A reply from Senator Feinstein

A few months ago I reached out to Senator Feinstein's office offering some ideas on direction for energy policy, particularly as it relates to Southern California's recently closed San Onofre Nuclear Generating Station. I recommended that the site be opened up for demonstrations of advanced reactor technologies that can securely process spent nuclear fuel while simultaneously producing power for California's grid. I specifically mentioned the Denatured Molten Salt Reactor (DMSR), a similar design to the more popular Liquid Flouride Thorium Reactor (LFTR). Two weeks ago I received Senator Feinstein's reply. It was much more substantive than I was expecting.

Vertical Farming

Farming with Arduino

Farming can become an information technology too. 

1. Determine your variables. I'd start with: humidity, temperature, pH. There are likely dozens of minerals/chemicals that would be advisable to track too.
2. Use sensors to track your variables.
3. Check the relationship of these variables to your crop's growth and/or nutrition content
4. Optimize these relationships

You can further improve this process by using standardized interventions. Then allow these interventions to be remotely triggered. Then pull the triggers via code. Using this simple process we could dramatically improve the quantity and quality of our food supply, at least for plants.

Sovereign credit, inflation, and bond yields

Lars Christensen sent me this link this morning...face, meet palm. The article is painfully wrong about the effect of inflation on bond yields and other related risk premia. The interviewee is obviously not reading any market monetarists, and apparently not looking much at market indicators either. Navel gazing at its worst.

“The volatility in the JGB market was a surprise to policy makers,” Masanao said. Abenomics caused a “big secular shift on how investors look at JGBs,” he said, adding that they should demand a higher risk-premium with the rising volatility and the potential “tail risk” of higher inflation.

 No! For a country with a highly depressed level of nominal output (NGDP), increased inflation expectations is a net positive. Higher inflation will reduce Debt/NGDP, increase the velocity of money, and increase overall output in both nominal and real terms. These are all good things, and the market knows it even if 'big men' are clueless.

In the above chart:

1. Green = nominal yield on 5 year JGBs
2. Yellow = price of 5YR CDS on JGBs (Credit risk)
3. White = 5 year break even inflation rate for Japan. 

Focus on the correlation between these variables, not their levels since they're using separate Y-axes. What happens to the price on credit risk (yellow) when inflation expectations increase (March & early May)? It drops. What happens when inflation expectations decrease (late March & late May)? It rises. CREDIT RISK PREMIA ARE NEGATIVELY CORRELATED WITH INFLATION.

So - what is happening in the real economy? Imports, Exports, & RGDP are UP! In fact imports increased even more than exports, despite a much weaker Yen. These better figures do not represent Japan's increasing competitiveness in foreign markets, they represent an increase in domestic demand.

Japan and Abenomics

I'll avoid directly rehashing what Scott Sumner and Lars Christensen have already said. Instead I'll highlight it and add some comments.

Here is Scott:

There’s a lot of speculation about how Abenomics will work out in the long run.  I don’t like much of this speculation, because it seems to conflate four quite distinct questions:

1.  Can the BoJ boost nominal aggregates?  I.e. is Japan stuck in a liquidity trap?

2.  Will the BoJ succeed in reaching its 2% inflation goal?

3.  Would higher inflation lead to better outcomes for the real economy?

4.  If 2% inflation is achieved, will Japan experience good times?

Before proceeding, let me indicate that I think the answers are:

1.  Yes, definitely.

2.  Probably not.

3.  Probably.

4.  Probably not.

These are important points, and not just for Japan.

1. If you're sympathetic to market monetarist thinking (and I am), then it's obvious that 'liquidity traps'  exist only to the extent that policy makers believe in them and are bound by ineffective policy tools (i.e. short term nominal interest rate manipulation). If you have a fiat currency, you can always devalue to reach a nominal income target. 
2. The real uncertainty is in the will. It is a very different sort of question that brings in the influence of institution-specific structures, history, and politics. The BoJ has a long history of extreme conservatism and has repeatedly tightened monetary policy prematurely. Expectations theory implies that a change in policy must be perceived as permanent to be effective; temporary increases in the money supply have no effect. If there is any substance behind claims that Fed monetary policy is ineffective, this is the mechanism.
3. If an economy is in long-run equilibrium, then this answer would be no. After a large debt-deflation spiral (aka decline in NGDP), then the answer is yes. Higher inflation will erode any wage stickiness and reduce the burden of nominal debt (debt/NGDP ratio goes down). Some people would call this a haircut, which is a fair but myopic point. Real returns may take a haircut, but the long run credit quality is improved because the risk of outright default (and much larger haircuts!) is significantly reduced.

Lars does a very good job of going into why #4 is "Probably no". Market monetarists often get accused of thinking NGDP targeting is a panacea, but this shows our innocence. Monetary policy can fix problems caused by bad monetary policy. Supply side problems still require supply side solutions.

Markets in health

The fatal problem with AACA/Obamacare.

The US healthcare system does a lot of things well. Efficiency is not one of them. Many wonks praise Obamacare for improving access to affordable health insurance (faint praise considering the baseline), but rarely ask 'for whom?' The biggest beneficiaries are the underemployed & self-employed middle aged, financed at the expense of the underemployed & self-employed young.

Improving the overall outcomes of our healthcare system is not difficult, at least conceptually. Starting from first principles, you need to establish a market for health care and health insurance. What makes a functioning market? Choices and prices; the more you interfere with choices and/or prices, the further you will get from efficient outcomes.

 The employer-provided health insurance paradigm has dominated the US health market since WWII (when wage controls prompted a boom in employer-provided benefits). One of the primary failings of this system is the wedge it drives between the cost of service and the price paid by the consumer. Unless prices reflect the full cost of a service, consumers will consume more/less of the service than is optimal. This third-party-payer issuer is also reflected in the ask/bid prices behind the scenes. While you may pay a $20 copay for a service, the real negotiations happen between doctors offices' and insurance companies. This is a recursive process whereby doctors' inflate the true cost of service, in full knowledge that insurance companies' will refuse to pay the full amount. In addition to the obvious inefficiency of this process, there is an enormous waste of labor and capital resources to facilitate it. The end result of these problems is the 17%+ of NGDP spent on healthcare in the US, for the worst price-performance in the developed world.

I wrote a more in depth break down of the specific improvements that should have been implemented for healthcare reform several years ago.