I studied linguistic anthropology in school because I have always been fascinated by the power of words to shape cognition. The more words we have, the greater our perception. But words can also mislead us. I recall one lesson in which a fatal accident occurred at a petroleum storage site because caution hadn’t been observed around the drums that were labeled as ‘empty’. Empty drums contained fumes which were more flammable than liquid drums yet the word ‘empty’ implied less danger in people’s minds than a drum ‘full’ of gasoline.
If you speak multiple languages then you are well aware of the power of words to expand perception. Eskimos have 40+ words for snow much of which are useful to navigate life and death situations. One of the joys of Yiddish is learning all the rich and colorful classifications of people and situations that may have flashed through your mind subconsciously at some point in time (and were then promptly forgotten) but which the language concretizes into something useful. By giving words to an idea, you conceptualize the subconscious. It is a tool that aids perception.
On the flip side, words and concepts can also be used to close the doors to perception. What can be a short-hand for communication can be a short-circuit to original thinking. How we frame a situation, therefore, is important to our understanding. It is critical, then, to be mindful of overusing concepts and framing to the point that they become factoids and tropes.
I’ve been feeling this way when I listen to financial news, lately. And I find myself asking very basic questions in order to not feel steamrollered into taking the status quo as gospel and being misled.
For example, there’s been a lot of talk about the US Federal Reserve’s decisions to dramatically raise interest rates to fight inflation and the Treasury’s need to issue government debt. The two words - inflation and debt - require closer inspection.
Let’s take debt first. Who is the US government indebted to? It issues its own currency and the currency isn’t backed by anything (goodbye gold standard) except by faith in itself (the government); why would it need to borrow money from anyone? As far as I understand it, the Treasury issues government bonds not because it needs to borrow money but because it’s not allowed (by Congress) to run a negative balance after it issues money to accommodate fiscal policy. In addition, it helps to grease the wheels of finance and is a preferred source of collateral in the Eurodollar market. Lots of financial institutions demand it. Technically, it is a debt instrument but it doesn’t serve the function of debt from the government’s perspective. Could it be that it functions more as a source of liquidity for the global market? Maybe it modifies investor behavior by taking one form of money out of the economy and substituting it for another? All of which to say it’s function isn’t debt; the government doesn’t actually need to borrow money when it can print as much as it needs.
Is the deficit a form of government debt? Does the government need to reduce the deficit and balance its books? As I understand it, reducing the deficit can be very destructive. That’s because the government doesn’t need to balance its books, since it’s not indebted to anyone but itself. Running a deficit means investing in the economy; reducing the deficit means abandoning the economy. So, perhaps deficits are better for the economy than surpluses because it means money is being put to work?
Now, inflation. What is inflation? High prices? There can be many reasons for high prices. Sometimes, it’s a symptom of an imbalance between supply and demand. In that case, ‘high prices are the cure for high prices’ and the imbalance will take care of itself. What about the money supply, itself - is there too much money in the system? Not if that money is simply being hoarded and not utilized (intermediated) effectively in which case the velocity (turnover) of the money might be more relevant. So how would raising short term interest rates calm inflation? If it’s because of supply and demand problems then it won’t; it’ll probably do the opposite. If it’s because of an oversupply of money then that’s debatable, too. If it’s a velocity of money issue then maybe it will help because it will affect investor behavior by sucking money out of other things and putting it into short-term goverment bonds.
My point in all of this is that we are using terms (debt, deficit, inflation) as short-cuts for communication in ways that aren’t helping us to understand the problem. If anything, they seem to be confusing the underlying causes and correlations of the market. Believing that the government is somehow indebted to someone else, or that the economy has inflation that can be reduced by raising short-term rates, or that deficits are bad and federal budgets must immediately be balanced might be ill-defined frames of reference that obfuscate not illuminate. By mis-framing the situation we might be making really poor decisions because we don’t understand what’s going on.
Let’s try a reframing exercise.
The Fed would like us all to believe that they are omnipotent. That when they raise short-term interest rates that they can not only move the market but guide it to where they want it to go - aka a, ‘soft landing’. Imagine a rowboat full of Federal Reserve bankers and economists who fancy themselves as Captain Ahab chasing the great, white whale (which in this analogy is the economy). When they harpoon the whale (by raising rates), the line from the harpoon snaps taut, and the boat and whale are in perfect alignment. Captain Ahab then proclaims, ‘See, I am steering the whale!’ Now, the rowboat and the whale are, indeed, travelling in the same direction but who is steering who? I think we know the answer.
Here’s another one. The Federal Reserve is the ‘lender of last resort’. What if nobody wants to lend to the losers and so they become the de-facto lender of first resort - as is often the case (and has happened very recently). What if we, the public, are really the lender (or, should I say ‘owner’) of last resort because it’s our tax money that ultimately bails them out? Here, the phrase is misleading.
It’s hard to innovate when you frame the problem incorrectly and use words that are misleading.
Here’s an ironic take on what I’m talking about called, ‘Aspecting’.