Sunday, March 24, 2019

Thoughts on the Trump-Russia Investigation

It's rare that I'll comment on something purely political and not economic, but I feel like it's warranted in this situation.

First and foremost, I've never been a believer that Trump actively and knowingly colluded with the Russians, but that doesn't mean I'm still right until we see the full report and his 12 other ongoing investigations are complete.

Note: I made my prediction based off of the 'Foundation of Geopolitics’, a book that details how the Kremlin should operate during the era of globalization and technology and how it should spread its geopolitical influence.

The Trump campaign still looks exceedingly dubious despite Barr's report and it's still worth noting that Barr was nominated in an attempt to serve Trump. Trump had fired Jeff Sessions due to him not being able to defend him because he had recused himself from the investigation. Trump replaced him with someone who was willing to do so. It's also worth noting that Barr has written numerous legal documents about defending the executive branch. Let's also not forget his firing of James Coney which cannot clear him of the obstruction charge.

We know Manafort gave 75 pages of internal polling data to Konstantin Kilimnik that allowed Russian to target voters with accuracy that would have not been legally possible. The special counsel could believe that the data was shared without knowledge that it was Russian intelligence and therefore wasn't collusion. Sharing data privately isn't an issue - it's shared amongst many private entities for the purpose of influencing elections, that's just a liberal democracy at work - but if it was knowingly shared with Russian intelligence that would stir legal action.

As far as we're concerned, the bar for intending to commit criminal conspiracy against the U.S. has not been met, but it's still obvious that the Trump campaign was littered with corruption from top to bottom. It's borderline undeniable that he was aware of the Russian interference and tacitly accepts it even if he didn't personally coordinate it. We also know that he has some shady business dealings with Russia that would have been gross ethics violations for any other person running for office. Had this information been permeating Hillary Clinton pre-2016 election, she would have been demonized even further by the right-wing and progressive blocs of the U.S. political spectrum.

State level investigations(he's probably screwed when he's out of office if he dares ever enter NY), show that virtually every company enterprise associated with him deserves to be shut down.

One of the most interesting cases would appear to be General Flynn who pretty much pleadled guilty to lying and admitted to collusion. Was he lying to get closer with Mueller or was he actually guilty?

The underlying question still remains… how direct is Trump's involvement? We know that Russia did get information through the Trump campaign, but how much did Trump and the people working under him know? Let's not forget the secret meetings with Trump, the Trump tower meeting, the lifting of sanctions and various other shady events.

Before the acceleration of the investigation, I thought it was much more beneficial for Russia to attempt to collude with Trump but knowingly fail. There would be enough material to further divide the American public and decrease America's global influence. It appears that I was right, as per right now, but I didn't expect this amount of evidence to be accumulated. It truly does seem as though there is a missing link that people are still trying to find, but many Russia is just better at their job than I thought they would be.

Note: The reason I made this prediction is because if Russia really did directly collude with Trump and Mueller found out then Trump's indictment could be used as a way to unify the public thus backfiring on the Kremlin's goal.

None of this matters until we see the full report.


Saturday, March 23, 2019

Short Take: Rates Aren't Indicative of Stance of Monetary Policy

There's a massive misconception that low-interest rates indicate that a central bank is pursuing easy money. In fact, there's a bigger misconception that interest rates, in general, indicate a monetary authority's stance on monetary policy.

Let's say you had a rate of inflation of about 7% and real interest rate of about 3%. This would give you a nominal rate of about 10%. Let's assume you want to reduce the inflation rate because the economy is overheating beyond maximum capacity and the deficit is high. You would, in consequence, reduce the growth rate of the money supply by raising the interest rate (let's say by one percent). In the short term, this increases your nominal rate to about 11% making the real interest rate about 4%.

However, in the long run, inflation goes down. Let's say the inflation rate becomes 4%. The central bank stabilizes the economy so that the real rate is back at 3%. This would give a nominal rate of about 7% which would be lower than your initial nominal rate.

In this example, tight money has led to low rates in the long term. Low-interest rates usually correspond with an increase in the money supply and high-interest rates correspond with a decrease. However, in a real-world setting, low and high-interest rates are not indicative of the current stance of monetary policy. Via the liquidity effect, tight money leads to high rates in the short run. Via the fisher and income effects, tight money leads to low rates in the long run.

Saturday, March 16, 2019

Short Take: Creating welfare with MMT reduces welfare

Currently, there is no real danger of U.S. deficit spiraling out of control. Despite this, deficits absolutely do matter. One possibility of higher deficits is that it can lead to higher taxes in the future, though this depends on how real interest rates evolve over time. Olivier Blanchard recently did work on this topic. Blanchard's conclusion was that this likely won't happen since(arguably) real interest rates in debt will remain below GDP growth rates. This is the baseline of an MMT argument, however, I never said that bad things couldn't happen.

MMT advocates do recognize the counter-cyclical view that deficit spending could lead to higher inflation once the economy overheats and expands beyond "maximum capacity". If inflation were to rise, MMT advocates say you should raise taxes to hold down inflation (although they don't think of inflation as a problem right now). This, once again, is a true statement. However, the MMT view of constantly spending and monetizing debt would not only lead to high deficits and inflation but as they said, higher taxes. It could even lead to hyperinflation. Because of this risk, the Fed will likely continue targeting it's mandates and refuse to monetize the debt. If this is true, then the burden of deficit spending will fall on future taxpayers, because fiscal policy would be the last resort in the absence of a monetary one. The increase of taxes would lead to slower economic growth and the decrease in overall income would lead to less welfare for people even though the intent of MMT would be to fund welfare programs. If this isn't bad enough, higher interest rates would crowd out private investments and capital accumulation which would also hurt the economy.

Keynes said that in the long run, we're all dead. MMT says, "Well what are we waiting for?"

Wednesday, March 13, 2019

Tax Cuts did boost GDP, so what?

Trump's tax cuts directly led to an increase in consumption. We can use many methods to help look at a countries growth such as using a Solow or DSGE model, but at the most basic level, growth, in the form of GDP is calculated by the addition of consumption, investments, net exports and government expenditure. A tax cut, putting more money in peoples pockets, directly leads to an increase in consumption which will increase the GDP. However, that DOES NOT MATTER. As an individual variable, consumption only accounts for short-term growth. In fact, it can even slow down an economy in the long term which I'll get into later. Investments and Trade are the sources of long term growth.

So why?

In the short run, how much stuff is made largely depends on demand - if stores sell all their goods they put on more workers and have people work overtime trying to get more sales.
But not all businesses can do that at once for long. Eventually workers become scarce, wages rise and businesses find it's no longer profitable to keep producing so much and the boom ends.

In the long run, the amount of stuff we can make depends on how clever we are, how good our technology is and how much capital (tools, machines and buildings) we have. Investment (depending on how you define it) creates these things, increasing how much stuff society can make without having to work overtime.

Tax cuts (that are not immediately financed by equal spending cuts), will likely lead to slower economic growth in the long term. Simple GDP accounting implies that holding all other things constant, tax cuts will result in an increased government budget deficit, which will reduce national saving and raise interest rates. This will crowd out private investment and, in the long-term, reduce economic growth. Why is this the case? Government budget deficits are financed by borrowing (through sale of government bonds). Additional government borrowing reduces the supply of loanable funds available in the financial system. This will raise interest rates, and reduce private investment.

In the short run, tax cuts increase demand and increase GDP in the short run (especially if the economy is in a recession).

Saturday, March 2, 2019

Gold and Depression

The Great Depression is and will always be a monetary phenomena. Monetary policy caused it, ended it, but didn't decrease unemployment down to frictional levels. Herbert Hoover, who was president during the initial phase of the depression, fervently stuck with the gold standard and defended the policy of sound money which only exacerbated the economic downturn. Many countries started to recover in the mid 1930's when they dropped the gold standard - allowing a greater expansion of monetary policy. Economists and historians find that the sooner a country dropped the gold standard, the sooner they recovered.

In his article and book "The Midas Parodox", Scott Sumner describes the impact of the international gold market on monetary policy as:

P * Y = P_g * g_s / (r * m_d)

Where P is the price level, Y is output, P_g is the nominal price of gold, g_s is the monetary gold stock, r is the gold-reserve ratio, and m_d is the quantity of money demanded by market actors.

We can view P*Y as a collection of income and expenditures, or, simply, NGDP. P_g is exgenously chosen by government. r is mostly determines by the central bank and P_g is endogenous. The monetary gold stock is the quantity of gold held by the central bank in vaults. The non-monetary gold stock is the quantity of gold held in the private sector. m_d can be influenced by many things, but if market actors want to hold more money then they will bid up the price of money, which is defined as 1/(P*Y).

During the Depression, we saw Shocks to all those variables that lead to an increase in P and a decrease in Y. There was also a massive amount of gold hoarding. The US and, especially, the French central banks were also increasing their gold reserve ratios by simply our basing more gold and also by increasing reserve requirements. We can infer that m_d was rising as well, but it's harder to do this in quantitative terms due to data limitations. Generally, m_d tends to be inversely proportional to money velocity, but that relation doesn't ways hold. Finally, the various labor market interventions during the second new deal led to an increase in P. In order to cancel out the effect of all changes,  Y must decline - which means a recession is happening.

What finally got us out of the Great Depression, in terms of GDP which is appropriate for a manufacturing/industrializing economy, was an increase in P_g when FDR re-pegged the gold to US dollar exchange rate. I said in terms of GDP on purpose, because although GDP was returning to normal levels, the unemployment rate was still staggeringly high. This is where, what is called a "natural test", of quasi-keynesian economics comes into play. 

Keynesian economics is the argument that the amount of total spending in the economy can affect the amount of economic activity in the country. e.g. if the government decides to buy more stuff that month, more will be produced.(Fiscal Multiplier)

What eradicated all traces of the Great Depression ( the unemployment side), was an increase in military spending during World War II,  that acted as a stimulus for the economy.