Friday, August 19, 2016

Focusing On Our Economic Breath

I've noticed that I get far fewer blog hits and retweets on posts about monetary policy. I don't take that personally at all. Much of the purpose of this blog is to figure stuff out for myself, and writing helps that process. But it's an interesting observation all the same, and I have a few theories why it might be true:

1) I'm a better writer on investing.
2) The self-selecting group that reads my blog is generally less interested in monetary policy.
3) I mostly focus on US monetary policy. Perhaps European and Asian readers are still as engaged.
4) There's monetary policy fatigue. After 8 years of headline-grabbing central bank actions, people are finally getting bored of hearing about policy changes. It's way more entertaining to read about outrageous things Donald Trump has said than to scrutinize cautious central bankers.
5) People are less interested in reading about monetary policy today because they believe it's a less important driver of economic and financial outcomes.

The reality is probably a mixture of these five possibilities. If theories (4) and (5) are true, other bloggers who focus primarily on monetary policy may also be seeing similar trends. You might think that would be reassuring, because it wouldn't be about my failings as a writer; it would merely be an exogenous change in demand for commentary on monetary policy. But you'd be wrong. I'd be incredibly worried if those two were the major factors. Every time someone comments that monetary policy has lost its power to affect macro or financial conditions, I get nervous. It's precisely when monetary policy is working well that we fail to notice it. Complacency is natural as labour markets heal and US financial markets march steadily higher. But it is incredibly dangerous for investors and policy-makers to forget the role that money plays. 

If you've spent any time with mindfulness or meditation practices, you'll know that a common starting point is to focus on the breath. It's actually pretty remarkable to realize how little attention we pay to the mechanism that keeps us alive. Similarly, appropriate monetary policy is the oft-neglected factor that allows policy-makers and investors to focus on structural, rather than cyclical, change. But there's one huge problem with this analogy: when we have trouble breathing, we know immediately that we're short of breath. But when monetary factors are out of equilibrium, we see the effects but aren't always quite as adept at diagnosing the cause. Economic mindfulness requires focusing on money, our economic breath. I'm hoping that the events of the past 8 years have created new economic pulmonologists - but sometimes, I'm just not sure.

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