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Memo to the Fed: "Not Spending" and "Saving" are not the same!

Friday, October 14, 2016

Janet Yellen today:
We need to know more about the manner in which inflation expectations are formed and how monetary policy influences them.
OK, good start because it suggests they might be aware that there are things out there they don't know.  Her whole speech today actually hints that this is beginning to dawn on them.

Good news. So, let me offer a little help:

By 'inflation expectations', Yellen means ordinary people start believing that prices will go up soon.  The idea is that if you think that box of something is going to be more expensive tomorrow, you'll buy it today.

Now, as to how they are formed, and how monetary policy influences them: 'Saving' and 'not spending' are NOT THE SAME.  If I am 'not spending' it may be because I think prices are going to drop.  This is the opposite of the observation above: If that box of something is going to be cheaper tomorrow than today, why would I buy today?

'Saving' is different.  If I am 'saving' it could be because I am 'buying' peace of mind in case of a rainy day.  And if my savings earn me less and less (by way of interest rates), it only means that 'peace of mind' becomes more expensive.  I have to save more to 'buy' the same peace of mind I could have gotten for less if my savings earned a decent rate of interest.

I could also be saving for a couple similar reasons: If I want to save to help a child pay for college, again, I am 'buying' the ability to discharge what I might think is a parental responsibility.  The less I get on my savings, the more 'expensive' that ability becomes - because I have to make up for what I am not getting in interest by adding to my savings.  And in a sector of the economy without any 'normal' price discovery (for tuition and books), that 'ability' is outrageously more expensive than it should be.

I could be saving for retirement.  Here I'll let you in on the somewhat colorful sense of humor between me and my oldest son, who is 18.  We were talking about why paying off our mortgage is so important to me and his mom.  I buried my parents in 2010, so I have seen the care needed for a dying parent.  I was starting to explain why I wanted the house paid off as early as possible and said: "So you and your brother..."

My oldest interrupted. "...don't have to change your diaper instead of the other way around!"

We got a very good laugh out of that. (The way he actually put it was a bit more colorful.) And he was spot on the money!

So by paying off our mortgage, I am saving for my old age. I am 'buying' the peace of mind that I will not end up relying on my boys to 'change my diaper' as my time on this earth draws to a close.

This is all entirely different than 'not spending' and therefore has nothing to do with inflation expectations (save perhaps the matter of saving for college).  And it is appalling that I find myself - a charter member of the Basket of Deplorables - having to explain these things to the Chair of the Federal Reserve, for Pete's sake!

But it isn't really that surprising after all.  I look at money and see a way of measuring the output of my time and skills.  I then see it as a means by which I discharge what I believe to be responsibilities to my children.  Ms. Yellen, the Federal Open Market Committee (FOMC), and their coterie of academic economists apparently do not see money this way, but rather as a tool of the State to be used to dictate the social order.

Of course we have seen this before in King Charles I, before he triggered the English Civil Wars with his monetary impunity.  It has a lot to do with why do not have a Monarch in this country...

Or do we?

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