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The Trump Superspike: If Trust in U.S. Governance Breaks, Interest Rates Will Explode | The Market Monetarist
In risk departments across Europe’s banks and pension funds, intense discussions are unfolding. The topic? Trump’s increasingly erratic behavior and what it means for financial stability. At first glance, the immediate concerns seem obvious—tariffs, trade wars, and economic uncertainty. But that’s not where the real danger lies. European credit departments will, of course, start by…
The Erosion of Institutional Democracy: America’s Shift Toward a Latin-Style Executive Rule | The Market Monetarist
I should start by noting that cultural analysis is not my area of expertise—I typically focus on economic policy and market-driven explanations. However, recent developments in American political culture have been striking enough that I feel compelled to address them, even if they fall outside my usual analytical framework. As someone who has long felt…
Make Inflation Great Again? Trump’s Trade War Sparks Price Surge Fears | The Market Monetarist
Recent developments in US financial markets are painting an increasingly clear picture of rising inflation expectations, a phenomenon we might call 'Trumpflation'. T he evidence is mounting across various market indicators, suggesting we may be transitioning from a 'goldilocks' economy towards a more stagflationary scenario. American consumers' inflation expectations have risen sharply in January and…
How Biden and Powell Mismanaged the 2021 Recovery – A Mistake Trump Seems Determined to Repeat | The Market Monetarist
The Golden Opportunity—Squandered Four years ago today, just as Biden had become president, I wrote the following on Facebook (in Danish): "No more grumbling from here. How is the US economy doing? Today we got retail sales figures for January. They look extremely good—retail sales are now 10% higher than a year ago. That there…
When Democracy Fails: US Budget Deficit Accelerating Towards 10% of GDP | The Market Monetarist
A Fiscal Crisis in the Making The United States' public finances are approaching a historic turning point. With Donald Trump's re-election to the presidency in November 2024, it is clear that American fiscal policy is moving towards a critical point. In this article, I present an econometric analysis of the US budget deficit, which shows…
Credibility problems: The Fed isn’t convincing and Truflation isn’t true | The Market Monetarist
Today we got the US inflation (CPI) data for January. Both headline inflation and core inflation (excluding food and energy prices) came in higher than expected. Headline inflation was 3.0% year-over-year, while core inflation rose to 3.3% year-over-year.This is hardly good news. However, we should be very careful about drawing too many conclusions from month-to-month…
Trump’s Tariffs and the Fed: A 1970s Velocity Nightmare in the Making | The Market Monetarist
The latest University of Michigan Consumer Sentiment Survey delivers a stark warning about U.S. monetary stability. Following Trump's return to the presidency in the November 2024 election, inflation expectations have surged dramatically. The short-term (one-year) inflation expectations have jumped to 4.3% - a level that should set alarm bells ringing. Even more concerning is the…
Trump’s Trade War Could Kill America’s ‘Exorbitant Privilege’ | The Market Monetarist
Yesterday, the Trump administration announced new tariffs of 25% on all imports from Mexico and Canada and 10% on all imports from China. In response to this announcement - which wasn't entirely unexpected - US stocks fell and interest rates rose. The simple interpretation is that higher import prices drive up US inflation, causing the…
Erdogan Redux: Trump’s Self-Defeating Mix of Tariffs and Demands for Lower Interest Rates | The Market Monetarist
In the realm of economic policy, there are times when ambition and political rhetoric can overshadow basic numerical coherence. President Donald Trump’s recent declaration at the World Economic Forum in Davos that he will “demand that interest rates drop immediately” while simultaneously championing protectionist tariffs is a glaring example of this kind of inconsistency (see…
Trump Optimism or Tariff Fears? The Curious Case of the January Philly Fed Surge | The Market Monetarist
A Record-Breaking January Jump Last Friday, we got the January Manufacturing Business Outlook Survey from the Philadelphia Fed, and to say the numbers were eye-popping would be an understatement. The data, collected from January 6 to January 13, showed such a remarkable turnaround in manufacturing activity that it demands closer scrutiny - particularly given the…
Fed gets it right: Central banks should do monetary policy, not climate policy | The Market Monetarist
The idea that central banks should conduct "climate policy" is fortunately dying out. I say fortunately because central banks essentially have only one instrument - how much money they create - and that instrument can only be used for one thing. So if one invents all sorts of tasks, one sets aside the main task…
I’m Not Panicking About US Debt, I’m Just Breathing Into This Paper Bag | The Market Monetarist
A slightly nervous look at America's financial future The Story So Far: Everything is Fine(ish) In recent days, I have been asked to write about public debt in the USA. So here we go… If we start by looking at the development of the public finance deficit, we can see from the first graph that…
P-Star Reloaded: Trump’s Tariffs, Powell’s Policy, and Inflation’s Next Act | The Market Monetarist
The Return of Inflation Fears US inflation fears are back. Therefore, I have decided to revisit and update my favorite inflation forecasting model for the US - the P-star model. In my recent post "Eeny, Meeny, Miny... Panic?", I warned that markets are too optimistic about Fed rate cuts, with the (Theoretical) Mankiw Rule suggesting…
Eeny, Meeny, Miny… Panic? The Fed’s Next Pivot Could Spark Stock Market Sell-Off | The Market Monetarist
As markets hang on every word from the Federal Reserve, a seismic shift in monetary policy could be just around the corner—and I don't think investors are fully ready for this - yet. While Wall Street continues to bet on further rate cuts, the data tells a different story. Inflationary pressures are rising, consumer expectations…
Rent-Seeking Royalties: MAGA Populists Turn on King Musk – A Lesson in Public Choice Theory | The Market Monetarist
Over the past 24 hours, a remarkable confrontation has unfolded on X (formerly Twitter) that perfectly encapsulates the inherent contradictions in Elon Musk's political positioning and the broader tensions within American tech politics. The drama began when Musk, the owner of X and Tesla CEO, launched into an expletive-laden defence of the H1B visa programme,…
The ‘Overheating’ Myth: The Unpleasant Arithmetic of Putin’s War (The RUST model) | The Market Monetarist
I have increasingly become frustrated by the focus on "overheating" of the Russian economy championed by many Western military and geopolitical analysts. The narrative more or less goes something like this: fiscal policy is very easy in Russia, so demand is high, and therefore there are now massive demand pressures, which cause 'overheating' and will…
Moscow Bitcoins: Stalin, Putin, and Assad’s Gilded Cage | The Market Monetarist
History often rhymes, as Mark Twain is famously quoted as saying. The story of Syrian President Bashar al-Assad’s flight to Russia—and the presumed transfer of his family’s substantial wealth to Moscow—offers a stark reminder of one of the most contentious financial episodes of the 20th century: the transfer of Spain’s gold reserves to the Soviet…
Trump 2.0: Can Populist Keynesianism Survive a Hawkish Fed? | The Market Monetarist
The Stage is Set: Familiar Playbook, Different Starting Point As President-elect Trump prepares for his second term, we are entering a period that bears striking similarities to 2016, but with crucial differences. Back then, I wrote about how Trump’s fiscal expansion plans, combined with the Federal Reserve’s willingness to tolerate higher inflation, created a unique…
First Immigration, Then Free Trade – Is AI Trump’s Next Target? | The Market Monetarist
Yesterday, Donald Trump shared a rather remarkable post on "Truth Social" about his meeting with the International Longshoremen's Association, where he strongly criticised automation at American ports. The message reveals Trump's economic thinking as fundamentally aligned with that of a 1970s New York union leader: opposing immigration, free trade, and now technological advancement. This is…
Putin’s Butter Crisis Intensifies as Ruble Slides | The Market Monetarist
Today, the Russian ruble has weakened significantly - 7-8% against the euro and dollar. This is quite substantial - even for an Emerging Markets currency. I am generally very sceptical about shouting "collapse" every time economic news (often just rumours) comes out of Russia, and I would also emphasise that the ruble market is virtually…
‘Do Away With Money and You’ll Do Away With Inflation’ – The Indy Cabbie, Bessent and I All Get This, But There’s More to the Story | The Market Monetarist
I had an interesting exchange on Bluesky yesterday sparked by Scott Bessent's recent comments on tariffs and inflation. It started with Leslie Ehrlich sharing a story about a cab driver in Indianapolis who in the 1980s said something quite profound: "Inflation is a money problem. Do away with money and you'll do away with inflation."…
When Growth Slows, Tensions Rise – Inside China’s Dangerous Pivot | The Market Monetarist
The Decade-Long Warning Signs For more than a decade, I have consistently argued that China's economic model is fundamentally unsustainable. This perspective, which I first articulated publicly in my August 2014 blog post titled "China might NEVER become the biggest economy in the world," has proven increasingly prescient as we watch China's structural weaknesses manifest…
Xodus Explained: Machine Learning, Social Dynamics, and the Rise of Bluesky | The Market Monetarist
Social Networks in Flux – The Shift from X to Bluesky In recent days, we have witnessed a remarkable migration of users from X (formerly known as Twitter) to Bluesky. This trend is not merely a reaction to Elon Musk’s controversial stewardship of X, but also deeply intertwined with the outcome of the recent US…
China’s Lost Decade: Communist Ideology Meets Japan’s Economic Fate | The Market Monetarist
China’s strategy of increasing debt issuance to stimulate the economy mirrors Japan’s reliance on public spending and debt during its “Lost Decade.” In response to a faltering economy, the Japanese government repeatedly increased public investment, hoping to jumpstart growth through infrastructure projects and other short-term measures. While these efforts provided a temporary boost, they ultimately…
1980s Danish Fiscal Wisdom: Expansionary Contraction as a Model for US Economic Revival | The Market Monetarist
On Twitter/X, Bob Elliott has been sharing his observations about American consumer behavior. Elliott, a seasoned investor and businessman, points out a paradoxical economic scenario: despite low mortgage rates and increased household wealth, both consumers and businesses are exhibiting remarkable restraint in borrowing and spending. Elliott noted: "So far the expansion hasn't required increased household…
Agent-Based Experimental Economics: A New Era for Understanding Market Dynamics | The Market Monetarist
AI-Powered Synthesis of Austrian and Chicago ideas Like many free-market economists, I began my early studies deeply influenced by the Austrian School, but over time I shifted toward the Chicago School, particularly when it comes to microeconomic theory. These days, I consider myself primarily aligned with Chicago Price Theory on microeconomic matters, while my views…
Listen Up: NotebookLM Converts Minecraft AI Economics Post to Podcast | The Market Monetarist
I have asked NotebookLM to create a podcast on my blog post "AI Agents in Minecraft: Vernon Smith-Style Experimental Economics on Steroids". I think it's pretty good - have a listen here: If you want to know more about my work on AI and data, then have a look at the website of PAICE — the AI…
AI Agents in Minecraft: Vernon Smith-Style Experimental Economics on Steroids | The Market Monetarist
From Vernon Smith to AI Agents: A Quantum Leap in Experimental Economics These days I spend most of my time talking and advising on the use of AI. I do this in my consultancy Paice that I have co-founded with my business partner Christian Heiner Schmidt. I therefore also spend a lot of time "playing"…
Eastern Giants Stumble: China and Russia Face ’90s-Style Economic Reckoning | The Market Monetarist
China and Russia Face Mounting Pressures as US Economy Remains Resilient Historical Parallels and Potential Consequences Yesterday we got the US ISM numbers, which surprised somewhat on the downside, which has caused recession fears in the US to rise again. The market is now again increasingly seeing a chance that the Federal Reserve will cut…
Between a Rock and a Yuan: China’s Tough Choice on Currency and Deflation | The Market Monetarist
The graph below in different variations have been making its rounds on social media in recent days. It is somewhat odd that it took so long for the number to get the any attention as the numbers this relateds to have been out for a couple of weeks. But frankly speaking I didn’t notice it…
4m-RUIN: The most simple recession indicator in the world | The Market Monetarist
On Friday, the headlines were flashing: "Sahm rule triggered". The reason was that with the US unemployment numbers for July coming out at 4.3%, the 3-month moving average was now 0.5 percentage points higher than its 12-month low. The Sahm rule has historically been a strong coinciding indicator for recessions in the US - hence…
Powell’s Reading List: Sahm’s Rule, Mankiw’s Guesses, and Dornbusch’s Echo from the Past ‘I Told You So’ | The Market Monetarist
On Friday we got the U.S. labour market report for July. Employment growth and wage growth continue to decelerate, and most notably, the unemployment rate rose to 4.3% in July, up from 4.1% in June. This increase has triggered a "recession alarm" — at least if one subscribes to the so-called Sahm Rule. Understanding the…
Eeny, Meeny, Miny, Mankiw: The Surprisingly Accurate Way to Guess Fed Policy | The Market Monetarist
The Taylor rule is the celebrity of monetary policy rules, frequently touted as the go-to framework for central banks, especially the Federal Reserve. Its simplicity is its charm: set interest rates based on how far inflation deviates from the target and how much the economy is straying from its potential output. However, let's not kid…
How Well Do Large Language Models Reason About Macroeconomics? | The Market Monetarist
I think it is pretty clear to everybody who follows this blog and follows me on social media that I am deeply fascinated by AI and how we can use, for example, Large Language Models in economic research—and I am eager to spread the gospel. Today, I spent a couple of hours building a simple…
A Summer Surprise: A rather massive positive supply shock? | The Market Monetarist
Here are two sets of high-frequency US economic data: first, the daily US "inflation" numbers as measured by Truflation.com and the Weekly Economic Index (Lewis-Mertens-Stock), which is a very good weekly indicator of US real GDP growth. What are we seeing? Inflation is sharply down... ... and (proxy) real GDP growth is sharply up. This…
The Yield Curve as a Policy Instrument: Decoding the Fed’s Implicit NGDP Targeting for the US Economy | The Market Monetarist
Yesterday, in my post "Fed's hidden strategy: Implementing new dual NGDP targets", I introduced a weekly NGDP growth proxy for the United States and proposed a medium-term NGDP target rule. Today, I want to push this analysis further by exploring how the US yield curve might be functioning as a policy instrument in the Federal…
Fed’s hidden strategy: Implementing new dual NGDP targets | The Market Monetarist
Traditionally, central banks have focused on inflation targeting, but NGDP level targeting provides a more comprehensive picture by encompassing both inflation and real GDP growth over time. However, real-time data on NGDP is not readily available. This challenge led me to develop a proxy for weekly NGDP growth. In January 2024, I introduced this approach…
The Effectiveness of Real Rate Rules: An Analysis Using 10-Year Yields and Inflation Expectations | The Market Monetarist
Abstract This blog post examines the effectiveness of real rate rules in stabilizing inflation expectations using quarterly data from 10-year Treasury yields and inflation data from 1988 to 2024. We estimate the relationship between inflation deviations from the target and the expected average deviation of future inflation, following the methodology outlined in "Robust Real Rate…
PAICE: My unexpected journey from Finance to AI | The Market Monetarist
Over the past year, I have increasingly dedicated my time to speaking, writing, and advising on the use of data, analytics, and artificial intelligence (AI). This includes workshops, lectures, and direct consultation with clients on introducing and using AI. Initially, this wasn't an active decision but rather driven by demand. My phone has been ringing…
“An economist, a basketball player, and a Muslim woman walk into a bar” – Understanding Statistical Discrimination in Large Language Models | The Market Monetarist
In my AI/ChatGPT workshops, I often ask ChatGPT to create an image of "an economist and a Muslim woman" to illustrate how AI "thinks." Artificial intelligence, in its broadest sense, is fundamentally about pattern recognition or prediction. In economic theory, we talk about "statistical discrimination," which occurs when a person is discriminated against based on…