Family’s away, can’t do yard work given the rain (well, could do some, but don’t want to), so better to sit on the back porch with an intravenous coffee feed and blog the weekend papers…right?
More on Skittish Markets: Check out the figures in this piece on another dimension of skittish markets as per my commentary earlier in the week: tanking bond prices. As bond yields begin to rise—because the must, they should, and they will—their price moves inversely. But it’s striking how sharply they’ve turned.
The broader economic lesson here is one of my favorites because it’s one of the most interesting aspects of relationships between economic variables: non-stable elasticities.
Economists often cite elasticities–how one variable moves relative to another–as if they’re etched in stone: an A% increase in unemployment leads to a B% decrease in inflation; an X% increase in the minimum wage leads to a Y% change in employment (with “Y” tiny, but that’s another story); a R% increase in bond yields triggers an S% decline in bond prices. But B, Y, and S are not fixed! The change with underlying conditions, demographics, policy, and more.
The large elasticity documented in the article—the movement in bond prices with respect their yields—is especially large at turning points, and is even further amped up by the length of time that bond rates have been so historically low.
So I humbly submit that you keep this lesson in mind: if a price or an interest rate or some other important economic variable has been where it is for a long time—and in financial markets a long time isn’t necessarily that long—and it starts to change course, or even people think it’s about to change course, be prepared for a much larger response in related variables than you were expecting.
We (really don’t) welcome this debate!: I don’t like to stray too far from my econo-lane here at OTE and I’m still trying to sort out the NSA phone-record issues that have dominated the press in recent days. As the President stressed yesterday, there’s a privacy/safety tradeoff here, but they can’t say much about it because it’s all secret–that may be true but it’s inherently confusing. In a similar vein, the growing magnitude of the NSA’s capacity in this space could lead you to feel safer re terror or more worried about its impact. One thing you can be certain of is that size in these matters is inversely correlated with ability to manage and control the mission.
But there’s one piece of hypocrisy that unequivocally pissed me off yesterday and I see Gail Collins has it today:
“I welcome this debate,” Obama said Friday. “I think it’s healthy for our democracy.” Under further questioning, he said that he definitely didn’t welcome the leaks. Without which, of course, there would be no debate.
I get the spin, but come on. I’m not saying it’s easy or even possible to engage the “American people”—all 310 million of us, in a national debate about this privacy/safety tradeoff. But that is the way to proceed in a democracy. If you can even get a partial buy-in from the majority before you undertake stuff like this, you can avoid the bad headlines and more importantly, loss of trust.