Must-Read: Every member of the FOMC needs to read this carefully, and either agree with it or lay out an analytical case for why David Beckworth is wrong:

David Beckworth: The Fed is Trapped in a Rate Hike Talk Cycle:

Since mid-2014 the Fed has been talking up interest rate hikes… but only has a 25 basis point rate increase to show for it….

The Fed’s plans… bump up against unexpected economic developments… in a cycle that goes as follows: the Fed talks up interest rate hikes → bad economic news emerges → the Fed dials down its rate hike talk → good economic news emerges → repeat cycle….

Recall… this year. After the FOMC did its 25 basis point hike in December 2015, FOMC members were talking up four more rate hikes in 2016…. Concerns… about financial stress… dial back… incoming economic data was improving so… a rate hike at the June FOMC seemed possible. The rate hike rhetoric quickly changed, however, when the the awful May jobs report… Brexit….

Now the cycle is starting over. The gangbuster June employment report and strong retail sales… officials… increasingly “confident” they can raise rates in September…. It is almost inevitable, in my view, that this cycle will repeat…. First, much of the bad economic news that has caused the Fed to repeatedly dial back its rate hike talk has… been a byproduct of the rate hike rhetoric itself. Whenever the Fed talks up rate hikes it also talking up the value of the dollar which, in turn, creates a drag… because a large swath of the global economy has its currency linked to the dollar and because there is almost $10 trillion in dollar denominated debt issued outside the United States….

The second reason is that the Fed’s desire to raise interest rates is pushing up against the Tsunami forces behind the global race to the bottom of safe asset yields…. This downward march of interest rates has occurred prior to and after QE programs… is the result of far bigger global market forces…. As Tim Duy notes, the Fed is fighting against this force and is unlikely to win…. Interest rates are being suppressed by market forces despite the Fed’s best efforts. The Fed will not be able to raise interest rates this year and maybe even next year.

Now the Fed could still force up its target interest rate temporarily. But it would learn the hard way what the Riksbank in 2010 and the ECB in 2011 learned: getting ahead of the recovery and market forces will only make matters worse. In the case of the ECB… another recession for the Eurozone. Ultimately, interest rates cannot be exogenously pushed up. They have to be endogenously pulled up by a healthy economy. Until this happens, the Fed is trapped in a self-defeating rate hike talk cycle.

Ben Thompson: Beyond the iPhone:

At first glance, as Manjoo noted, the iPhone 7… is mostly the same as the two-year-old iPhone 6….

Probably. I have been and remain relatively pessimistic about this iPhone cycle. However, I was actually very impressed by what Apple introduced… laid the foundation for both future iPhone features and, more importantly, a future beyond the iPhone…. The annual camera upgrade is always one of the best reasons to upgrade…. Bokeh, though, is only the tip of the iceberg: what Apple didn’t say was that they may be releasing the first mass-market virtual reality camera…. Apple hasn’t released a headset… but when and if they do, the ecosystem will already have been primed, and you can bet FaceTime VR would be an iPhone seller. Apple’s willingness and patience to lay the groundwork for new features over multiple generations remains one of its most impressive qualities. Apple Pay, for example….

Apple executives told BuzzFeed that removing the headphone jack made it possible to bring that image stabilization to the smaller iPhone 7, gave room for a bigger battery, and eliminated a trouble-spot when it came to making the iPhone 7 water-resistant. It’s a solid argument, albeit one not quite worth Schiller’s hubris. That said… Apple’s vision… is such a big deal for Apple in particular that I just might be willing to give Schiller a pass…. Putting aside the possibility of losing the AirPods… it really looks like Apple is on to something compelling. By ladling a bit of “special sauce” on top of the Bluetooth protocol, Apple has made the painful process of pairing as simple as pushing a button. Even more impressive is that said pairing information immediately propagates…. I can absolutely vouch for Apple’s insistence that there is a better way than wires, and the innovations introduced by the AirPod (which are also coming to Beats) help the headphone jack medicine go down just a bit more easily.

What is most intriguing, though, is that “truly wireless future”…. To Apple’s credit they are, with the creation of AirPods, laying the foundation for a world beyond the iPhone… a world that Apple, thanks to said product expertise, especially when it comes to chips, is uniquely equipped to create. That the company is running towards it is both wise–the sooner they get there, the longer they have to iterate and improve and hold off competitors–and also, yes, courageous. The easy thing would be to fight to keep us in a world where phones are all that matters, even if, in the long run, that would only defer the end of Apple’s dominance.

Must-Read: Diligently and industriously study the Thought of Nick Rowe to understand the qualitative microfoundations of recessions in a monetary economy!

There can be excess demand for all kinds of things–kumquats, Mona Lisas, experiences of the ineffable, savings vehicles, stocks of safe assets, cash–*but unless the excess demand spills over into an excess demand for cash there will not be a recession. The difference between an excess demand for Mona Lisas or kumquats on the one hand and an excess demand for savings vehicles and safe assets on the other is that cash can be–and in some recessions is–pressed into service as a savings vehicle or a safe asset, and thus the initial excess demand propagates itself into an excess demand for cash:

Nick Rowe: Money Stocks and Flows:

Those… differences between money and all other assets means that it is misleading to think of the demand for money, like the demand for other assets, in terms of portfolio choice….

Money is not just a medium of account…. Money is the medium of exchange, which means it flows around the economy whenever anything else is traded…. It matters a lot whether individuals want to save in the form of money or want to save any other non-money asset. If individuals want to save in the form of land, they won’t collectively be able to if the stock of land does not increase. There will be an excess demand for land in the land market, if the price of land does not rise to dissuade that desire to save. There is nothing an individual can do if he wants to buy more land but nobody else wants to sell.

If individuals want to save in the form of money, they won’t collectively be able to if the stock of money does not increase. There will be an excess demand for money in all the money markets, except those where the price of the non-money thing traded in that market is flexible and adjusts to clear that market. In the sticky-price markets there will be nothing an individual can do if he wants to buy more money but nobody else wants to sell more. But… any individual can always sell less money…. Nobody can stop you selling less money…. Unable to increase the flow of money into their portfolios, each individual reduces the flow of money out of his portfolio. Demand falls in sticky-price markets, quantity traded is determined by the short side of the market (Q=min{Qd,Qs}), so trade falls, and some trades that would be mutually advantageous in a barter or Walsrasian economy even at those sticky prices don’t get made, and there’s a recession…. There’s now a stock-flow consistency, of sorts. But it’s a rather ugly one. We call it a recession.

Must-Read: Duncan Black: Mismatch:

One of the phenomenon studied due to the suburbanization of employment was spatial mismatch…

…that there was a mismatch between where people lived and where jobs they were qualified to get were located. Roughly, for various reasons, less educated people lived in cities, without cars, and the jobs they would be able to get were in the suburbs, requiring either a car they didn’t have or a nightmarish public transit commute to places with horrible public transit.(It was more complicated than this, of course, with enforced residential segregation and other types of racial discrimination having a large impact on location patterns).

As poverty moves to the suburbs, people are going to be in worst-of-both-worlds territory. They’ll need a car for jobs, and for everything else, and cars are expensive things. And while there is no secret welfare system, it is the case that there are often more readily available social services and similar support systems – private and public – in some urban areas.

Must-Read: Mark Thoma: Labor Compensation and Labor Productivity:

Just a quick reminder:

More here: Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend, B. Ravikumar and Lin Shao, St. Louis Fed

Must Read: Note the difference between wealth inequality and income inequality. Lowering interest rates raises wealth inequality (by boosting the value of old capital) and lowers income inequality (by reducing the rate of return earned on new capital). Cf: John Maynard Keynes, “euthanasia of the rentier*…

Dietrich Domanski et al.: Wealth Inequality and Monetary Policy:

Explor[ing] the recent evolution of household wealth inequality in advanced economies by looking at valuation effects on household assets and liabilities….

Using household survey data, we analyse the possible drivers of wealth inequality and the potential effect of monetary policy through its impact on interest rates and asset prices. Our simulation suggests that wealth inequality has risen since the Great Financial Crisis. While low interest rates and rising bond prices have had a negligible impact on wealth inequality, rising equity prices have been a key driver of inequality. A recovery in house prices has only partly offset this effect. Abstracting from general equilibrium effects on savings, borrowing and human wealth, this suggests that monetary policy may have added to inequality to the extent that it has boosted equity prices.

Must-Read: My late friend Susan Rasky was, in general, annoyed at William Grieder.

You see, she was covering Stockman and the budget in the New York Times in 1981. She was trying to tell as it happened the same story about David Stockman and his budget that William Grieder was going to tell in the Atlantic Monthly piece he published at the very end of the year.

But, she told me, she got substantial pushback from her New York Times editors, which hobbled her. Why? In part because the Washington Post reporters–being supervised by Grieder–were telling a very different story. And her editors said that if she were right the Post would be on board as well. Grieder, she thought, might not only have been keeping his own material from the reporters he supervised, but also may have been steering the reporters he supervised away from the real story–he certainly wasn’t dropping them any hints, and wasn’t doing them any favors as they tried to cover a complex situation–the real story that Grieder was saving for the Atlantic, and that Rasky was trying to tell as it was happening:

William Grieder (1981): The Education of David Stockman:

As budget director, [Stockman] intended to proceed against many of the programs…

…that fed money to the poor blacks of Benton Harbor, morally confident because he knew from personal observation that the federal revitalization money did not deliver what such programs promised. But he would also go after the Economic Development Administration (EDA) grants for the comfortable towns and the Farmers Home Administration loans for communities that could pay for their own sewers and the subsidized credit for farmers and business–the federal guarantees for economic interests that ought to take their own risks. He was confident of his theory, because, in terms of the Michigan countryside where he grew up, he saw it as equitable and fundamentally moral:

We are interested in curtailing weak claims rather than weak clients. The fear of the liberal remnant is that we will only attack weak clients. We have to show that we are willing to attack powerful clients with weak claims. I think that’s critical to our success—both political and economic success….

No President had balanced the budget in the past twelve years. Still, Stockman thought it could be done, by 1984, if the Reagan Administration adhered to the principle of equity, cutting weak claims, not merely weak clients, and if it shocked the system sufficiently to create a new political climate. He still believed that it was not a question of numbers. “It boils down to a political question, not of budget policy or economic policy, but whether we can change the habits of the political system.”…

This process of trading, vote by vote, injured Stockman in more profound ways, beyond the care or cautions of his fellow politicians. It was undermining his original moral premise—the idea that honest free-market conservatism could unshackle the government from the costly claims of interest-group politics in a way that was fair to both the weak and the strong. To reject weak claims from powerful clients–that was the intellectual credo that allowed him to hack away so confidently at wasteful social programs, believing that he was being equally tough-minded on the wasteful business subsidies. Now, as the final balance was being struck, he was forced to concede in private that the claim of equity in shrinking the government was significantly compromised if not obliterated…

Must-Read: An answer to a question from Robert Waldmann. Milton Friedman rejects rational expectations, seeing instead “quinquennia or decades” before “the public… [will have] adapted its attitudes or its institutions to a new monetary environment…”:

Milton Friedman (1976): Inflation and Unemployment:

A major factor in some countries and a contributing factor in others may be that they are in a transitional period…

…this time to be measured by quinquennia or decades not years. The public has not adapted its attitudes or its institutions to a new monetary environment. Inflation tends not only to be higher but also increasingly volatile and to be accompanied by widening government intervention into the setting of prices. The growing volatility of inflation and the growing departure of relative prices from the values that market forces alone would set combine to render the economic system less efficient, to introduce frictions in all markets, and, very likely, to raise the recorded rate of unemployment. On this analysis, the present situation cannot last. It will either degenerate into hyperinflation and radical change; or institutions will adjust to a situation of chronic inflation; or governments will adopt policies that will produce a low rate of inflation and less government intervention into the fixing of prices…