The most recent Fed’s decision to turn policy on its head
and pursue higher inflation targets for the sake of stimulating the economy,
reminds us of a grand strategy without tactics, which simply is no strategy.
The reason for this is the fact that the Fed has no means of achieving the
gradual inflationary push that it desires (i.e. forward guidance means), unless
it resolves for a massive QE not via increases in reserves but rather via cash
infusions to the public.
With all due respect to Mr. Powell and his colleagues at the
Fed, this is pure sophist pursuits in an attempt to keep interest rate policy
at the zero level (actually negative real rates) and sustain the swollen
balance sheet of the Fed which has introduced so many economic distortions in
the form of magic money that resembles nothing but Strepsiades in the great
comedy by Aristophanes titled “The Clouds.”
The Old Athenian comedies combined burlesque shows, opera,
and a journal of opinion in such a magnificent way that they became the epitome
of social, economic, and political satire. Aristophanes wrote his comedies in a
time of crisis (Peloponnesian War). Traditional values and the way of life were
breaking down. Aristophanes thought that such radical shifts were corrupting
democracy and values in a way that the moral fabric of socioeconomic
developments was breaking down. Moreover, he needed to attack the new
“intellectualism” of the Sophists who were turning things upside down by
teaching arguments and logic that could undermine social stability and real
progress in a society where true liberty could thrive (in several of his
comedies Aristophanes made fun of Athenian political and military leaders, and
yet he was never banned or punished for those, contrary to modern “democracies”
of the Putin and Erdogan style).
In our humble understanding of things, the Fed has missed
the boat in its new policy pursuit, because in the current environment relative
prices are being distorted (e.g. used car prices are increasing while hotel and
air fares are decreasing). However, fundamentally, the Covid-19 crisis is a disinflationary phenomenon,
therefore the massive QE that has been implemented since March of this year is
an asset-inflationary push that has also distorted the equities and debt
markets, and has infused a sophist logic in the derivatives markets where
out-of-the-money options contribute to a market melt-up which by itself cannot
be justified even at the zero level interest rate environment for the next 3-5
years.
The subversive new policy by the Fed is a sophist argument
that teaches that bad is good, that white is black, and that rain reflects an
amazing sunshine (and vice versa). The protagonist in Aristophanes’ Clouds is
Strepsiades who is looking for a way to avoid paying his debts. His solution is
to enroll his son, and later himself, as a student in Phrontisterion (‘Thinking
House”) where they can learn the worse kind of unjust logic. By learning the
techniques of unjust logic, they can defend the non-payment of their debts.
Here is Sterpsiades goals:
“…appear without conscience or fear,…a concocter of lies
A shuffler complete, well worn in deceit,
A supple, unprincipled, troublesome cheat,
A hand-dog accurst, a bore with the worst,
In the tricks of the jury-courts thoroughly versed.”
All Strepsiades wants is the skills to cheat his creditors;
he has no interest (let alone respect) in harmony, justice, civility and the
law. When Strepsiades is thrown out of the School, he urges his son
Pheidippides to enroll, and at that time, Socrates leaves the young man to
choose between two Logics the Old and the New. The Old adheres to honor, truth,
modesty, temperance, respect for elders, culture, and courage. The New teaches
its followers to contradict the old rules, norms, values, and laws. The New Logic
allows the worse to be the higher calling, the right cause to pursue that will
lead to easy profits and a life of sensual pleasure. Emboldened by this New
Logic, Strepsiades refuses to pay his debts and sends his creditors packing
based on absurd technicalities. The old man is in his glory. But that glory is
short-lived, as Pheidippides (the son) beats up his father and then proceeds to
demonstrate that this is the right thing to do! The glory of corrupted minds in
all its “magnanimity!” When Pheidippides is getting ready to beat up his mother
too, Strepsiades finally realizes that he has corrupted his son in his vicious
desire to cheat his creditors.
At a time when the economies are facing challenges of a
lifetime due to the pandemic, the New Policy by the Fed resembles the New
Sophist Logic of Strepsiades and is imputing in the markets a distortive
mentality that can justify an asset price inflation concentrated in just a few
names (see previous commentaries on the issue) while at the same time the call
options bets placed in the derivatives markets may create shortages that need
to be covered and hence an upswing cycle starts that has nothing to do with
future earnings, or overcoming the pandemic, let alone companies’ fundamentals,
but is simply kicked off by a Fed that knows the price of everything but the
value of nothing.
Ode to Old Logic!
Market Melt-up and the Fed’s Magic Flute in the Courtyard of Aristophanes
Author : John E. Charalambakis
Date : September 9, 2020
The most recent Fed’s decision to turn policy on its head and pursue higher inflation targets for the sake of stimulating the economy, reminds us of a grand strategy without tactics, which simply is no strategy. The reason for this is the fact that the Fed has no means of achieving the gradual inflationary push that it desires (i.e. forward guidance means), unless it resolves for a massive QE not via increases in reserves but rather via cash infusions to the public.
With all due respect to Mr. Powell and his colleagues at the Fed, this is pure sophist pursuits in an attempt to keep interest rate policy at the zero level (actually negative real rates) and sustain the swollen balance sheet of the Fed which has introduced so many economic distortions in the form of magic money that resembles nothing but Strepsiades in the great comedy by Aristophanes titled “The Clouds.”
The Old Athenian comedies combined burlesque shows, opera, and a journal of opinion in such a magnificent way that they became the epitome of social, economic, and political satire. Aristophanes wrote his comedies in a time of crisis (Peloponnesian War). Traditional values and the way of life were breaking down. Aristophanes thought that such radical shifts were corrupting democracy and values in a way that the moral fabric of socioeconomic developments was breaking down. Moreover, he needed to attack the new “intellectualism” of the Sophists who were turning things upside down by teaching arguments and logic that could undermine social stability and real progress in a society where true liberty could thrive (in several of his comedies Aristophanes made fun of Athenian political and military leaders, and yet he was never banned or punished for those, contrary to modern “democracies” of the Putin and Erdogan style).
In our humble understanding of things, the Fed has missed the boat in its new policy pursuit, because in the current environment relative prices are being distorted (e.g. used car prices are increasing while hotel and air fares are decreasing). However, fundamentally, the Covid-19 crisis is a disinflationary phenomenon, therefore the massive QE that has been implemented since March of this year is an asset-inflationary push that has also distorted the equities and debt markets, and has infused a sophist logic in the derivatives markets where out-of-the-money options contribute to a market melt-up which by itself cannot be justified even at the zero level interest rate environment for the next 3-5 years.
The subversive new policy by the Fed is a sophist argument that teaches that bad is good, that white is black, and that rain reflects an amazing sunshine (and vice versa). The protagonist in Aristophanes’ Clouds is Strepsiades who is looking for a way to avoid paying his debts. His solution is to enroll his son, and later himself, as a student in Phrontisterion (‘Thinking House”) where they can learn the worse kind of unjust logic. By learning the techniques of unjust logic, they can defend the non-payment of their debts. Here is Sterpsiades goals:
“…appear without conscience or fear,…a concocter of lies
A shuffler complete, well worn in deceit,
A supple, unprincipled, troublesome cheat,
A hand-dog accurst, a bore with the worst,
In the tricks of the jury-courts thoroughly versed.”
All Strepsiades wants is the skills to cheat his creditors; he has no interest (let alone respect) in harmony, justice, civility and the law. When Strepsiades is thrown out of the School, he urges his son Pheidippides to enroll, and at that time, Socrates leaves the young man to choose between two Logics the Old and the New. The Old adheres to honor, truth, modesty, temperance, respect for elders, culture, and courage. The New teaches its followers to contradict the old rules, norms, values, and laws. The New Logic allows the worse to be the higher calling, the right cause to pursue that will lead to easy profits and a life of sensual pleasure. Emboldened by this New Logic, Strepsiades refuses to pay his debts and sends his creditors packing based on absurd technicalities. The old man is in his glory. But that glory is short-lived, as Pheidippides (the son) beats up his father and then proceeds to demonstrate that this is the right thing to do! The glory of corrupted minds in all its “magnanimity!” When Pheidippides is getting ready to beat up his mother too, Strepsiades finally realizes that he has corrupted his son in his vicious desire to cheat his creditors.
At a time when the economies are facing challenges of a lifetime due to the pandemic, the New Policy by the Fed resembles the New Sophist Logic of Strepsiades and is imputing in the markets a distortive mentality that can justify an asset price inflation concentrated in just a few names (see previous commentaries on the issue) while at the same time the call options bets placed in the derivatives markets may create shortages that need to be covered and hence an upswing cycle starts that has nothing to do with future earnings, or overcoming the pandemic, let alone companies’ fundamentals, but is simply kicked off by a Fed that knows the price of everything but the value of nothing.
Ode to Old Logic!