Macro Lit Review 3: Highlights from Early 2023 with George Selgin

Episode Summary

Executive Summary: David Beckworth and George Selgin discuss three current debates: how to interpret 2008 money-market fund runs, the fiscal and institutional costs of the Fed’s floor system and quantitative tightening, and the growing erosion of monetary-fiscal boundaries. They also assess secular stagnation claims, the Phillips curve debate, and the likelihood of a Brazil-Argentina common currency, generally favoring careful institutional design and skepticism toward simplistic narratives.

Main Topics: Money market funds, shadow banking, and the 2008 crisis (Priority: 5/5): Selgin reviews Norbert Michel’s book arguing that money-market fund outflows in 2008 were not mainly panic contagion, but often rational, discriminating withdrawals tied to fund risk and broader market conditions. He argues the crisis was not uniquely a shadow-banking failure and that reforms may have reduced useful commercial paper funding. Fed balance sheet, floor systems, and fiscal costs (Priority: 5/5): Beckworth and Selgin discuss Governor Chris Waller’s comments that QT can continue even if rates are cut, and contrast this with the fiscal losses central banks face under large balance sheets and high rates. Selgin argues floor systems are a major policy mistake and that a corridor system would better force balance-sheet normalization. Monetary-fiscal boundary and executive power (Priority: 4/5): Selgin discusses Christina Skinner’s forthcoming paper on how Congress has ceded monetary and fiscal authority to the executive branch, especially since the 1930s. He warns that Fed/Treasury emergency programs and asset purchases bypass appropriations and weaken constitutional checks. Secular stagnation and low real rates (Priority: 4/5): Beckworth cites Olivier Blanchard’s argument that secular stagnation and low real rates will persist; Selgin responds skeptically, noting historical overstated stagnation claims and pointing to uncertainty around productivity, demographics, and future innovation. He prefers flexible nominal-income-style thinking over permanently raising inflation targets. Phillips curve, inflation, and soft landings (Priority: 4/5): Selgin critiques Phillips-curve framing as misleading causality. He argues inflation and unemployment are both outcomes of aggregate-demand restraint, not direct cause-and-effect, so central bankers are not necessarily 'trying to cause a recession' when fighting inflation. Brazil-Argentina common currency proposal (Priority: 3/5): They debate reports that Brazil and Argentina may prepare a common currency. Selgin is skeptical, citing asymmetric credibility, Argentina’s inflation and debt problems, and the lack of optimal-currency-area conditions such as synchronized cycles, labor mobility, or fiscal transfers.

Key Arguments: Money-market fund runs in 2008 were not necessarily contagious panics; withdrawals appear discriminating and often rational given fund-specific risk and alternative investment choices. The standard 'shadow banking caused the crisis' narrative overstates shadow-banking responsibility and underplays the role of conventional banks and securitization. Reforms aimed at preventing contagion may have had unintended costs, including reduced prime money-market-fund support for the commercial paper market. High-rate environments expose the fiscal costs of large central-bank balance sheets, making floor/ample-reserve systems especially problematic. Arguments for quantitative easing do not imply support for a permanent floor system; corridor systems can accommodate QE when the zero lower bound binds and force QT afterward. Emergency Fed/Treasury interventions and large-scale asset purchases blur the constitutional line between monetary policy and fiscal appropriations. Historical and current evidence does not justify strong confidence in permanent secular stagnation; productivity and global conditions can change. Inflation is better understood through aggregate-demand restraint than through a simplistic Phillips-curve story of policymakers deliberately causing unemployment. A Brazil-Argentina common currency would likely help Argentina more than Brazil and lacks the institutional preconditions for a stable currency union. Argentina’s inflation and fiscal weakness make it a poor partner for currency integration without deeper institutional reform.

Data Points: Fed balance sheet losses (policy brief estimate): close to $1 trillion over the next decade - Referenced in discussion of losses from the Fed’s large balance sheet and higher interest rates Fed losses annualized estimate: $800–900 billion every year - Beckworth’s paraphrase of expected losses as rates rise and losses materialize Swiss National Bank loss: largest so far among advanced central banks - Used as an example of the global scale of central-bank balance-sheet losses UK Treasury support to Bank of England: explicit transfers back to the Bank of England - Contrasted with the Fed’s deferred-asset accounting approach U.S. 10-year nominal government bond rate: 3.4% - Blanchard’s secular-stagnation discussion using current U.S. rates U.S. 10-year inflation forecast (CBO): 2.4% - Used to infer a 10-year real rate in Blanchard’s argument U.S. 10-year real rate implied by CBO forecast: 1.0% - Calculated from nominal bond rate minus forecast inflation U.S. 10-year CBO growth forecast: 1.7% - Used to imply R minus G remains negative U.S. implied R minus G (CBO): -0.7% - Blanchard’s estimate that real rates remain below growth Japan implied R minus G: -1.3% - Blanchard’s cross-country comparison Eurozone implied R minus G: -1.2% - Blanchard’s cross-country comparison Fed long-run forecast R minus G: -1.3% - Blanchard’s use of the Fed’s own long-run projections Argentina annual inflation rate: approaching 100% - Used to illustrate why Argentina might seek a new currency arrangement Argentina IMF debt: more than $40 billion - Reported outstanding obligations tied to the 2018 bailout Brazil-Argentina common currency timeline: could take 30 years - The FT article notes the plan would be a long preparatory process

Pivotal Quotes: "How bad does the news have to get about the floor system before people start admitting that it's been a big mistake?" — George Selgin: Selgin’s critique of reserve-floor operating systems and the fiscal losses they create "Arguments for QE are not arguments for a floor system." — George Selgin: Selgin distinguishes emergency QE from a permanent ample-reserve framework "The decline in inflation and the increase in unemployment are both consequences of a common cause of reduced growth of aggregate demand. They aren't cause and effect." — George Selgin: His critique of simplistic Phillips-curve reasoning during the inflation discussion

Implications: Listeners should expect continued debate over central-bank operating frameworks, with stronger scrutiny of balance-sheet costs, fiscal entanglement, and crisis narratives. The episode also warns against overconfidence in permanent low-rate or currency-union assumptions.