Bonds

Bonds have had a good run, but maybe now is not the time to own them. ($BOND is a PIMCO ETF, but I’d be very surprised if its performance was not representative of an investment-grade bond index).

People imagine that the Left don’t worry about balancing the budget, but that the Right do. This is nonsense, obviously. It’s just that Left and Right have different ideas about what spending justifies big deficits. Everyone thinks that Stephanie Kelton (or Randall Wray or Warren Mosler) invented MMT, but it’s actually Dick Cheney who coined the phrase “Deficits don’t matter,” and he is no icon of the Left.

But the Fed worries about it, supposedly because of its mandate, but really because the people who run it want to look good, as I’ve written before. The artificial separation of central bank and treasury functions in western countries leads to a peculiar fixation on the CB making a ‘profit’ by buying up lots of govt debt in exchange for reserve balances, a trade that is usually lucrative — as long as the yield curve is upward sloping. It’s only a ‘profit’ because treasuries make a corresponding loss: they might as well just fund themselves overnight, since that’s usually the cheapest rate, and they can’t actually run out of money.

So, fighting inflation sort of doesn’t matter, but in the real world does matter, and in the real world this means having the central bank engineer a recession, to crash demand. Central bankers pretend they can manage a soft landing, but you know they are lying. Although some downward pressure on prices can be engineered by crashing the housing market (a pretty blunt instrument in itself), because services, which is really just labour, is such a huge component of the economy, you have to make more people unemployed to bring down inflation. Even though, in the UK, eight million people do not work enough to not have to depend on means-tested benefits like Universal Credit, still people have to lose their jobs to stop asset prices falling any more, and, for example, making houses cheaper to buy.

Economists talk in terms of all borrowers at all maturities pay a single rate of interest. This is a heroic assumption, but jacking up the base rate by 5% will certainly kill capital spending, which is going to put builders out of work. Sure, some people will earn more interest income, and will spend some of it, and increase demand, but mostly they are rich people who already have too much stuff and will probably spend it buying an island in the Carribean.

The currency will increase in value, which is handy for buyers of overseas islands, but has the effect of making stuff made overseas cheaper than stuff made here, shifting production abroad. Oh well, China needs more factories.

Marx talked about the “reserve army of labour:” the need to maintain an excess supply of labour at all times, to make sure that the price of labour did not escalate rapidly as the stock of capital (the complementary good) accumulated. Bill Phillips, a lot later, posited that there would be a tradeoff between inflation and unemployment, without adding a lot, in my opinion, to Marx’s insights, but I guess “Phllips Curve” sounds more patriotic.