The Fed is supposed to be independent. Sometimes it is, to a degree, and sometimes it isn’t. The current Fed is constrained by politics.

What is the worst thing in the world for the Fed?

People losing their jobs.

Yes, the Fed has a dual mandate (sadly), but over the last 20 years, we’ve seen a massive shift from the inflation side of the mandate to the employment side of the mandate. This Fed doesn’t really care about inflation, as long as people don’t lose their jobs. This will continue until the pain of inflation exceeds the pain of unemployment.

One thing about finance is that there are always precedents. If you read a little bit about the Burns/Miller Fed of the ‘70s, they were captive to the same sort of politics, and the Fed only took action once the pain of inflation was worse than the pain of unemployment.

Now, when I began my career, in the late 1990s, it was a different sort of Fed. Back then, there were discussions about whether the Fed could:

1. Spot an asset bubble, and

2. Whether it had the responsibility to pop it.

The federal funds rate rose to 6.5% by the end of 1999. At that point in history, I said, well, 6.5% in a money market account is pretty good, maybe I shouldn’t be screwing around with stocks, and I acted accordingly. The bubble popped, unemployment rose, and nobody had a problem with it.

I want to examine why at some points in history, people are okay with bad outcomes, and at other points, they aren’t. I want to examine the psychology behind this. Because it is fascinating.

It’s Not Just Economics

What else have we seen in the last 20 years? The push toward safety.

It all started with those blasted Baby on Board signs. Look, I have a child in the car, please drive carefully around me. Then everyone started wearing bicycle helmets. Seat belt compliance went to 100%. We developed this whole lexicon around safety. When the pandemic started, we told each other to be safe.

We required backup cameras on all new cars and trucks, requiring a huge capital investment on the part of automakers (and increased prices for consumers), to save a handful of lives each year. The calculus on saving lives totally changed—in the past, one would do a cost-benefit analysis, and now, any amount of money will be spent as long as it saves one life.

Of course, 9/11 happened, and we created a whole new federal bureaucracy (the Department of Homeland Security) and a smaller one within it (the Transportation Security Agency) to keep people safe. Of course, that is the ultimate expression of not allowing any bad outcomes, because if you make one mistake, it could be catastrophic.

Is this progress? Maybe. Maybe we have a greater appreciation for the sanctity of life.

We see this elsewhere, too, in the financial world. Banks no longer take risk—partly for regulatory reasons, but partly out of a desire to avoid losses. Hedge funds no longer swing for the fences. Investing in a hedge fund used to be like buying a call option; now it is like selling a call option. Outside of the basement dwellers in their gaming chairs trading GME and bitcoin, risk appetites have declined across the board.

The world we live in is less dangerous, more antiseptic, and less fun than it was 20 years ago. It’s a huge cultural shift, and it’s reflected in finance.

The Old Days

We have a free market economy. In the past, it was generally accepted that we had expansions and recessions. People would lose their jobs during recessions, they’d temporarily collect unemployment benefits, and then they’d find different jobs. No big deal. Now, it is a big deal.

Of course, the pandemic shifted these cultural attitudes even further. We are completely unwilling to accept bad outcomes of any sort. In one sense, it is a fear of failure, but it is bigger than that. It is also an expression of omnipotence—that somehow we actually have the power to control our environment to prevent anything bad from happening ever again. Then you get into Hayek and the fatal conceit stuff.

The desire for safety, the woke ideology, risk-taking, it is all connected. Nobody wants to feel unsafe. This will continue until we allow the world to get a little more dangerous.

When do we reach the tipping point? I have no idea, but in the economic realm, we have to get to the point where we fear inflation more than we fear unemployment. We must get to the point where we fear lockdowns more than we fear the coronavirus. Etc. We must fear the cure more than we fear the disease.

At the moment, inflation is merely a nuisance. Give it some time.

Party On, Wayne

I said I would include the link for tickets for the party in NYC on Friday, November 12. Here it is!

It’s a great club in a great location with an amazing sound system—come out and meet other subscribers and have a good time. No one has ever regretted it.

Jared Dillian

subscribers@mauldineconomics.com