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Jul 18, 2022Liked by Joseph Politano

Thank you for your posts. I find your reasoning clear and insightful, and I appreciate you citing the data sources, which helps me follow up. (And thank you for explaining nuances in various data series!)

Toward the end of this post you write, "The 2018 scenario is one in which the Fed reacts early to deteriorating financial and economic conditions and swiftly reverses course on its policy outlook." Do the Fed and US government have less room to adjust policy today compared to in 2018? In particular, do current high inflation and low real interest rates force the Fed's hand to continue monetary tightening, more or less regardless of how the real economy responds, until inflation comes down to "reasonable" rates? Is there justified concern that historically high levels of national debt, globally, will interact with inflation, especially as central banks raise interest rates?

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Thank you! I am very glad you're enjoying.

I think there definitely is a larger political constraint on the Fed thanks to how high inflation is—and they really need to see inflation come down before they can let up now. As for the fiscal sustainability question, that's a topic for a future post I will be writing so I will hold my tongue for now!

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I think this is the best post in a while about the current state of the economy, just because we are comparing the data now with the data during / right before past recessions. Even though every recession is different, how useful an indicator is seems to be determined by how well it actually indicates for past, similar recessions.

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Thank you! I am glad you enjoyed the piece!

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Jul 9, 2022Liked by Joseph Politano

I keep looking at the data and too much continues to be trending lower, at least the forward looking data, for me to believe that we will avoid a recession. Friday's NFP number will actually just make things worse as the Fed will feel bulletproof for longer and possibly tighten even more aggressively. Given their inability to pivot smoothly is legendary, I fear the recession will be deeper than you describe here. Too many massive bubbles imploding.

But thanks for the clear explanations Joe, your writing is terrific.

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Thank you!

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great post joey!

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Thank you!

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Jul 9, 2022Liked by Joseph Politano

Well it is not Sri Lanka where the President and Prime Minister have had to run for it because of the collapse of the economy. The mob have taken revenge by swimming in the Presidential pool.

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Fascinating post, as always. But I have a question: you often refer to 'tightening financial conditions' and 'worsening financial conditions', sometime in consecutive sentences. Are these the same thing - and the switch in adjectives is just for style points - or different? I would argue that there is a good case for saying that they are different and being precise in the usage. To me, 'tightening' is just that. It's about the direction of policy. I don't think of 'tighter' as necessarily bad or as 'worse' than looser. Tight money may be a desirable response to an overheated situation: such as the rapid recent-year year increases in home prices and the high percentage of speculative buyers. By contrast, 'worsening conditions' evokes for me the situation where defaults are increasing, lender balance sheets are indeed 'worsening', and loan volumes are falling, not because interest rates are high but because lenders can't or won't take as much exposure as they did in previous periods. Recessions have a financial side as well as an employment side, and it may be prudent to save some descriptive powder for that situation. More importantly, a distinct 'worsening' suggests a set of indicators distinct from yield curves and spreads: it suggests default rates, loan and underwriting volumes, pace of credit downgrades, etc. The current shakeout in startup funding may really speak to worsening conditions and may even be predicting something.

All of the above is just a small point. I love these posts and learn a lot from them. TB

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I use "tightening" and "worsening" interchangeably for financial conditions and consciously use them both together—after talking to a lot of laypeople about the state of the economy I have realized that the "tightening/loosening" phraseology is really unintuitive. I have had many conversations where I say "the labor market is tight" and people have responded back with "yes, it is very difficult to find a job right now" or when I say "banks are tightening credit" and people go "yes, they'll lend to anyone nowadays." So I try to use strengthening/improving and weakening/worsening in place of or alongside tightening/loosening to make the point clearer. It's hard because no matter what word you use the connotations will be difficult to manage—obviously tighter monetary policy will increase likelihood of default for a lot of borrowers, but is using "worsening" appropriate or histrionic? I'm not sure, but it is a communication issue I still think a lot about.

Regardless, I'm very glad you enjoyed an appreciate the comment.

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Thanks for the response - and the clarification. Cheers, TB

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