Welcome to another edition. Here are today’s entries:
01. The Phillps Curve’s Missing Curve
What does this show?
There is an inverse negative relationship between inflation and unemployment, except there isn’t one anymore. And maybe there never was one.
Why does it matter?
The Phillips curve shows that inflation and unemployment have an inverse relationship, in that higher inflation is associated with lower unemployment and vice versa. Except that’s mostly not true, in particular in recent years. Of late, there has been no relationship at all, which has been something of a puzzle. Where did the relationship go? Can we have whatever interest rate we want and not get inflation? Doesn’t the supply of money matter? Economists had started to wonder. It was only post-pandemic that the curve seemed to partially return, with higher inflation finally appearing, but, so far, without a sharp rise in unemployment. Like so many things in economics, the Phillips curve works terrifically in theory, but not so well in practice.
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02. Banks Have Become Weird in the U.S.
What does this show?
Many U.S. banks need more money, and they’ve been trying to avoid getting it from depositors.
Why does it matter?
Banking can be a fairly simple business. Banks accept money from others and pay interest on that money, lend money out on which they charge interest, and try to make sure what they get for their loans is more than what they pay depositors. Money that they don’t loan out is kept in safe and secure things, like government bonds & bills, which pay interest and add to bank income.
Zero interest rates messed all this up for banks. To generate interest income they had to buy long-dated treasuries, with their higher rates, but long-dated debt gets whip-sawed by rates unless you hold it until it matures. But inflation, and then rising rates to bring it under control, has made a mess of bank balance sheets. Banks’ bond holdings are getting smashed by higher rates, and depositors are going elsewhere, given that banks are trying to make money by keeping the rate spread between what they pay out in interest and what they get in interest as large as possible. This has made banks into weird entities, reluctant to provide things their customers want, which makes their customers leave, which makes them more fragile.
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03. La Nina Finally Leaves the Building
What does this show?
After three consecutive La Nina events, models say it is finally over.
Why does it matter?
While back-to-back La Nina patterns are unusual, to have three in a row is unprecedented in the modern record. It is difficult to know the relative importance of climate change in this pattern, but most studies suggest it played a role, even if uncertain how large. At the same time, there are certainly freakish and unusual patterns going on, with a new study suggesting, based on tree ring data, this year’s California snow and floods are perhaps a 1000-year event, wildly outside anything that could be expected.
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