We’re in no danger of fire, but we are trapped in the house with the air filter going full blast. If you want to understand how bad it is, take a look at this air quality map (with smoke plumes enabled) from the EPA. Heading to clean air means driving 4+ hours over the Sierras to somewhere East of Reno?!? Smoke all the way to Michigan? This is nuts.
But what’s the connection to the economic policy? The same short-term-greedy, long-term-stupid calculus is apparent in both the wildfires and the Fed.
Averting Small Disasters Creates an Eventual Mega Disaster. Hopefully on the Next Guy’s Watch…
While climate change isn’t helping the fires, the immediate problem is the bill coming due for 100 years of fire suppression.
- Instead of letting fires burn (frequent small, relatively manageable wildfires), we kept putting them out. Ever-more heroic, telegenic pushes. Water tankers and helicopters. Applause all round after disaster has been averted.
- The dry tinder builds up.
- Eventually, you get huge, destructive, mega fires.
The above is obvious and well documented. We also have an obvious and well documented solution. Prescribed burns. See this excellent New Yorker article for an in-depth look at the whys (and why-nots-even-if-its-stupid) of fire management. Or this Guardian article.
But we reliably choose to increase our long-term risk of disaster to avoid taking a short-term risk of (smaller) immediate loss. Why do we do that? Partly because we are humans. Our brains are wired to overweight the short-term over the long term.
Partly because no executive wants to be responsible for a disaster (e.g. a burn going out of control). Let the next guy take the hit. Because our brains are definitely wired to pass the buck if we can.
Dumping Money On Every Financial Market Fire Also Risks an Eventual Mega Disaster. Possibly Not on the Next Guy’s Watch…
The Fed has been doing the financial equivalent since the mid 90’s. Heroic helicopter drops of money every time the market catches fire. Money that never quite goes into “real economy” circulation or gets mopped up. As evidenced by massive increases in money supply with concurrent massive declines in monetary velocity (see post here).
All that look worryingly similar. Dry tinder building up against a backdrop of climate change (the aging boomer demographic in the financial case).
As with forest fires, the problem is that you never know when a whole pile of cash is finally going to go up in smoke. It might have been the 2008 Financial crisis. It wasn’t. It might (still) be the 2020 pandemic. We might also get by. I have no better idea than the next guy, even if I were sitting next to Chairman Powell.
But We Do Know There is a Lot of Dry Tinder Out There.
We also know the conflagration would be pretty ugly if it gets going. The risks (and eventual damage) go up with every “successful” intervention. Especially as the boomers don’t have the time to dig themselves out of a financial hole before they retire. If their asset values go down (and stay down), we will end up carrying a lot of impoverished old folks for a very long time. Old people who have the time to vote.
The above is why I remain cautious. I don’t think know better. Lord knows I’ve been super duper wrong for the past 6 months.
But we all know there is a lot of dry tinder out there. At some point, it starts to make sense to pack up the car and evacuate at the first whiff of smoke. Even if your end up looking foolish. I’d also note that, in a financial sense, too many people packing up the car and evacuating is also known as a “market crash.”
We are also hardly out of the (dry, tinder-filled) woods. I still look ahead and (still) seeing more uncomfortable “uncertainties” than manageable “risks.” FYI, In the language of Economics. there is a bright line definitional difference between the two words:
- risk is present when future events occur with measurable probability
- uncertainty is present when the likelihood of future events is indefinite or incalculable
Rather than ranting on, I’ll link to this excellent FT article as a summary of the negatives. I have no idea if he is right. He has no idea either. That is sort’ve the point. We have a lot of “uncertainties” over the next 6-12 months and a lot of dry tinder about …
FYI Monetary Velocity Has Crashed Since March. Follow Link Chart Doesn’t Display.
https://fred.stlouisfed.org/graph/fredgraph.png?g=vy7M
