In September, we proposed a theory of the Fed and suggested that the FOMC will soon worry mostly about financial imbalances without much concern for recession risks. We reached that conclusion by simply weighing the reputational pitfalls faced by the economists on the committee, but now we’ll add more meat to our argument, using financial flows data released last week.

We’ve created two charts, beginning with a look at cumulative, inflation-adjusted asset gains during the last seven business cycles:

powell change 1

Read more »


Last month, the good people at Focus Economics asked me for my thoughts on cryptocurrencies, allowing either a general outlook or my answers to two specific questions:

  1. Could cryptocurrencies supplant traditional currencies or are alternative currencies a bubble that will eventually burst?
  2. Could a central bank really issue its own digital currency in the near future? How could this affect the world economy and financial markets?

I went with a general outlook, although I might have used a different format had I realized my response would be printed verbatim alongside twenty others. In any case, it was interesting to see the diversity of views. A few respondents even sounded as though the crypto craze made them angry.

Here’s the link:

https://www.focus-economics.com/blog/cryptocurrencies-block-chain-future

Rereading my own contribution, I should have written that “the vast majority of cryptocurrencies will fail” instead of “many cryptocurrencies will fail.”

And in case you missed it, Bitcoin topped $15,000 this morning.


Forget about big hair, Ray-Bans, and Donkey Kong. Don’t even think about Live-Aid, Thriller, and E.T. Above all else, the 1980s were the gravy days of the money supply aggregates.

Beginning in late 1979, the Fed built its policy approach around the aggregates—primarily M1 but occasionally M2, and policy makers also monitored M3 while experimenting with M1B and, later, MZM. But those were just the “official” figures. Economists and pundits debated the Fed’s preferred measures while concocting their own home-brewed variations.

Notably, the Fed allowed interest rates to fluctuate as much as necessary to achieve its money growth targets. Fluctuate they did—rates soared and dipped wildly as a direct result of the Fed’s policy. The world, meanwhile, watched the action as attentively as a Yorkie watches breakfast, studying every wiggle in every M. Missing one wiggle could have meant the difference between exploiting the volatility that the Fed unleashed or being sunk by that same volatility.

And to make sense of it all, the world looked to the most famous economist of his day, Milton Friedman. By converting a large swath of his profession to his strict brand of Monetarism, Friedman more than anyone else had triggered the monetary frenzy.

But then, almost as quickly as the frenzy blew in, it blew right back out. With none of the Ms living up to their billings as economic indicators, the Monetarists drifted from view. Not in five minutes but in five years, give or take a couple, their period of fame was over. Friedman’s reputation as an economics savant fell particularly hard—his highly publicized forecasts proved inaccurate in each year from 1983 to 1986. And the Fed once again redesigned its approach, first deemphasizing and eventually dropping its money growth targets.

But maybe the Monetarists came closer to explaining the economy than their critics allowed?

Maybe the best indicator—I’ll call it “MDuh”—was somehow hidden in plain sight?

Read more »


We’ve produced some research over the years that we’d love to see the powers-that-be react to, but none more so than our look at financial flows during the QE programs.

By netting all lending by banks and broker-dealers and then comparing it to the Fed’s lending, we stumbled upon a chart that seemed to show exactly what QE does or doesn’t do. But “doesn’t” was the story, and it couldn’t have been clearer or shown a more stimulating pattern. Our Excel click on “Insert, Line” was like stepping from a shady trail to a sunny vista.

Here’s the updated chart, which we dubbed the “argyle effect” and looks even sharper than it did when we first produced it in 2014:

Read more »


As reported earlier this morning by the Wall Street Journal, President Trump and Treasury Secretary Mnuchin met with Kevin Warsh yesterday to discuss the potential vacancy at the Fed next February.

Warsh already has central banking experience, having sat on the Federal Open Market Committee as a Fed governor from February 2006 until March 2011.

Two and a half years after he resigned from the Fed, he emerged as a vocal critic of FOMC policies, including policies he helped craft. He published an op-ed in the WSJ on November 12, 2013, and it was quite the editorial. As that happened to be the first week of hunting season, we suggested that Warsh had declared open season on his ex-colleagues, and we came up a gimmicky picture to go along with our reporting:

warsh hunting

But we also thought his op-ed needed translation. It was written with the polite wording and between-the-lines meanings that you might expect from such an establishment figure. He seemed to be holding back, so we offered our guesses on what he was really trying to say. And with today’s breaking news, we thought we would reprint our translation.

So, if you’re wondering what the current frontrunner as Trump’s choice for the Fed chairmanship really thinks, here are Warsh’s comments on nine topics, followed by our translations.

Read more »


Even as the Fed’s decision makers are beginning to worry less about recession and more about bubbly stock prices, we’re not yet moved by their attempts to curb the market’s enthusiasm. After all, the fed funds rate sits barely above 1%, which not too long ago qualified as a five-decade low. And other indicators, besides interest rates, aren’t exactly predicting the next bear, either. Inflation is subdued, credit spreads are tight, banks are mostly lending freely and the economy is growing, albeit slowly. It just doesn’t feel as though we’re close to a major market peak.

Read more »