The Normanator Dis-invertigation

I still try to keep up with social media MMT spaces, but it is hard, since (a) I don’t have the time, and (b) it is a major stimulant for anxiety and depression. But I did manage to click the appropriate pixels on my browser page to see what Mike Norman had to say about the recent dis-inversion of the yield curve. Below I’ll attempt a mini synopsis, and finish with my take on the story. Let me emphasize: no one should bother paying any attention to me, especially not the “paying”. But if this amuses you, delights you, or motivates you to get into macroeconomic justice activism, then my job is well done. (This is not Millennial Gen false modesty and fake absurdist self-deprecation, it is just fact, since my expertise is in physics.)

Actually, I am going to invert this essay, and start with my take on the situation, then afterwards go through the terminology and the dynamics a bit. (Non-technical, no math. Apologies to the nerds.) The challenge is to offer a decent honest “explainer” using only cartoons. This is an art, and I’m no Rembrandt at it, and my pencil is just words and letters, but I hope I find some appreciators.

The Normanator

Mike Norman puts out an episode of his podcast claiming the Monetarists have it all backwards again. For all previous history they scream “murder” (or “recession”) when the bond market yield curve inverts — meaning short term yields on bonds go higher than long term yields. I will try to explain later the (false) logic why the ‘Monetarists’ (read: almost all mainstream economists) think an inverted yield curve signals a recession.

OK, but today, Mike notes, the Monetarists are changing their tune: now it is a dis-inverted yield curve that signals a recession. (MoneyTsarist: “Haha! Psyche. We knew this all along, we were only kidding before, couldn’t you tell?”. 🤣 )

((Ooops! Big linguistic pun error? When you think about it, it is really the MMT extremist who is the “MoneyTsarist”.))

Mike then points out there was no recession after the yield curve inverted a few years ago, and there will be none. He then claims the yield curve dis-inverting (going back to “normal” with future yields higher than current yields) is also not a cause of a recession, but later on there might be a recession, say next year. But it is because the FED${}^\dagger$ votes as a committee to lower the interest rate that we get recession risk.

Thus, a dis-inverted yield curve in isolation means nothing, since the bond market is purely parasitic on the real economy, and serves as nothing but a regulator for interest-income to people who already have money. It also helps tighten the torture apparatus screws on households who cannot avoid bank debt, but that’s another story, because in one regressive trickle-down way or another the rich c_nts have to get this income into the pockets of the middle class (at least) to keep up sales. Right. So if this trickle down fails and gets clogged up by neoliberal brain excretions in the pipes, then a recession is very likely. Sales dropping off is always the main damage. The spiral of lay-offs & hence declining sales leading to more lay-offs, then the epidemic-like nature of unemployment spreads like a nasty virus.

${}^\dagger$ “The FED”: the US central bank, a branch of government with limited policy setting authority and regulatory authority. (Just had to state it, in case any libertarians are reading.)

Short story then: Mike was right. Or will be vindicated if things play out with interest rate cuts absent fiscal policy adjustments to keep demand steady.

As I inferred though, it is a double edged sword. The rich c_nts lose interest-income, but so what? They already had money, and can still purchase whatever they need, just less of it, or the yacht that doesn’t have the NSA/CIA GPS, only the NASA GPS. The poor get a lower debt burden, which is good, but not as high a wage growth with which to pay-off their past debt. The poorest always have past debt, that’s why they are poor. Negative scorepoints.

There is also the initial impulse effect of asset revaluations whenever the interest rate changes sharply, but this is a transient effect. It causes market disruptions both ways and so creates a perturbation in winners and losers, but the interest rate story is not what most people think it is, and the MMT alternative is to just have a permanent zero rate policy. Private money lenders can be permitted within non-fraudulent reason, to charge a usury fee, but the MMT alternative is to employ workers so they do not need to borrow (except if they want to, e.g., buy a house).

This is a policy I have not heard about in the MMT literature too much, but Warren Mosler gets close to it, with the Job Guarantee. The idea is that a basic decent income is government guaranteed, and is sufficient for any family to live with, inclusively, without stress, and that means it will always pay the rent, the electricity and the groceries, minimum, plus a bit to save for a vacation or whatever.

Why is it not more prominent in the MMT literature? The answer is because the recovering neoliberal MMT’ers still fear the inflation bogeyman.
Keltonista: “Look, we cannot give the poor too many scorepoints, or they might eat too much and then we will get the horrors of inflaaaashhiooooon.”

Right. Stomach inflation. Not so good.

If regularly adjusting the JG wage upwards causes a bit of inflation then it is a good thing. You should never fear or cry about inflation if this is the cause, it would be reactionary right-wing thinking and framing. You’ve just improved people’s lives. So friggin’ what if the general price level went upwards?, it is a gauge of the scorekeeping system that the policy to improve people’s lives has just re-gauged.

Or as Bill Mitchell once put it, what do you prefer? (A) the social pathologies of mass unemployment and wasted human lives, exceeding the costs of all wars in human history, or (B) the scorepoints inflating?

(I suggest you prefer not to be a proxy mass murderer.)

The Yield Curve

The conventional (so false) concept is that the yield curve charts the “cost to the government of borrowing”. 🤣 A more stupid and regressive framing is not possible. It is completely backwards.

First, there is no cost to the government. The government matures all bonds by marking down a Treasuries account and marking up a check account. There is no grandchild transported in from the future, nor any taxpayer involved. It literally cost $1$ minute of a central bank clerk’s labour time.

Second, the government cannot borrow Its own IOU, at least not if it desires a non-zero interest rate floor, because the over-night cash rate will head upwards if the reserve drain (selling bonds) is not offset by a reserve add (government spending).

Third, the government does not need to sell bonds. If the policy is zero interest rate floor, then the government can always spend and not sell bonds. Bonds are an interest rate maintenance account, not a funding account, and as a side-effect benefit only people who already have money.

Fourth, if the government desired a positive interest rate (for whatever reason, but there are no reasons when on a floating exchange rate) then they might still set the effective interest rate floor to zero but then tighten regulations on bank credit extension, say by restricting the policy on collateral regulatory requirements for issuance of those tax credits. Or increase the credit risk regulations. There are several other policy options I am sure to increase the “own price” of the currency (aka. the interest rate) in the secondary market.

I personally do not think such policies are necessary. The more stable option is to have your IOU trade at par, as the base case. Let’s try to eliminate usury, and let’s face it, that is what it is when government chooses a positive interest rate, because although this privileges people who already have money, its also means chartered banks will increase their interest rate, since banks (who are not at risk of asset devaluations) are insensitive to the government’s central bank rate, they always operate on a spread rate. (They are supposed to always be insensitive by regulations, but these are not well enforced, remember SVB bank!)

Another way to put this is that a floating exchange rate provides a government with greater fiscal policy space. It allows the central bank to set a permanent zero rate without psychological damage of nominal inflation.

Fifth, the zero rate policy is not “cheap money”. It is money at par. “Cheap money” is the higher interest rate, but it is only cheap money for people who already have money. In fact is is better than cheap, it is free. Money for nothing except for “being rich”. Bravo. let’s reward you folks who have sucked up rents from the poor.

((I can fry my eggs in the sarcasm that drips from my keyboard.))

This is the thing about interest rates. They are not pure gauge, because they are asymmetric. For people who have money it is stimulus (albeit highly regressive, since it is all demand add for no supply add) and they do not need the money. For the poorest it is crippling, because they need credit, just to eat. It does not have to be this way.

The (non-zero) interest rate policy is thus a policy that generates changes in winners and losers. The positive interest rate acts as a continual transfer from the poor to the rich, and in real terms (what your whole income can purchase).

Sixth, there are the other stories about other asset prices effected by changes in interest rate policy, but I do not need to write about all that, it is mostly a perturbation for the investment class, and only rich c_unts exist in that class, and I have no moral obligation to go to bat for them, they all should know the risks of living in a system with policy set (and regulations ignored) by worm-brain neoliberal politicians and central bankers. Governments should just pay pensioners a decent healthy basic income. Euthanize the “investment” class and money managers — they are all parasitic overhead, a massive drain on the real economy.

By “investment class” I really only mean the money managed accounts. Real investment in real industry is a good thing.

Senventh, why does the yield curve invert, then dis-invert. I’ve given you the answer, it is because the central bank votes to set the current interest rte floor. If they vote it up then new bonds will have higher yield. That is the whole story.

Almost. If the central bank thinks there is too much economic activity for the good of those who like seeing workers suffer from unemployment, then they think it is appropriate to vote up the interest rate — because they believe (falsely in most cases) this cools down the economy. (It doesn’t.). It is a terrible policy response, but that is their thinking. That is why the yield curve can invert.

Conversely, if they fear a recession they vote to lower the interest rate, because they think this lowering of the cost of funds (aka. “cheap money”) will help stimulate the economy. I just pointed out this latter idea (“cheap money”) is false, it is the base case for trading the currency at par. It is the most stable. It is not “cheap money”. It does not stimulate the economy in most cases. Especially not if the currency is on a float. In any case, this vote will dis-invert a yield curve if it was previously inverted. Whether the feared recession ever happens is anyone’s guess, but the backwards policy response is a sick self-fulfilling prophecy, the lower rates without any fiscal offset, like reducing taxes, will help cause a recession (drop in sales — for goods that people need that can easily be produced — then the spiral).

I think I had a few more points to make concerning the Treasury bond market operations that relate to the Yield Curve story, but hopefully that is sufficient for now. If you have questions, or question my account, feel free to write to me. If you donate a few government scorepoints into my bank account via KoFi then I might also write back and apologize if I got something wrong. Oh my goodness, am I selling Indulgences of some kind? LOL.

Psychological Damages

I want to overlap with previous notes here at Ōhanga Pai, and comment upon the reality that nominal inflation is not a financial nor economic risk, it is a psychological risk. It gets you voted out of office.

But there is another collateral damage. Because neoliberals do not understand the monetary system, their policy responses to nominal inflation adjustments are almost always regressive. This is what hurts the poorest, not the inflation itself. It is always the inappropriate policy response. Hence my constant refrain to lefties:

Never fear the inflation bogeyman, it drives you towards regressive austerity polices. Do not do that! Instead make the appropriate policy adjustments by stuffing the pockets of the lowest wage workers with your scorepoints… but only the lowest waged.

And I would add, do this until you just start to feel like the right-wing assassins are about to mobilize, but no more than that.

I myself, if supreme leader, would go the whole hog and risk assassination. Just to prove a point. The point that honest workers getting paid more are never the problem — unless they are the backwards thinking miscreants who turn fascist because someone even more Cretinous told them they should desire gold but cannot convert their scorepoints into certificates for gold bullion that is kept under the ground. (Is it a transgression to use the word Cretin these days? I cannot keep up with these things.)

Rich c_nts: I know I should not cuss, you cannot help yourselves. But you understand why I do pity you so much: you do have a moral choice, unlike a starving household. You can always choose to spend all your income. A low wage worker cannot, they always spend all their income (which is a good thing for everyone else) but not because they choose.

Preppers: When you build your bunker for the end of the world scenario, is gold really going to be your main commodity of choice to steal? What do you think the farmer who bakes your bread is going to ask in exchange for her bread? She is not going to waste burning energy carrying around gold bars.

Apologies

Sorry again for no mathematics to back up the stories, and no actual cartoon cartoons. If I can think of a good cartoon I will update this post. How do you draw a central banker with the end of the yield curve in his hand like a skipping rope, and an investor trying to jump rope and the banker not cooperating? Probably better animated, but I have no time for that, or if I do it’ll have to be xkcd style.