Shulmaven Back on X (Twitter)

Last August I was erroneously banned from X(Twitter). (See: Shulmaven: Shulmaven Banned from Twitter (X)) A week ago X recognized the error of its ways and restored my account. I have been and will continue to post under @shulmaven.

My Amazon Review of George Tavlas' "The Monetarists: The Making of the Chicago.........."

 A Book Only Economics Nerds Would Like

 

Economist George Tavlas has written a very long, deeply researched intellectual history of the Chicago monetary tradition. In the late 1920’s and early 1930’s a group of economists at the University of Chicago outlined a series of policy measures that would become the basis of modern-day monetarism. At its core would be the Fisherian equation of MV=PT, or money times velocity equals price times transactions along with the importance of real interest rates as opposed to nominal rates. The group fully supported a rules-based system over discretionary monetary authorities with the view that discretion can only lead to uncertainty.

 

The thought leader were Frank Knight, Aaron Director, Lloyd Mintes, Harry Simons, Jacob Viner, and Paul Douglas, the first of risk and uncertainty fame and the last the coinventor of the Cobb-Douglas production function and later a distinguished Senator from Illinois. They believed that economic instability was caused by the fractional reserve-based banking system and hence they called for 100% reserves, or in today’s parlance narrow banking. They opposed the gold standard, supported flexible exchange rates, and money financed deficits to jump start the economy out of the depression. They later walked away from 100% reserves because of the end of the gold standard, deposit insurance and allowing the Fed to discount government securities. However, we do note that an over-leveraged banking system loaded with bad paper almost triggered Great Depression 2.0 in 2008.

 

They stood athwart the new Keynesian consensus that money didn’t matter, and only fiscal policy could stabilize the economy. As such they remained in the economic wilderness for over two decades.

 

To me the most interesting member of the group was Paul Douglas. He was a political activist and supported labor unions. At the age of 50 he enlisted in the Marine Corps and saw combat in the Pacific where he was awarded two purple hearts. As a senator, from his perch on the Joint Economic Committee, he led the charge in support of the Treasury-Fed Accord of 1951 and was a firm believer in the role of money in the economy. Indeed, as a New York Times editorial noted at the time, Douglas was the most influential senator on banking policy since the passing of Carter Glass in 1946. As an aside, much of the group in the 1940’s supported progressive income taxation to equalize the distribution of income and strong enforcement of the antitrust laws. Those beliefs would soon go by the wayside.

 

Milton Friedman would come on the scene in 1946 and become the intellectual leader of the new monetarism. His 1956 “Quantity Theory of Money: A Restatement” would establish his as a force in economics where he called for the money supply to grow at a consistent rate to accommodate the growth in real output.  He spread the gospel with his Workshops on Money and Banking bringing in scholars from all over the country. MV would equal PY instead of PT, with Y standing for real output. That along with other research with Anna Schwartz would lead up to his classic “A Monetary History of the United States, 1867-1960” which placed the blame of the Great Depression squarely on the Federal Reserve’s failure to keep the money supply from collapsing. However, I did learn from the book, that a little-known FDIC economist Clark Warburton had much of this figured out in the late 1940’s and early 1950’s.

 

I came into contact with monetarism as an undergraduate at Baruch College in the early 1960’s.  There I had professors Alvin Marty, Eugene Lerner and Robert Weintraub who were all Friedman acolytes. In fact, we used “A Monetary History” as a text. I then went on to graduate school at UCLA in the then business school which was very close to the economics department. At the time the UCLA economics department was known as Chicago west, with professors Robert Clower, Karl Brunner, and Benjamin Klein. In the business school I had Professors Neil Jacoby and But Zwick, both of the Chicago tradition.

 

As a result, when I got involved with the UCLA Anderson Forecast in the 1970’s, monetarism was second nature to me, and it enabled me to better understand that tumultuous era of high inflation. Of course, by the early 80’s the hard fast money growth rule would succumb to monetary innovations that made money hard to define. Soon the Taylor Rule would substitute for the money growth rule.

 

Tavlas has written an important intellectual history, but as I said at the outset, it is not for the lay reader and for economics nerd the book could have used a better editor.

For the full Amazon URL see: A Book Only Economics Nerds would Like (amazon.com)

2024: Volatile Politics, Volatile Markets and the Fed Joins CREEP

Shulmaven did not cover itself in glory in 2023. (See: Shulmaven: 2023: Another Year of Living Dangerously ) We got much of it wrong:

* The economy did not enter a recession.

*Stocks did not trade in a broad range of 4200-3300 and instead approached its all-time high of 4800.

*Bitcoin didn't collapse to below $10,000 and and instead more than doubled to over $40,000.

*Trump was not a spent force and he now seems cruising towards nomination.

* The market has yet to recognize we have entered a new 13-year cycle.

We got a few things right:

*The Fed remained on the warpath for much of the year and wage gains remained solid.

*10-Year Treasury yields stayed above 4% for much of the year. Coincidentally  the yield ended where it stated at 3.9%

* Ukraine struck deep into Russia with missiles and sabotage as global tensions remained high.

Now, in the spirit of being often wrong and never in doubt here are my views for 2024:

* With the S&P 500 trading just below its all-time high and the VIX index at 12, I believe 2024 will be year of high volatility coming from volatile international and domestic politics. Think 1968.

* The stock market appears to be ignoring the warning of former Secretary of Defense and CIA Director Robert Gates where he noted in the November/December issue of Foreign Affairs "The United States now confronts graver threats to its security than it has in decades, perhaps ever."

* In retaliation for attacks on Ukraine's power plants, Ukraine will set ablaze several of Russia's prize West Siberian oilfields.

* Israel will defeat Hamas sufficiently to declare a victory and by yearend Saudi Arabia will be on track to join the Abraham Accords. (See: Shulmaven: Hamas Aggression Must be Punished)

*Domestically all of the signs point to a Trump victory for the Republican nomination and his victory in November, hardly a confidence building eventuality. Nevertheless, I am not yet predicting a Trump victory; I think it is a 50/50 call as of today.

* The Fed will do whatever it takes to avoid a recession in 2024. Their recent pivot is a step in that direction.  Objectively the Fed will join the Committee to Re-Elect the President. (CREEP, the name of Nixon's campaign in 1972.) As a pillar of the establishment and fearful of its independence, the Fed will effectively be all-in for Biden. Thus the Fed will plant the seeds for a very problematic 2025.

* Core CPI will likely run at a 2-2.5% rate in the first half, but accelerate to a 3% run rate by yearend. As a result the yield on the 10-Year Treasury will once again be north of 4%. In keeping with my view that we are in a new 13-year economic cycle, wage growth will remain solid.

* In this environment the S&P 500 should trade in a broad range of 5000-4200, approaching both ends more than once during the year, with the VIX exceeding 30 at least once during the year. Consistent with the past month, the S&P 493 will outperform the Magnificent Seven.

Crunch Time for Ukraine, Israel and the Border

 As I write this an ad hoc Senate committee is attempting to forge a broad border security bill that would attract 60 votes in the Senate thereby paving the way for passing much needed aid to Ukraine and Israel. It is frightening that the national security interests of the United States is being compromised by the Republican wrecker caucus. 

Perhaps more dangerous is the fact that the Republican Party is now home to a Putinista caucus as well that likely will vote against Ukraine aid no matter what the Senate Democrats and Biden offer up on immigration. Indeed the best that can happen to the Democrats is to make a deal on immigration, because if they don't put this issue behind them they could very well be a gonner in the next election.

Not to be out done the Hamas caucus within the Democratic Party will likely vote against any aid to Israel. Thus if any bill comes out of the Senate it will likely be a coalition of the centrists of both parties and I would like to point out that once again my favorite Senator, Kyrsten Sinema (I-AZ) is leading the charge to forge a workable bill. 

However the question remains whether or not the House, which is not in session, would actually pass any Senate compromise. In that body the Putinista caucus would rather have an issue than passing substantive legislation. 

Last week marked the 82nd anniversary of the attack on Pearl Harbor. It would be tragic if Congress' failure to act on Ukraine aid will be remembered as a week of infamy.

My Review* of David Grann's "The Wager: A Tale of Shipwreck, Mutiny and Murder"

 Shipwreck and Survival Around Cape Horn

 

Author David Grann knows how to spin a yarn. He tells the story of the Wager, a British warship on a mission to seize Spanish treasure during the War of Jenkins Ear in 1740. The convoy is led by George Anson who succeeds in circumnavigating the world and seizing Spanish treasure off the coast of the Philippines. The Wager is not so lucky.

 

After barely making it through the Straits of Magellan the Wager runs aground on an island off the Chilean coast. It is there that we see a struggle for survival that is aided by some temporary help from Indigenous people from the mainland. It is a long struggle involving near starvation on the island and the crew ultimately gets off by fashioning an ark out of a small landing craft from the mother ship. That tiny ark makes it through the perilous straits and ends up in Brazil, quite an achievement in seamanship.

 

The story is told through the eyes of three main characters. The Captain, David Cheap; John Bulkeley the gunner, and the 16-year-old John Byron, who would become the grandfather of Lord Byron, the poet. It is Bulkeley who is the one who ultimately takes charge of the situation, and it is he who chronicles the events upon their return to England.

 

What I found most interesting was the daily life and daily hardships aboard ship in the days of sail. It was a hard life and the sailors had to deal with the harsh elements, limited navigation equipment, epidemics, and the ongoing threat of scurvy. Absent Vitamin C, the body deteriorates, skin turns black, and teeth fall out and this is what happened to much of the crew. I also learned the origin of such present-day terms as “toeing the line,” “under the weather,” and “learning the ropes” had its origins in the British Navy.

 

Grann tells a true story that he writes like a novel. The book held my interest throughout, and it is an enjoyable read.

*- Amazon is, yet again, late in posting. Amazon posted on 12/16 with the following URL: Shipwreck and Survival Around Cape Horn (amazon.com)

 

 

My UCLA Talk on the Long Term Outlook for Financial Markets

 On December 6th I presented my long term outlook for the financial markets at the UCLA Anderson Forecast conference. The talk was based on the 13-year cycle theory I outlined in May 2022. ( See: Shulmaven: The U.S. Economy is Entering a New Thirteen Year Cycle ) The link to my talk can be found below. It lasts about 15 minutes and I would note that before it began there was a fire alarm that evacuated the building.

The link is here: https://www.youtube.com/watch?v=KFbLvDzXRJk&t=191s