstream economists are skeptics.
At least we’ll get an experimental test of the hypothesis, which the dismal science will benefit from.
Eventually, surely, we’ll return to the 70’s. Inflation will start to creep up and interest rates with the, and governments will face a constant battle to finance their deficits and to protect their currencies.
But not for now. For now, creating money has no downside.
As Scott Sumner has been saying for years, we’ve been running monetary policy far too tight, not too lose, because we focus too much on interest rates and not on the output gap.
Turkish Lira going down the tubes
Erdogan has sacked his central bank governor. He believes that high interest rates create inflation and as a consequence cause the currency to sink.
He might have correlation on his side, but I’m not sure about causation. Apparently, his ideas are derived from the writings of Irving Fisher, not someone with the same cachet as Keynes or Friedman today, but a serious enough economist to be sure.
And the first economist to emphasise that nominal interest rate is a function of both the real rate and the expected inflation rate (to a first-order approximation, their sum).
Fisher argued that changing nominal rates (which is all that central banks can do) will have no effect on real rates (because inflation expectations will adjust) so monetary policy is impotent as a tool for stabilizing the real economy (including the current account deficit).
(I’m not sure where Erdogan gets the idea that it works in the opposite direction to what you’d assume).
Anyway, sacking a central bank governor is never a good look when your currency is already on the slide, so I think it’s pretty certain that the Lira will slump more on Monday, against practically every tradeable currency. Don’t try to put on the trade now, or you’ll get severe whiplash.
Film recommendation
I don’t watch many films, and those I do are usually very old.
On Friday I watched “The Client” with Susan Sarandon.
It is about the plight of a trailer park kid who witnesses the suicide of a bent lawyer who is being leaned on by the mob to keep quiet about the murder of a senator.
The star, for me, was the kid, who was thoroughly convincing as a feral 12 year old from the wrong side of the tracks.
I looked him up, and I discovered that that was exactly what he was: a kid who was discovered by some scout and picked out as representing the sort of kid that was portrayed in the plot.
Sadly, having shot to fame, and fortune, as a result of this appearance, he found he could not handle the new life he’d been so rudely dropped into and ended up dying alone of a heroin overdose.
I hope he rests in peace.
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