Friday, September 07, 2012

Macroeconomics and STRUCTURAL risk

Jon Stewart interviews Austan Goolsbee, economics professor from the University of Chicago and former Obama adviser. This clip summarizes the idea of risk mitigation in macroeconomics better than anything I've seen on television. No matter your politics I think this is educational.  Do we lower tax rates on high income earners to incentivise risk taking, or do we provide structural safety nets to incentivise workers to take risks such as going back to school or moving across the country for a better job? This is a fundamental question about the structure of our economy.

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This morning on CNBC Rick Santelli interviews James Bianco about the latest employment numbers that show we are not creating enough jobs to keep up with our growing work force. (The video link is here in case the embed doesn't work.) Note the reference to structural economics problems.

Santelli has been vociferous in his condemnation of current economic policy, note the self-sure smirk as he gladly reports on the lousy employment statistics.  But also note that he and Bianco agree that the macroeconomic problems are "structural" yet offer no other remedy. Granted, this is a short clip and we cannot expect Santelli to offer a lengthy solution (here is a more full-throated diatribe) but his mantra has always been that we should "cut spending" while leaving out specifics, and he has bemoaned for years that federal spending will lead to inflation and high interest the detriment of any investor/ trader who has taken his advice.

MY COMMENT: There are no easy solutions; financial meltdowns take years-- maybe a generation-- to fix. This is not a mere oil shock like the 1970's. The structural problems in our economy need structural solutions. Central banks do have a role to play, issuing monetary easing to keep us treading water while we educate the next generation in useful jobs, while Europe digs out of their fiscal crises and begins to collect taxes for a change, while we re-build our debilitated infrastructure and repair our housing market, reduce our dependence on foreign oil, etc.  Structural.

Santelli is concerned about the value of the dollar, but he needs to get over it. Fiat currencies ALWAYS lose value-- that is what governments are supposed to do to spur investment and inhibit stockpiling currency-- but actually the US dollar has not lost any value in the current crisis, rather, it has gained value versus other currencies. US Treasuries have outperformed and are at multi-generational low rates. This is the clearest evidence that world markets have confidence in US policy. Can this change? Yes, in fact it definitely WILL change eventually. The best thing that could happen is that interest rates climb, which would be a sign that people are taking on risk in the equity markets and leaving the safety of US bonds.  

Structure, baby.

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