Welcome to Known Unknowns, a newsletter about what keeps us safe—and how to keep it that way.
Yes, institutions are holding
Americans—actually, everyone all over the world, it seems—are unhappy. We’ve just experienced months of shutdowns that curtailed our lives and put many of our basic freedoms on hold. We were fed confusing, contradictory information, and the government bungled many aspects of the pandemic. I think that as time goes on, and we learn more, we’ll be even more outraged about what has happened. I hope we’ll be somewhat charitable and remember the chaos and uncertainty, which meant that no government response would have been perfect—except maybe that of Iceland.
So perhaps it’s not surprising, after months of isolation and fear—which made people a little loopy, angry, confused, and distrustful of the institutions that were supposed to protect us—that we are lashing out at long-standing inequities that our institutions have perpetuated, or even started in the first place.
And yet, I am still feeling optimistic, and even grateful. The Financial Times recently published a great story about what’s happening in Lebanon. What was once the middle class is now in poverty, inflation and shutdowns have decimated life savings and pensions, and there’s a weak safety net. Reading about it, I realized how lucky we are to have the institutions that we do. As crazy as things are—and they are crazier than they’ve ever been—I don’t worry that my bank account will be wiped out, that trash won’t be collected (at some point), that trains will stop running, that there will be threats to my personal safety, or the economy will stop functioning—even at a reduced capacity.
We have an independent central bank; we have a stable, accountable government (even if you don't like the party in power); and even as we question the role of FDA, the CDC, and law enforcement, we don’t doubt that they will continue to exist in some form. They are strong enough that they can criticized, and then reformed—for the better, we hope.
The test of an institution isn’t how it performs in good times; rather, it is resilience that counts, and whether or not it can evolve when we need it to. And, believe it or not, I think that our institutions have held up—even if they are currently somewhat diminished. And many people in developing countries don’t have that security.
Yield curve control
But that doesn’t mean we should take our institutions for granted. Their credibility took a big hit during this crisis, and for them to continue into the future, they must redeem themselves. And this has gotten me thinking about the possibility of yield curve control. The Fed, as an institution, has held up well over the past few months, and it may be the only institution that has come out of all of this with a better reputation than it had at the start. And, as we can see from the example of Lebanon, we should be very, very grateful for that.
And this is why I’m skeptical about the Fed controlling the yield curve. It is considering doing so, though Jay Powell said not too seriously yet. Now, I’m not saying that it’s a slippery slope toward hyperinflation. But the Fed has power because people believe that it can influence the path of the economy, even if we all really know that it doesn’t actually have much impact on the real economy.
What worries me about yield curve control is that I’m not convinced that the Fed can actually control it. Before the financial crisis, empirical evidence suggested that the Fed’s policy didn’t have that much influence on long-dated securities. Of course, then they only bought short-term bills, so this was simply a rejection of the expectations hypothesis—which everyone (except for people on economics Twitter, it seems) knew never held up. But what about when the Fed actually buys long-term bonds? The evidence that QE had that much impact on the long end of the curve is pretty iffy, and if it did work, it was mainly through the expectations channel.
I suppose that if the Fed buys lots and lots of bonds, then maybe it would accomplish something. But then, monetizing debit becomes an explicit and long-term policy—and for what? Through what channels does yield curve control impact economic variables, and what variables is it even supposed to impact?
I think that before the Fed undertakes a new policy, it needs to ask the questions of whether or not we can actually do this, and what exactly it will achieve. Otherwise, they lose credibility, and credibility is what gives the institution its power.
I’m sharing a chart that I made with us Pension Geeks in mind. A lot of us went into the pandemic a little more aware of the effects of 1918 than most people, just because we spend so much time looking at historical mortality data. Here is life-expectancy for different ages over time (years of life expectancy is on the y-axis and each line is a different age).
As you can see, there is a dip downward in 1918 for people under 30, but no change, or a slight increase in life expectancy, for people over 60, which is the opposite of the virus we are dealing with today. This reminds us how little 1918 actually tells us about what’s happening now. A virus that kills young people has very different implications for the economy and for society as a whole, and even how successive waves of infections will play out. We’ll probably see drops in life-expectancy for older people this time, and we may even see increases for young people if they drove less during lockdown, for example.
It’s also remarkable how much we’ve changed from back then. They never even pondered a global economic shutdown—in some places, a total shutdown—for two to three months, and this was for a virus that killed healthy people in the prime of their lives!
Society is much richer now, so we can afford to shut down—and can issue the debt that we need in order to support the economy—in a way that we simply couldn’t back then. We have a much wider safety net now. A bad recession in 1918 really could have caused more deaths than the flu itself. This whole ordeal we’ve gone through is in many ways a triumph of how wealthy we’ve become, and that has enabled us to value life in a different way.
However, the history books are still being written. Humans have lived with viruses for thousands of years, and have never responded in quite this way before. It was all a big experiment, and I wonder how it will all turn out in the end. One thing is for certain, though: we’ll find out soon enough.
Until next time, Pension Geeks!