I’m concerned the Fed has gone off the rails.

Okay, this is going to take a little explanation.

(Though here’s the “Too Long; Didn’t Read” summary: the Federal Reserve is making a mistake by raising interest rates in order to increase unemployment rates from 3.7% to a target of 4.4%–because many of those jobs are shit jobs, unemployment rates are not a good metric of economic health, and inflation rates do not warrant an increase.)

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Once upon a time, the Federal Reserve focused strictly on inflation numbers–specifically the Consumer Price Index less energy and food–in order to control monetary supply.

See, the theory is this: fiat money is, in a very real sense, a good produced by the government that is in demand by consumers of money who use that money in order to buy things.

And like all goods produced by a producer, it is subject to the supply-demand curve: when there is too much of that product, it’s value declines. When there is too little, it’s value increases.

Well, with money it’s harder to see what this means, so let’s use an example. Suppose you have a loaf of bread that costs $1. If suddenly the value of money “goes up”, this means it takes more bread to “buy” a dollar. If the value of money “goes down”, this means it takes less money to “buy” a dollar.

In other words, if the value of money “goes down”, we get inflation: if it takes less bread to “buy” a dollar (say, 0.8 loafs of bread), that also means it takes more money to buy a full loaf of bread: in this case, 1/0.8 = $1.25 per loaf of bread.

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So: too much money, money’s value goes down, it takes more money to buy things–inflation.

Too little money, money’s value goes up, it takes less money to buy things–deflation.

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The primary role of the Federal Reserve is to control the supply of the monetary supply so as to keep the economy on an even keel. And the Federal Reserve does this in two ways: first, it controls the short term interbank loan interest rate. This is the rate the Federal Reserve charges member banks to borrow money from the Federal Reserve overnight–and it affects how much it costs banks to make loans.

The higher the cost to make a loan, the higher the interest rates. The higher the interest rates, the less people borrow. The less people borrow, the less money is out there. The less money out there, the value of money “goes up”–counteracting inflation or even triggering deflation.

The second way the Federal Reserve can alter the money supply is by buying debt directly from the Federal Government. Think of the Federal Government as a bank in this scenario, borrowing money from the Federal Reserve. Of course this second method is highly unusual–but after 2008 it was the primary mechanism that prevented the economy from going into another 1930’s style Great Depression.

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And this: the Federal Reserved looked at CPI, and adjusted the short-term interbank borrowing rate in order to alter the monetary supply, was the status quo for several decades.

But then during the recession of 2008, the Federal Reserve announced that in addition to CPI, the Federal Reserve would start looking at employment rates in order to gauge the health of the economy.

To my mind, when this was announced, it felt to me like a “feel good” sop to the economy. Employment tends to be a trailing indicator (because companies need money before they can hire people), so in some ways it felt to me like the Federal Reserve was signaling an informal policy that would delay raising interest rates even when inflation was kept under control, in order to allow the economy to recover from the 2008 crisis.

Unemployment, however, is a terrible indicator of the health of the monetary supply. It’s a terrible indicator because unemployment rate statistics are not gathered in a way which can usefully indicate the health of the economy–but instead is gathered to determine the number of people who need unemployment help. (That is, if you’re unemployed long enough, you’re no longer counted as “unemployed” (because you no longer qualify for unemployment insurance)–which can artificially depress employment figures. Further, if there are plenty of well paying jobs, even retired people may take jobs–because why not, it’s something to do. There is for many people a social utility to having a job–and if they’re willing to throw buttloads of cash at you at the same time, why not?)

Worse, what we’re seeing today in the ‘gig’ economy is the rise of underemployed people–people whose “jobs” are driving for Uber or the like. These alter unemployment rates–but they don’t mean these people are happy in their jobs, or that the low unemployment rate is actually a sign of economic health.

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But that’s what the Federal Reserve is now doing: they’re targeting unemployment rates as well as inflation rates.

Now inflation (less food and energy, whose price tends to fluctuate for reasons beyond monetary supply reasons) has held fairly steady at around 2.2-2.3% for about a year now. So there is no reason to be altering the monetary supply.

So why did the Federal Reserve raise rates 0.25%–thus slowing the economy, at a time when uncertainty over trade (thanks to President Trump’s actions on trade) has already slowed the economy?

Because the Federal Reserve is still monitoring unemployment.

And they’ve decided the 3.7% unemployment rate is too low and needs to rise to between 4.0% and 4.6%.

Let that sink in.

The Federal Reserve has decided thanks to a policy change to track unemployment when deciding monetary policy that too many people are working (even if they’re working ‘shit’ jobs), and we need to increase unemployment.

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I remember a lot of people congratulating the Federal Reserve when it decided to target unemployment rates back in 2008–and thinking “that’s a huge mistake.”

Now we’re paying for that mistake.

And I would love it if the Federal Reserve would not set an “unemployment target rate”–because it’s a terrible policy.

As we see now, when the Federal Reserve clearly–on their own web site–claim too many people are working. Even if a lot of them are working shit jobs and would love to have better jobs instead.

And rather–as the Federal Reserve states:

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

Instead, it seems to me the Federal Reserve needs to see unemployment rates (which again is a metric about individual welfare by measuring who qualifies for unemployment insurance, and not a direct measurement of monetary supply) as an indirect consequence of economic health.

That may sound pretty brutal–seeing jobs as a side effect of economic health. But it does mean we move away from silliness like “too many people are driving for Uber and flipping hamburgers for McDonalds, so we need to slow economic growth.”

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Now I have no problems with the Fed considering employment rates as one of their considerations when assessing long-term economic growth.

But setting an unemployment target?

Fuck no.

When you assume people are stupid, you can’t reasonably help them.

Rational self-medication

We develop a theory of rational self-medication. The idea is that forward-looking individuals, lacking access to better treatment options, attempt to manage the symptoms of mental and physical pain outside of formal medical care. They use substances that relieve symptoms in the short run but that may be harmful in the long run. For example, heavy drinking could alleviate current symptoms of depression but could also exacerbate future depression or lead to alcoholism. Rational self-medication suggests that, when presented with a safer, more effective treatment, individuals will substitute towards it.

When you combine this with the Rat Park experiments which showed that laboratory mice, when put into a isolated environment will heavily self-medicate using morphine–but when put into a “rat park”, a living environment with other mice and with plenty of social stimulation, will not become ‘addicted’ to morphine–and it suggests that drug abuse is far more complicated than the current “disease model” of addiction.

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And here’s the greater problem.

Throughout society we see a number of social problems, from poverty to drug addiction to inequality–and we assume that at some level either we as a society don’t care (the liberal view), or that individuals are lazy and stupid (the conservative view).

Both views persist throughout all our discussions, and underlying them is a sense of aesthetics: a view that the world should work a particular, familiar and comfortable way–and if it doesn’t, it’s not because others are making rational choices using information we are not privy to, from a cultural framework we don’t understand.

No, it’s because other people are stupid.

And that’s not helpful.

Instead, I wish we would spend more time both being self-reflective and trying to understand others (to “walk a mile in their shoes”)–and rationally try to understand why people make the decisions they make.

Because so long as we continue to tell people we don’t like (because their skin color, politics, socio-economic situation or the like is not like ours) that they’re stupid, we can never understand why they behave the way they do. And more importantly we can’t help them if they indeed need help.

Too bad no-one knows what a treasury yield curve actually is.

Too bad no-one seems to know what an “inverted yield curve” is, or why the current inverted yield curve is weak sauce at best.

An “inverted yield curve” is when any longer-term treasury bond fetches a lower rate than a shorter-term treasury bond. This indicates that investors think the short term is riskier than the long term. (Generally the longer term–by virtue of being longer term and harder to predict–is seen as riskier.)

The present yield curve (as of December 14) is between the two and three year treasuries: the 2 year is currently returning 2.73%; the 3 year is returning 2.72%.

The difference is 0.01%: it’s not much of an inversion.

It’s even a weaker signal when you consider that different treasury bonds go up for auction at different dates: in this case, the 2 year treasury was auctioned off for issue on November 30, while the 3 year auctioned off for issue on December 17th.

(Click on “Auction Results.”)

This means that the 2 year and 3 year returns are interpolated from auctions held two weeks apart.

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For a while now we’ve seen a flattened yield curve, which is definitely a sign of a slowdown.

But we are miles away from the inversion of yield curves we saw, say, in Februrary of 2017 when we saw yield curves like:

3 mo	6 mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
5.14%	5.10%	4.93%	4.59%	4.50%	4.46%	4.46%	4.50%	4.73%	4.62%

That is, nearly every treasury is inverted until you move out to the 10 year treasuries.

Now that is an inverted yield curve.

Only a well educated college graduate can be this fucking stupid.

‘Late Capitalism’: The Saddest Faith

“It’s breathtaking what’s happened in the last 20 years or less,” observed Daniel Yergin, the award-winning co-author of the book The Commanding Heights. “It’s as though the whole world has changed its mind.” Indeed, the 20th century concluded with a resounding victory for market forces. The old socialist order was swept away in Europe, East Asian authoritarianism survived, but its command economy did not, and once fashionable Keynesian economic prescriptions fell out of favor in the West. The democratic revolutions of this period had some successes and some failures, but almost everywhere capitalism emerged triumphant.

To some, this is just a detour on the road to capitalism’s inevitable collapse. Only in the Marxian imagination could a prophecy foretelling predestination be deemed scientific, but that is the inescapable conceit inherent in the vogue idea that we are witness to capitalism’s final stages of development. Whether it is invoked ironically to explain why markets cater to unusual tastes or a sincere warning about the cataclysm to come, the phrase “late capitalism” is everywhere.

That last link, by the way, is to “The First Annual 2018 Late-Stage Capitalism Holiday Gift Guide”–an ironic list of things you can buy which supposedly shows “late-stage capitalism” but really shows the silliness of marketing.

Of course while the definition is hard to pin down, the essence is that capitalism is about to fail, and in that failure socialism will take over. It comes from the Marxist observation that capitalists will eat their own.

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The problem, of course, is this: suppose the modern markets were to collapse. And we were to devolve to some sort of pre-industrial society–a’la the Native Americans. What does this “utopia” actually look like on the ground?

Most people who believe in socialism and who oppose capitalism is that they fall into one of two fundamental schools of thought. The first are the ones who look at the inequality of the world, the emptiness of their own pockets, and think there has to be a better way. That is, the first group are those who are emotionally wailing at the world, and who are therefore susceptible to the “late-stage capitalism” echo chamber.

The Soviets used to call them “useful idiots.”

The second are the well educated Marxists who have climbed up the levels of abstraction until they’ve stopped being in touch with reality.

The problem here: well, let me give you a hint. If your abstracted model predicts something that doesn’t quite match the un-abstracted model, don’t say “wow, our abstractions teased out something new.” Your reaction should be “huh, that didn’t make sense. I wonder what’s wrong with the abstraction?”

And that’s where the whole “late-stage capitalism” thing goes haywire. Because they (as well as many economists, especially apologists for socialism and communism) have forgotten what “capitalism” is, beyond a vague notion of belching factories owned by billionaires, or its usage by Karl Marx as a pejorative for a bourgeoisie class whose very definition has been warped over the decades.

Capitalism, at its core, is the system of economics that arises when individuals and groups owns the means of production.

And what is “the means of production?”

Back in feudal times, say, back in the 15th century, the principle means of production in an agrarian society was land. The principle economic activities of feudal Europe was agricultural: the production of food, cloth for clothing, wood for shelter. And that required land: land to grow crops, land to grow cotton and hemp for clothing, land with trees for wood.

But in today’s world, where agriculture represents a minuscule fraction of the GDP, where we do not question laws against nudity because even the poorest of the poor can afford cheap clothing imported from China, where the standards of shelter mean the poorest live in environments the Kings of the 14th century could only dream of (with fresh water on tap, sanitary bathrooms and soft bedding)–what is the “means of production?”

The “means of production” is the pickup truck full of tools used by a plumber to fix pipes and install a toilet. The “means of production” is the laptop computer used by a computer programmer to write the next iPhone application, the author of the next book, the journalist submitting his byline. The “means of production” means a factory–but increasingly we’re seeing things like 3D printing reduce what we mean by a “factory” to a series of manufacturing processes, an increasing number of which can be performed in a garage or a rented warehouse somewhere. The “means of production” is increasingly knowledge: the knowledge as to where to go to get inexpensive custom circuit boards, custom plastic injection moulding, or the knowledge to design your own custom things for manufacturing, using software to design your own circuit boards or your own objects.

“Late-stage capitalism” is the idea that somehow our modern economy will collapse through capitalists losing “control the means of production.” But what does that means when a capitalist “loses control” when the means of production is the laptop computer or the truck full of tools or the garage with a miniature plastic injected moulding machine and wave soldering and pick-and-place device–all things, by the way, which are now available not for millions but for thousands–and increasingly, for hundreds of dollars?

To socialists who believe the means of production needs to be socialized–who believes the means of production must be under government control (and whose mental model of capitalism is the billionaire-owned factory, a mental model which borrows from the era when the majority of economic activity was agricultural)–does that mean sweeping through everyone’s garages and taking all the 3D CAM milling machines and 3D printers? And taking their garages as well?

Or to the believer in “late stage capitalism”–at what point does “capitalism” collapse when “capitalism” is me, writing custom iPhone software, selling it to you, someone who needs to promote your movie?

What does it mean for capitalism to collapse when the highest expense for any economic endeavor is labor costs?

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Or to go back to the original question? What does life look like once capitalism collapses–when we no longer have a “market economy?”

It can’t look like the Native American tribes of North America; Native American tribes used money in various forms to track trade between tribes and between tribal members. We know the idea of a tribe of people sharing freely amongst each other really only works when everyone is related–and when we are below Dunbar’s number and when there is an elder or strongman who can knock sense into people who don’t behave. And even there, it’s convenient for elders to track trade between the members of a family group using some system of accounting.

But without that–and without some massive evolutionary advance which makes us more like ants than humans–what is left but abject poverty, isolation and a mean and shortened existence?

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If your abstract model makes predictions that make little sense in an un-abstracted model, your abstraction is a mistake.

It also means if features of your abstraction makes a particular prediction–you need to ask yourself where the features of the abstraction arise from the un-abstracted model.

For example, socialism fails not because of anything intrinsic about socialism. Socialism fails not because we can’t get along, or because somehow singing “cumbya” causes the Gods to strike us down. Socialism doesn’t fail because somehow caring for the weak and the downtrodden makes Jesus Christ mad or because Huitzilopochtli requires the sacrifice of a certain number of poor people to assure the crops.

No, socialism fails because price controls and top-down management of the economy destroys price signals which allow individuals who control the means of production (the owners of laptop computers and trucks full of tools) to make rational decisions–for the plumber to decide he can make more money installing sinks or for the computer programmer to decide the money is in creating Android software.

(This is in fact what we’re seeing in Venezuela, where socialism is causing the descent of that country into abject poverty unseen anywhere in the world in recent history.)

And when we realize the failures predicted by your abstraction and how they arise from the underlying un-abstracted model you can look for similar patterns elsewhere.

Such as realizing the same thing happens in large corporations with their top-down management styles. It means the same failure of Socialism causes the lifespan of large capitalist companies to shrink to under 20 years, a little longer than the average lifespan of a house cat.

But this doesn’t prove late-stage capitalism; only that the three most important aspects of any economic system are:

• Individual freedom and the freedom of individuals to operate in groups (corporations).
• Wealth is proportional to knowledge–both in the design of products (and the design of manufacturing processes) and in the knowledge of those who make things.
• The health of an economic system–either a company or a group or a nation–is related to the freeflow of economic information, such as price signals, inventory levels or feedback from customers.

And any system–such as Socialism or Corporatism–which interferes with any one of these three things will create a sick economy which will eventually collapse into poverty and despair.

And only the college educated can be so smart (with their systems of abstraction) that they can become so stupid and so out of touch that they neglect the real world or fail to learn the lessons of their abstractions.