What are Arnold Kling’s biggest contributions to the world of ideas?
1. Style - His style in short blog posts, book reviews and sharing links. That style is humble, concise, both thoughtful and thought provoking, and does much to encourage reading about important and advantageous ideas.
2. Virtue - His style is also one of leadership through virtue. That style and his best ideas - FITs, the Essay Grader, Three Languages, the NBU - all share in the theme of modeling and promoting virtue.
Where does his style and virtue come from? Maybe, much of it comes from the practices and doctrine of Judaism, The Old Testament, through his family and culture.
“The four main human virtues as defined by Plato are prudence, justice, courage, and self-control. These are the so-called cardinal virtues, from the Latin word cardo, or ‘hinge.’ These are the virtues upon which all other human virtues hinge. Each of the non-cardinal virtues is bound up in and depends on one of the cardinal virtues.
“In the Book of Wisdom, we read: ‘Wisdom teaches self-control and prudence, justice and courage, and nothing in life is more useful than these.’ That the Old Testament mentions the four cardinal virtues shows that the Jews valued the wisdom of the ancient Greeks.”
“Virtues are dynamic forces—witness the word's Latin root, virtus, meaning ‘strength’ or ‘power.’ Each, when practiced habitually, progressively enhances one's capacity to act.”
Excerpts from the book Virtuous Leadership: An Agenda for Personal Excellence by Alexandre Havard.
"The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal."
As Treasury offerings have grown to exceed the savings available for investment in them at low interest, the Fed's portfolio has swollen to immense proportions. So I would add that the Fed's job now further extends to monetizing the deficit. In this scenario, the banks (primary dealers) function is to perpetuate the illusion that there is an functioning market for Treasuries at those interest rates.
Monthly PITI at 3% is very roughly 50 basis points of house price. At 7% it's more like 75bp. Hold "amount one can afford to and will pay towards a mortgage" constant and the price affordable declines about a third, and the market value of the debt loses even more. Hard to say how it's going to shake out except some chickens are going to be coming home to roost.
Possibly, the flatness of the Oz business cycle from 1992 to 2020 might have something to do with a more focused central bank. We had no GFC or Great Recession.
So for the economic amateur who knows enough to be dangerous, what are the major implications of this primary role of the Central Banks? It would seem to me that this would set up a vicious cycle where a central bank would have tremendous forces against ever reaching the proper interest rate equilibrium that crowds out consumer and business savings and investment in favor of governments, which misallocate uses of funds for its own political ends.
Just this morning I heard a reference to the civilization versus barbarism Kling concept in an EconTalk podcast related to the Israel and Hamas. Combined with the Progressive "Oppressed/Oppressor" and libertarian "state coercion/individual": a powerful framework that one can use for a lifetime to describe perspectives. Book ordered.
I indeed hold this cynical view, which is that the goal of financial regulation is to allocate capital to the government's preferred uses, including funding its own deficits.
I'm kind of surprised you made a statement like this. We could discuss the preferred uses (the list is long and varies for many reasons, including whatever might be perceived as the biggest scare of the moment) but it seems more straight forward to discuss who it is that holds these preferences - politicians? Republicans? Democrats? Lobbyists? The Fed? President/Treasury?Which of these groups is "the government"?
I get that sometimes the Fed might be inclined to aid incumbents, especially the President when an election is approaching but I still don't see the Fed wanting quite the same. I don't really remember before Volker but I don't really see him or Greenspan doing anything but what they thought best for the economy as a whole. Maybe Bernanke, Yellen, or Powell are different but I wouldn't want to make that judgment. Maybe I just don't know or maybe more time needs to pass first.
My guess is more like a gradual, rolling monetization at just below the level that would provoke a major crisis. At least for a few years until the crisis can no longer be delayed.
Indeed. In the USA this pain point is probably around 3-3.5% inflation, which is what was seemingly achieved by the Fed hiking rates to around 5.5%. The 5.5% rate seemed to be closing in on the limit for Fed though as there were clearly cracks appearing: banks and insurance cos (SV bank etc), housing (the existing housing supply is frozen by locked in low rate mortgages), and the increased costs of servicing and rolling Treasury debt (now $1T p.a.) was becoming noticeable (but not precipitating major fiscal cutting), with the TY market having the odd hiccup.
However, the tipping point is fragile and temporary -- if inflation persists at 3%+ level, rates cannot come down and TY placement and rollover will become a major problem. If they come down temporarily, congress+Krugman crowd will probably just crow and spend the "interest rate decrease dividend" and blow whatever buffer saved the US this time round. And a future recession will open the spending flood gates, again if the Fed drops rates in response, following which the Fed will be unable to lift rates high in the future. As Arnold would say: have a nice day.
I would hope Arnold or someone can apply the Ferguson framework to Turkey and Japan and some other cases, esp how they dealt with recent inflation. Japan had to deal with a much higher debt:GDP ratio, but appears it has a domestic savings base and quiescent population and a persistent deflation problem which probably allowed it to save itself from inflation with a low nominal JCB rate (??). Turkey went for high inflation; seemed they intended to inflate debt away faster than they created it, but also not clear why the population did not revolt -- perhaps those capable of leading the revolt have their financial assets in or could function using Euros?
But not, for better or worse, perpetual inflation, because offset by deflations. Before the 20th century the real purchasing power of a dollar was pretty close to what it had been when the constitution was ratified. Compare than to losing 90% over just the last 60 years.
Local events on a much smaller scale occurred before the Fed, now we have inflation impoverishing everyone worldwide. Who benefits from inflation? Anyone with significant assetts ie the rich. Who does it fleece? The poor of course, rinse and repeat.
In certain countries I agree, billions have been lifted out of poverty. In the US a tradesman works just as hard as 50 years ago but is now struggling to survive and used to support the whole family on one wage. The working and middle classes have got poorer for the last 50 years while the 0.1% have stolen all the productivity gains and then some.
I'm not saying you are wrong but you are definitely swimming upstream. I don't know Kling's position but all the "renowned" economists I know of, including both conservative and liberal leaning, and libertarian Russ Roberts, agree that official measurements over-estimate inflation.
Renowned economists are simply spouting banking propaganda. By constantly under reporting inflation you constantly over report GDP "growth" which does not exist. For the real data you need to see Shadowstats.
"Renowned economists are simply spouting banking propaganda.“
Whether they are right or wrong, I can only think of one other past comment on all of Kling's substack that was this absurd. Clearly you have no clue how they formed their opinions. Believe want you want.
Economics is corrupted pseudoscience in the main, Bill Bonner, Jim Rickards and Naomi Prince are the only ones worth listening to. I know exactly how most "economists" form their opinions and they think what they are paid to think.
The Fed’s real purpose is to save the wealth of the human owners of the Big Banks, mostly the rich. They allow the rich to privatize profits made by risky investments, the profits of which are a reasonable measure of the increase in wealth. Yet the Fed joins in the process of socializing the occasional losses when there is massive mal-investment which would lead to massive losses to the rich without the Fed’s action.
Those investments by the rich have been leading to increases in wealth and health, tho not so much relative status, still stuck at a max of 100% available. And thus a smaller increase in happiness than wealth.
When the US deficit, and debt, get “too big”, it will be shown by some massive financial catastrophe. Or worse, in war with people being killed. This dystopia is highly uncertain, tho the Financial Crisis is less likely than war with China in 2024.
I've not read the Niall Ferguson book, but maybe he addresses this, but it seems like Bagehot's Lombard Street pretty much set up this arrangement. He mentions the two pockets and the limits on the Bank of England's ability to issue new cash to cover government borrowing. I mention this because Bagehot supposedly wrote the book as a defense of Peel's Banking Act of 1844 which gave the Bank of England a monopoly on issuing currency notes and prohibited other banks from issuing their own circulating currencies as had been the practice. This seems of interest, because as I understand it, in Argentina, Milei is repealing the Peel-like system, essentially erasing "This Note Good for all Debts" language on the peso, and allowing parties to denominate transactions in whatever currency they choose. In American history, the ability of the 13 colonies to force creditors to accept payment in their own currencies was one of the grievances of the wealthy creditors that led to the coup against the Articles of Confederation. Were currency issuance and freedom of currency transaction denomination choice to be instituted, would government spending be constrained?
Alternately, I am reminded of Antonio Salazar, the Portuguese dictator and celebrated economics professor, who was coaxed into leaving academia to accept the Minister of Finance position on the condition that he have unlimited veto power over spending throughout all of the government. Portugal at the time was in precarious financial position and unable to borrow on its own credit. As minister, Salazar cut spending widely and produced a budget surplus during his first year as well as in subsequent years. Perhaps another of Dr. Kling's popular ideas. the Chief Operating Officer position, should be imbued with a similar raw, arbitrary power to cut federal agency budgets.
You didn't mention that the central bank has a major role in writing down government debt by decreasing the value of money with "inflation". You seldom even see the term "real interest rate" being used any more, as they switch back and forth using inflation indicators that are deceptive. Include food, energy or exclude which ever is trending lower.
However, if they let inflation get out of control it will destroy the whole economy including the banks as I have seen in other countries and the citizens will get upset. This quiet theft of citizens assets can become public and unstable as people discover how the central bank is stealing value to help the political rulers.
"The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal."
But how do they make sure that the Treasury can market its debt? By hitting a target for inflation, unemployment, nominal GDP but mostly inflation.
If and when the debt reaches a point buyers are unwilling to take the lending risk, everything changes. We aren't yet at that point.
What are Arnold Kling’s biggest contributions to the world of ideas?
1. Style - His style in short blog posts, book reviews and sharing links. That style is humble, concise, both thoughtful and thought provoking, and does much to encourage reading about important and advantageous ideas.
2. Virtue - His style is also one of leadership through virtue. That style and his best ideas - FITs, the Essay Grader, Three Languages, the NBU - all share in the theme of modeling and promoting virtue.
Where does his style and virtue come from? Maybe, much of it comes from the practices and doctrine of Judaism, The Old Testament, through his family and culture.
“The four main human virtues as defined by Plato are prudence, justice, courage, and self-control. These are the so-called cardinal virtues, from the Latin word cardo, or ‘hinge.’ These are the virtues upon which all other human virtues hinge. Each of the non-cardinal virtues is bound up in and depends on one of the cardinal virtues.
“In the Book of Wisdom, we read: ‘Wisdom teaches self-control and prudence, justice and courage, and nothing in life is more useful than these.’ That the Old Testament mentions the four cardinal virtues shows that the Jews valued the wisdom of the ancient Greeks.”
“Virtues are dynamic forces—witness the word's Latin root, virtus, meaning ‘strength’ or ‘power.’ Each, when practiced habitually, progressively enhances one's capacity to act.”
Excerpts from the book Virtuous Leadership: An Agenda for Personal Excellence by Alexandre Havard.
+2, for style and virtue.
Related to both is Arnold’s respectful disagreement, when he disagrees with anybody.
"The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal."
As Treasury offerings have grown to exceed the savings available for investment in them at low interest, the Fed's portfolio has swollen to immense proportions. So I would add that the Fed's job now further extends to monetizing the deficit. In this scenario, the banks (primary dealers) function is to perpetuate the illusion that there is an functioning market for Treasuries at those interest rates.
If a bank lent someone money to buy a house at 3% over 30 years in 2021, that's worth about 3X% face value today.
That seems like a pretty big deal. Maybe rate will come down and lessen that hit, but who knows.
Whether you recognize it up front or earn below market returns for thirty years, somebody is holding the bag on that.
Monthly PITI at 3% is very roughly 50 basis points of house price. At 7% it's more like 75bp. Hold "amount one can afford to and will pay towards a mortgage" constant and the price affordable declines about a third, and the market value of the debt loses even more. Hard to say how it's going to shake out except some chickens are going to be coming home to roost.
Australia separates financial regulation and central banking.
https://en.wikipedia.org/wiki/Australian_Prudential_Regulation_Authority
Possibly, the flatness of the Oz business cycle from 1992 to 2020 might have something to do with a more focused central bank. We had no GFC or Great Recession.
So for the economic amateur who knows enough to be dangerous, what are the major implications of this primary role of the Central Banks? It would seem to me that this would set up a vicious cycle where a central bank would have tremendous forces against ever reaching the proper interest rate equilibrium that crowds out consumer and business savings and investment in favor of governments, which misallocate uses of funds for its own political ends.
Just this morning I heard a reference to the civilization versus barbarism Kling concept in an EconTalk podcast related to the Israel and Hamas. Combined with the Progressive "Oppressed/Oppressor" and libertarian "state coercion/individual": a powerful framework that one can use for a lifetime to describe perspectives. Book ordered.
I indeed hold this cynical view, which is that the goal of financial regulation is to allocate capital to the government's preferred uses, including funding its own deficits.
I'm kind of surprised you made a statement like this. We could discuss the preferred uses (the list is long and varies for many reasons, including whatever might be perceived as the biggest scare of the moment) but it seems more straight forward to discuss who it is that holds these preferences - politicians? Republicans? Democrats? Lobbyists? The Fed? President/Treasury?Which of these groups is "the government"?
I get that sometimes the Fed might be inclined to aid incumbents, especially the President when an election is approaching but I still don't see the Fed wanting quite the same. I don't really remember before Volker but I don't really see him or Greenspan doing anything but what they thought best for the economy as a whole. Maybe Bernanke, Yellen, or Powell are different but I wouldn't want to make that judgment. Maybe I just don't know or maybe more time needs to pass first.
Full monetization of government debt is always going to be the end state.
My guess is more like a gradual, rolling monetization at just below the level that would provoke a major crisis. At least for a few years until the crisis can no longer be delayed.
Indeed. In the USA this pain point is probably around 3-3.5% inflation, which is what was seemingly achieved by the Fed hiking rates to around 5.5%. The 5.5% rate seemed to be closing in on the limit for Fed though as there were clearly cracks appearing: banks and insurance cos (SV bank etc), housing (the existing housing supply is frozen by locked in low rate mortgages), and the increased costs of servicing and rolling Treasury debt (now $1T p.a.) was becoming noticeable (but not precipitating major fiscal cutting), with the TY market having the odd hiccup.
However, the tipping point is fragile and temporary -- if inflation persists at 3%+ level, rates cannot come down and TY placement and rollover will become a major problem. If they come down temporarily, congress+Krugman crowd will probably just crow and spend the "interest rate decrease dividend" and blow whatever buffer saved the US this time round. And a future recession will open the spending flood gates, again if the Fed drops rates in response, following which the Fed will be unable to lift rates high in the future. As Arnold would say: have a nice day.
I would hope Arnold or someone can apply the Ferguson framework to Turkey and Japan and some other cases, esp how they dealt with recent inflation. Japan had to deal with a much higher debt:GDP ratio, but appears it has a domestic savings base and quiescent population and a persistent deflation problem which probably allowed it to save itself from inflation with a low nominal JCB rate (??). Turkey went for high inflation; seemed they intended to inflate debt away faster than they created it, but also not clear why the population did not revolt -- perhaps those capable of leading the revolt have their financial assets in or could function using Euros?
We will get an important data point on how far the Fed gets with the current reduction of its balance sheet.
Don't forget their main purpose, make the rich richer and the poor poorer.
1. Cause massive inflation
2. Lie about it pretending it's much lower
3. Rinse and repeat
Note their were virtually no recessions and no inflation before the Fed.
There were plenty of recessions and depressions before the Fed.
But not, for better or worse, perpetual inflation, because offset by deflations. Before the 20th century the real purchasing power of a dollar was pretty close to what it had been when the constitution was ratified. Compare than to losing 90% over just the last 60 years.
Local events on a much smaller scale occurred before the Fed, now we have inflation impoverishing everyone worldwide. Who benefits from inflation? Anyone with significant assetts ie the rich. Who does it fleece? The poor of course, rinse and repeat.
Certainly half wrong, the poor are also getting richer.
The problem I see is that the poor get richer slowly, like 1% py, the rich more like at 4% py.
So the relative difference gets bigger.
So I do half agree, that the Fed makes the rich richer faster than without the Fed.
In certain countries I agree, billions have been lifted out of poverty. In the US a tradesman works just as hard as 50 years ago but is now struggling to survive and used to support the whole family on one wage. The working and middle classes have got poorer for the last 50 years while the 0.1% have stolen all the productivity gains and then some.
I'm not saying you are wrong but you are definitely swimming upstream. I don't know Kling's position but all the "renowned" economists I know of, including both conservative and liberal leaning, and libertarian Russ Roberts, agree that official measurements over-estimate inflation.
Renowned economists are simply spouting banking propaganda. By constantly under reporting inflation you constantly over report GDP "growth" which does not exist. For the real data you need to see Shadowstats.
More here; https://truthaddict.substack.com/p/mainstream-economics-is-now-100-propaganda
stu
just now
"Renowned economists are simply spouting banking propaganda.“
Whether they are right or wrong, I can only think of one other past comment on all of Kling's substack that was this absurd. Clearly you have no clue how they formed their opinions. Believe want you want.
Economics is corrupted pseudoscience in the main, Bill Bonner, Jim Rickards and Naomi Prince are the only ones worth listening to. I know exactly how most "economists" form their opinions and they think what they are paid to think.
The Fed’s real purpose is to save the wealth of the human owners of the Big Banks, mostly the rich. They allow the rich to privatize profits made by risky investments, the profits of which are a reasonable measure of the increase in wealth. Yet the Fed joins in the process of socializing the occasional losses when there is massive mal-investment which would lead to massive losses to the rich without the Fed’s action.
Those investments by the rich have been leading to increases in wealth and health, tho not so much relative status, still stuck at a max of 100% available. And thus a smaller increase in happiness than wealth.
When the US deficit, and debt, get “too big”, it will be shown by some massive financial catastrophe. Or worse, in war with people being killed. This dystopia is highly uncertain, tho the Financial Crisis is less likely than war with China in 2024.
I've not read the Niall Ferguson book, but maybe he addresses this, but it seems like Bagehot's Lombard Street pretty much set up this arrangement. He mentions the two pockets and the limits on the Bank of England's ability to issue new cash to cover government borrowing. I mention this because Bagehot supposedly wrote the book as a defense of Peel's Banking Act of 1844 which gave the Bank of England a monopoly on issuing currency notes and prohibited other banks from issuing their own circulating currencies as had been the practice. This seems of interest, because as I understand it, in Argentina, Milei is repealing the Peel-like system, essentially erasing "This Note Good for all Debts" language on the peso, and allowing parties to denominate transactions in whatever currency they choose. In American history, the ability of the 13 colonies to force creditors to accept payment in their own currencies was one of the grievances of the wealthy creditors that led to the coup against the Articles of Confederation. Were currency issuance and freedom of currency transaction denomination choice to be instituted, would government spending be constrained?
Alternately, I am reminded of Antonio Salazar, the Portuguese dictator and celebrated economics professor, who was coaxed into leaving academia to accept the Minister of Finance position on the condition that he have unlimited veto power over spending throughout all of the government. Portugal at the time was in precarious financial position and unable to borrow on its own credit. As minister, Salazar cut spending widely and produced a budget surplus during his first year as well as in subsequent years. Perhaps another of Dr. Kling's popular ideas. the Chief Operating Officer position, should be imbued with a similar raw, arbitrary power to cut federal agency budgets.
You didn't mention that the central bank has a major role in writing down government debt by decreasing the value of money with "inflation". You seldom even see the term "real interest rate" being used any more, as they switch back and forth using inflation indicators that are deceptive. Include food, energy or exclude which ever is trending lower.
However, if they let inflation get out of control it will destroy the whole economy including the banks as I have seen in other countries and the citizens will get upset. This quiet theft of citizens assets can become public and unstable as people discover how the central bank is stealing value to help the political rulers.
"The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal."
But how do they make sure that the Treasury can market its debt? By hitting a target for inflation, unemployment, nominal GDP but mostly inflation.
If and when the debt reaches a point buyers are unwilling to take the lending risk, everything changes. We aren't yet at that point.
So does mainstream economic theory say subsidize supply, restrict demand? What does Kling add?
What would be the best way to reform the Fed? Abolition? Privatization? More narrow focus and more limited authorities?
Any thoughts, Arnold? Would somethin like the Australian way referenced by Lorenzo Warby earlier be an improvement?