Maybe not the most consequential thing but certainly the most noteworthy thing
in the markets this week was the Bank of England saying they're going to buy an
unlimited number of long term gilt bonds to try to stabilize the market.
I know there is a specific problem there but does that indicate something broader
about the markets. David we're in very complex and
unchartered territory with what's happening in the U.K.
It wouldn't amaze me if we had situations like that in more places.
Look the U.K. has fundamentals that are out of whack
in which the market does not believe that they have a sustainable path of
macro economic policy that over time no matter what interventions you do spells
very difficult times for their long term bonds for their currency for their rate
of inflation and ultimately for their economy.
They pursued yesterday what's called the in this little field.
A market maker of last resort option at a moment when there were huge margin
calls. And so there was great selling pressure
but no buying pressure on long term bonds.
They committed to step in and buy for the next two weeks.
And that for a time stabilize things. But it's not going to stay stable
forever on the basis of two weeks by it. And it's probably not even going to stay
stable for two weeks unless there is a sense that this is a
bridge to the fundamentals being fixed. And that's not what we
are seeing from the indications we're getting this morning.
That's why I encouraged the IMF to make clear that it was monitoring this
situation. And the IMF made clear that it was
concerned even adding some editorial ization on the rigorous city of the tax
policy of the tax code which I'm not sure is their usual
role. But there's got to be real concern.
So Larry it's clear the Bank of England stepped forward and saying we are
willing to be as you say the market maker of last resort or some other
central banks are going to have to potentially step up or at least be
willing as to be a market maker of last resort.
What about Bank of Japan. What about for that matter the Federal
Reserve. I don't think there's any sign that I
see yet of other markets being disorderly.
But we know that when you have extreme volatility that's when these situations
are more likely to arise when you have extreme volatility coupled with
substantial leverage coupled with substantial uncertainty about what's
going to happen in policy layered on top of the kind of uneasiness that you have
with high rates of inflation underlying. And with the kind of geopolitical and
commodity uncertainty that's coming out of what's happening in Ukraine and
China. This is certainly not a time when very
many firefighters should be taking vacations.
And so I've got nothing to put to predict.
But I do certainly think we're living through a period of
elevated risk and that earthquakes do not begin.
Earthquakes don't come. All of a sudden there are tremors first.
And most of the time when they're tremors they're just tremors and it goes
away. But not 100 percent of the time when
there are tremors does it just go away. And so in the same way that people
became anxious in August of 2007 this is a moment.
When there should be increased anxiety so Larry a couple more reasonably quick
ones no one should the Federal Reserve be particularly nimble at this point.
You said it's incredibly complex. Some people think they've built in so
much momentum on the rate hikes that they should actually consider how they
can adjust to the data. Look I think
after a long time. Hayden when
he was still captaining Team Transitory I think Chairman Powell is now in the
right place. I think chairman
Chairman Powell is saying that he sees this travesty of inflation
as the concern. He's also say which is just the right
thing to say that while it's their plan to move vigorously
to the point where monetary conditions are restrictive and the 3 percent
interest rate they have right now is not restrictive.
Their plan is to move to a restrictive place and that's appropriate.
He's also making clear that they're going to maintain their peripheral
vision on what's happening to the real economy and certainly to the emergence
of financial strains. So I think that he is broadly
appropriate. You know I certainly have written the
sentence many times about long and variable lags and that is a real feature
of the difficulty of doing monetary policy.
Now David I think it's worth remembering that when you're in a regime of signaled
policy I suspect the lags may be a bit smaller than they otherwise would be in
the sense that the response to for example the hike that will come in
December is probably already happening because it's been factored in to prices
has fed through into medium term rates as a Rosalind Chin point Larry one
last one. You really tweeted a fair amount of the
Jones Act this week. Finally there was a suspension of a to
Puerto Rico. So they get some of that fuel on.
Explain to us why you're so brought up about the Jones Act.
So look at the Jones Act. Was Woodrow Wilson's by America by
America industrial policy that had the idea that we'd require that stuff being
carried between the United. Between the United States between
Houston and Boston to Puerto Rico to Hawaii.
We have to be carried on U.S. ships because that would make us not
dependent on foreigners and not make us and make us more secure.
Whatever the logic of that idea when they had it in 1920 it makes no sense
today. It means we can't get natural gas from
Texas in New England today because there are no U.S.
registered natural gas tankers. It means that vitally needed fuel was
sitting off Puerto Rico for days because it happened to be on a far and ship.
It means there's an incentive to send stuff to Europe and to import stuff from
Europe. Plus the shipping costs are lower even
though the distance is longer because we can use foreign flag carriers.
So it makes our economy work less well it makes us be less environmental
because the stuff goes on trains or on cars rather than over the water.
It reduces competitiveness because inputs of anything you have to ship
costs more. And the reason this is important is it's
important to the health and well-being of a couple of million people who've
just been through a hurricane on Puerto Rico.
And eventually eventually the Biden administration got that fixed with the
exemption. But the deeper point is that this
demonstrates the danger of buy America industrial policy to preserve 4000 jobs.
This is not the stuff of a great nation. It's the stuff of parochial politics.
We should be trying to do less of it not build on its example.
And that's why I'm apprehensive about where this will go unless it's very very
carefully managed.