Daily Economic Update: January 12, 2024

Yesterday bond yields rose then fell and stocks were lower but closed nearly flat following a CPI report which showed inflation hotter than forecast.  The 10Y ended  the day back under 4%.  Core CPI was 0.31% MOM vs. 0.3 est. and 3.93% YOY vs. 3.8% est.  Headline CPI was 0.3% MOM vs. 0.2% est. and 3.3% YOY vs. 3.2% est.  While shelter cost looked better than expected, healthcare cost and insurance cost were hot and car prices were strong.  Of course most of the commentary is how the hot components are backwards looking (and remember rent is always falling) and largely behind us, we'll see.  In labor news you still can't get fired as jobless claims were super low again.

On the day ahead PPI and bank earnings will be the highlights.

I wasn't expecting to be writing about MMT on a Friday, I kind of thought it was dead, but MMT made it into the FT yesterday with Stephanie Kelton's FT Interview .  Here are some of the takeaways:

• Kelton considers rising bond yields to be a subsidy for “people who already have money”.
• Kelton thinks the US should stop selling Treasuries to fund the federal deficit and governments everywhere ought to invest in public jobs programs so that workers who lose their jobs never become fully unemployed
• She thought inflationary pressures would abate on their own and believes MMT is being proven correct
• She thinks monetary policy gets too much credit and is actually an inflation accelerator
• A core component of MMT is that deficits don't really matter (technically MMT does believe they matter - but believe the size of deficits needs to be much larger than anyone generally thinks)
• Government bonds are unnecessary and only a tool to allow for an interest rate target (I think Alexander Hamilton may disagree here)
• Government deficits need to be at least as big as the US current account deficit, in order for the private sector as a whole to save.
• Kelton would: (1) stop managing interest rates and move to a permanent zero interest rate policy with no government debt (I wonder if she's read The Price of Time ?)  (2) Fiscal policy would be the sole demand management tool for the economy (3) Stop worrying about deficit neutral, but do think about inflation neutral (4) Offer a government job guarantee (BTW, the Soviets provide anyone a job, and that's pretty scary) (5) Take more action on Climate

I don't know what you think about MMT, but I've read Kelton's book, The Deficit Myth, I find the theory somewhat interesting, I think partly because I believe not enough attention is paid to fiscal policy.  That said, I find John Cochrane's Fiscal Theory of the Price Level much more compelling (it reaches a very different conclusion about the importance of govt.debt) and grounded in traditional economic analysis, supported by equations that can be used to test the theory, narrative histories, etc.

For the uninitiated in Kelton's book, my summary is as follows (largely captured in the article - which begs the question why did the book need to be so long?):

• In almost all instances deficits are good for the economy
• Taxes don't matter (other than to create demand for currency and to punish certain behaviors), the government can print it's own currency to finance all expenditures
• Inflation is governed by real resources and often economies are not maximizing those (i.e. not everyone is employed) so having the government run deficits when the economy's real resources are not maximized won't lead to inflation
• What we've been taught, that the government has to Tax and Borrow first to finance spending is wrong and backwards - the government doesn't need our money, we need it's money
• Spending has to come first or else no one would have any money to pay in taxes
• Taxes are used to get people to do work and to create demand for currency
• Borrowing is a choice of offering people a different form of money, it's not necessary
• Kelton tells of an illustrative example provided Warren B. Mosler (I do enjoy listening to Mosler when he's interviewed, he's an interesting guy) to illustrate the MMT worldview:
• Mosler wanted his kids to help keep the house and yard clean, etc.
• To compensate them for their time, he offered to pay his kids.
• They got 3 of his business cards if they made their bed, 5 for doing dishes, 25 for yard work
• At first the kids didn't do any chores and Mosler wondered why
• Then he had an epiphany, the kids didn't need his business cards.
• So he told the kids they didn't have to do any work, but at the end of each month they each needed to pay him 30 of his business cards, failure to do so would result in loss of privileges.
• Mosler had imposed a "tax" which now made his business cards worth something
• MMT contest the concept of a natural rate of unemployment or the need for some unemployment to keep inflation in check
• Bond sales just allow holders of green dollars to exchange them for yellow dollars
• The government doesn't have to accept the "market" rate, it can choose whatever rate it wants
• All government deficits are just nongovernmental surpluses - Uncle Sam's red ink is our black ink
• MMT's stance on trade is a little confusing, but I think their belief is to produce more at home
• Provide a job guarantee where those jobs could work on addressing climate

When I read the book, I couldn't help but think it all as a read on the need for a very big, centrally planned government agenda, supported by a regime of deliberate financial repression, substituting government for all private sector solutions.  It seemed to fail to address the possibility that at some limiting point people (both domestic and foreign) would no longer want to hold the government's currency (including loss of the dollar's "exorbitant privilege") because it's effectively worthless and at that point, yes, the government could require it for taxes, but effectively those taxes would just be a form of punishment that leads to no incentives for productivity and at some point the politicians who created this situation would all be voted out.  History shows people have always found substitutes for trading without making use of the fiat currency when needed (see Soviets or South America).  In other words it doesn't seem to be sustainable, at some point credibility would be lacking and the relationship between the government and those it governed would fundamentally change.  It's true if you can print your own currency you can't technically default, but fails to mention that there are consequences, like hyper-inflation, that are the same as default. It further fails to recognize that savings are a form of deferred consumption and that capitalist economies are proven at efficiently crowdsourcing dynamic solutions to problems of production that are fueled by market incentives. If you want the government to provide all jobs, what jobs and at what wage and what about skills mismatches, etc.

If you're interested in a full review of the book by someone more credible then I am when it comes to economics, John Cochrane's is worth a read https://johnhcochrane.blogspot.com/2020/07/magical-monetary-theory-full-review.html

XTOD: Bitcoin -- a project designed to allow the masses to bypass the use of conventional intermediaries -- now brought to you by none other than the intermediaries it was designed to replace.

XTOD: CPI bottomed last June. I don't know why this is so difficult for people to understand.  What's interesting to me is that today's inflation report is below the fold in the WSJ. Gotta look to find it. It's the only thing that matters to any professional investor today, and downplaying it like this is significant from a narrative-shaping perspective. On the left is today's WSJ inflation-splainer graphic, where they want to emphasize core CPI. On the right is last July's WSJ inflation-splainer graphic, where they wanted to deemphasize core CPI.  See the difference?
Also, look at the phrasing here. This isn't inflation picking up again. It's the downturn "stabilizing". It's an all-of-2023 thing instead of a first-6-months-of-2023 thing.

The truth is that disinflation stopped cold turkey six months ago.

XTOD: There is much talk about "sticky" CPI Owner's Equivalent Rest (OER) for December, printing 0.5% and pushing headline CPI to a beat of 0.3% for December. (3.4% YoY).  Many argue that this is "wrong" and that OER should be coming down.  They need to look at it correctly. 

Here is a chart of the cumulative changes of Zillow's Rental Index (black), OER in orange, and Rents of Primary Residence in red.  Zillow is the "real world." From 2013 (its creation) to 2021, it tracks closely with OER and RPR's cumulative changes.  Then, starting in early 2021, Zillow raced ahead of OER and RPR. In other words, OER and RPR are "undercounting" CUMULATIVE housing inflation.  OER and RPR should stay "sticky" to close the gap with the real world (Zillow).  We are in a "sticky" inflation world of 3% - 4% YoY inflation (December was YoY 3.4%).

XTOD: This is good. Just got off with my workout contact at a bank w/ 15b+ book. They claim ZERO problems.   I push back. How can you really have no problems? Didn't get a clear answer.  

Then I started talking about CREFC and how no one really talked about problems. 

He goes to me. "Man, if anyone says they don't have problems, they're full of sh!t". 

I laughed and said. YOU JUST TOLD ME YOU HAVE NO PROBLEMS

XTOD: Save more money than you think you need. Life is unexpected and your future tastes will likely be more expensive. Not worrying about money tomorrow is worth more than whatever you could buy today.

XTOD: Nick Saban: *retired at age 72*  Pete Carroll: *retired at age 72* 

Congressmen at age 97:https://twitter.com/i/status/1745310835583443258

XTOD: Nick Saban is 72 and still on top of his game. He's retiring.  Pete Carroll is 72 and just got pushed out of his job after consecutive winning seasons.  Bill Belichick is 71. He's only a few years removed from the playoffs. He's also being pushed out of his job. 

Three of the greatest football coaches of all time. But still, football coaches. 

And yet Republican and Democrat primary voters seem hell bent on making us choose between 78 year old Donald Trump and 81 year old Joe Biden to lead the entire country, neither of whom is as sharp mentally as any of the coaches I just mentioned. You people should be ashamed of yourselves.

https://x.com/dandolfa/status/1745496226689376610?s=20

https://x.com/EpsilonTheory/status/1745454490227233262?s=20

https://x.com/biancoresearch/status/1745502587854709054?s=20

https://x.com/JamesClear/status/1745493979217445225?s=20

https://x.com/PryKnowsBall/status/1745310835583443258?s=20