The mystery of the Federal Reserve leaves people wondering if it’s controlled by the mysterious Illuminati, corrupt politicians, or fat cat bankers. And it leaves people wondering what exactly it does, or not care and demand an audit. If you believe any of the foregoing then Bluff by Anjum Hoda is not the book for you.
Bluff is a deep dive into macroeconomic theory and monetary policy. It’s sharply written and easy to read, assuming you have some basic understanding of the subject.
The books focuses on the split requirements of the Federal Reserve. The primary role is monetary stability. We all want that dollar in our pocket to be worth a dollar. We want to be able to buy something tomorrow. We accept that it will cost a little bit more next year. We accept a small amount of inflation. Nobody wants high inflation. Nobody want to have to use a wheelbarrow full of dollars to do our shopping.
The other mission of the Federal Reserve is to pursue full employment. It’s this one that causes the problems according to Ms. Hoda.
To her, the Federal Reserve’s “bluff” is to pump of asset values pre-emptively to boost economic growth by lowering interest rates. The magic formula is let assets slowly while wages move on the same path.
The problem is that the Fed gets caught in a bad place when it misses an asset bubble that develops from low interest rates. If the Fed raises rates and pops the bubble, it may burst before wages caught up and send wages back down.
The problem is that artificially lower rates are not boosting economic activity. In the first half of 1999, the Fed lowered rates dramatically after the Asian Flu. Non-financial corporations issued debt with gusto to buy back their own shares. In the years that followed, debt issuance and stock buybacks diminished. Cheap debt is more likely to raise asset prices than to increase employment.
The goal of the Fed is to program a small bit of inflation into the economy. Ms. Hoda’s proposal is to reduce that to a zero inflation policy.
It’s worth the price of the book. For me the price was zero since the publisher sent a copy to me for review.
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