Wednesday, June 25, 2008
There was a remarkable development at the start of the Federal Open Market Committee's deliberations last night which somehow managed to stay out of the financial press. Fortunately, Macro Man has a mole in Washington who's filled him in on what went down.
Shockingly, Ben Bernanke and the rest of the committee have abdicated responsibility for determining monetary policy this month. Fortunately, the policy vacuum has been filled by an incomparable intellect: Vizzini, the Sicilian of Princess Bride fame. Macro Man's mole has provided him with a verbatim transcript of yesterday's policy deliberation after a black-cloaked stranger walked into the Federal Reserve conference room:
Vizzini: So it is down to you, and it is down to me. If you wish the economy dead, by all means, keep moving forward.
Dread Pirate Inflation: Let me explain--
V: There is nothing to explain. You are trying to kill the consumer that I have rightfully supported.
DPI: Perhaps an arrangement can be reached?
V: There will be no arrangement, and you're killing the consumer.
DPI: Well if there can be no arrangement, then we are at an impasse.
V: I'm afraid so. I can't compete with you physically, and you're no match for my brains.
DPI: You're that smart?
V: Let me put it this way. Have you ever heard of Bernanke, Greenspan, Volcker?
DPI: Really. [pause] In that case, I challenge you to a battle of wits.
V: For the economy? [DPI nods] To the death? [Pirate nods] I accept.
DPI: Good. Inhale this. [DPI pulls out a small vial and uncorks it.]
V: I smell a viscous, tarry substance.
DPI: What you smell is called petroleum. It powers the global economy, as well as the US consumer. And despite a drop in US vehicle miles traveled, its price continues to rise.
DPI: [Turns away from Vizzini, then turns back and places two pieces of paper on the table.] All right. Which is the appropriate monetary policy statement? The battle of wits has begun. You must choose whether to turn hawkish in the face of high and rising headline inflation, or to remain dovish in the face of significant consumer distress. It ends when you have made your decision, and we find out who is right....and who is dead.
V: But it's so simple. All I have to do is divine from what I know of you: are you the sort of problem that will respond well to a tightening of domestic monetary policy that will not kill the consumer? Now, an endogenous inflation problem will respond to reduced demand and a slackening of labour markets, so I can clearly not choose the dovish policy in front of me. But only a great fool would think that US consumer demand is driving the price of oil. I am not a great fool, so I can clearly not choose the hawkish policy in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the policy in front of me.
DPI: You've made your decision then?
V: Not remotely. Because oil comes from the GCC and Russia, as everyone knows, and the GCC and Russia are entirely peopled by currency piss-takers who would be bailed out of their piss-taking by tighter US monetary policy, so I can clearly not choose the policy in front of you.
DPI: Truly, you have a dizzying intellect.
V: WAIT TILL I GET GOING! Where was I?
DPI: The oil producers.
V: Yes, the oil producers. You must have suspected I would have known petroleum's origin, so I can clearly not choose the policy in front of me.
DPI: You're just stalling now.
V: You'd like to think that, wouldn't you? You've beaten my jawboning, which means you're exceptionally strong, so you could trust in your ability to overcome a moderate policy tightening, so I can clearly not choose the policy in front of you. But you've also bested my econometric models, which means that you've studied, and in studying you must have learned that the sacrifice ratio has risen, so you would have put the suboptimal policy as far from yourself as possible, so I can clearly not choose the policy in front of me.
DPI: You're trying to trick me into giving away something.
V: IT HAS WORKED! YOU'VE GIVEN EVERYTHING AWAY! I KNOW WHAT THE OPTIMAL POLICY IS!
DPI: Then make your choice.
V: I will, and I choose-- holy cow, how bad is that confidence data? [Vizzini points at the chart below. Inflation turns and looks.]
DPI: What? Where?
V: Well, I- I could have sworn I saw something. No matter. [Vizzini smirks.]
DPI: What's so funny?
V: I'll tell you in a minute. First, let's announce policy. I'll use this statement in front of me.
DPI: You chose the wrong policy.
V: You only think I chose wrong! That's what's so funny! I switched policies when your back was turned! Ha ha! You fool! You fell victim to one of the classic blunders! The most famous is never get involved in a land war in Asia, but only slightly less well-known is this: never offer more than one policy choice to a two-handed economist! Ha ha ha ha ha ha ha ha--
[Vizzini stops suddenly, as the US consumer falls dead to the ground.]
Vizzini: Who are you?
Dread Pirate Inflation: I am no one to be trifled with. That is all you ever need know.
Vizzini: And to think, all that time the suboptimal policy was in front of you.
Dread Pirate Inflation: They were both suboptimal. I've spent the last few years getting ready to bugger the Western consumer.