Yay For The Bond Vigilantes

The New Year has started off as well as one could suspect. In addition to the Co-President arguing that the United States should invade the United Kingdom on Twitter, and we Canadians lost our Prime Minister with the timing due to the crisis caused by the threat of massive tariffs from a country that we allegedly have a free trade agreement with. (Trudeau’s hold on power was slipping, so the tariff threat was not the cause, rather the trigger for an event that would probably have happened anyway.)

The tariff situation is what I want to comment on in this article. As I expected would happen, Trump is pushing for a massive economic bill that combines a hefty income tax cut, with matching “pay fors” coming from a limited amount of spending cuts as well as a farcical amount of projected tariff revenue. 

Banknote Short Follow Up

I have again been ambushed by distractions — Christmas shopping and consulting (to pay for the Christmas shopping). I just have a few short addenda to my earlier post on how banknotes are central bank liabilities.

Banknotes are Matured Bearer Bonds

Accounting is supposed to reflect economic reality, not what statutes might say. Otherwise, statutes could just define central bank balance sheet entries to be whatever sounds good. One hallmark of economic reality is to look through the superficial features of an instrument, and see what they are economically equivalent to.

Canadian Recession Watch

I saw a comment by former Bank of Canada Governor Stephen Poloz that suggested that only population growth is keeping Canada from slipping into an “official” recession. (In the United States, the NBER is the standard recession-dating source, in Canada, the C.D. Howe institute aims to replicate that role.)

Yes, Banknotes Are A Central Bank Liability

David Bholat recently wrote “How to Modernise Central Bank Balance Sheets: No Notes.” It is partly in response to this article. The idea is that banknotes (“dollar bills”/”pound notes” etc. issued by the government should not be classified as a liability, rather as some form of capital or possibly taken off the balance sheet. I have run into variants of this idea in the past (the stronger version being that all forms of the monetary base are not liabilities), and the root idea is that “monetary issue is good for the economy, so how can it be a liability?” Such a redefinition or removal of banknotes is either misleading or wrong.

Tariffs: Only Transitory Inflation

I managed to not notice a curling rock in my path when sweeping on Monday, so my writing plans this week were curtailed as I nurse my left knee. As such, I am stuck with following the herd on Bluesky. My consulting work schedule has still been intense, but I think it should slow down shortly, giving me more editing time for my manuscripts.

One of the current Bluesky points of discussion is whether tariffs are “inflationary,” a “one-time price shock,” or even a “relative price shift.” I think that if we do see a large universal tariff hike, it would qualify as “transitory inflation.” As we have seen, transitory inflation is no big deal politically.

Tariffs As A Fiscal Tool?

One of the more predictable outcomes of this election is that I am now running into analyses suggesting that tariffs are a growth-enhancing policy tool. One of the ugly realities of financial/economic commentary is that a lot of it is the result of starting from the desired conclusions, and then working backwards to find reasons why the conclusions are correct. An analyst that is pro-Trump needs to discover why tariffs are great policy. (The advantage of not publishing forecasts and not having a policy agenda is that I am not continuously putting out articles explaining why my forecast is correct, and the data/markets are wrong. The disadvantage of this policy is that it is harder to come up with new content.)

One of the Big Ideas floated by Trump is that income taxes can be replaced by tariffs, which is what excites some of the commentators. I do not see the numbers even getting close to that, even if we put aside the side effects of tariffs on the economy.

Epilogue: The Trump Re-Election

Editorial note. This article is an unedited excerpt that is the last section of my inflation manuscript. I have been sitting on that manuscript for a long time, as I was not completely satisfied with the final chapter that discussed the post-pandemic inflation surge. (The bulk of the book are primers discussing the basics of inflation, and the wacky theories you see from the inflation nutters in financial/economic commentary.) I think I still need to compress the final chapter’s text, but it is getting close to be ready for external editing. This article is a fairly lightweight discussion of current events, but I expect it to be read by people years from now, so delving into details of the election are not really needed.

I am also throwing in the towel on my Twitter presence. I have not spent much time reading social media or other blogs (mainly Subtstacks now) due to being overrun by projects, but I need to re-build my social media presence before trying to market my new book. With Musk throttling links to Substack, Twitter is effectively dead as a marketing tool. Anyway, I think Blue Sky is building up a critical mass, so I am now going to pay more attention to it: @brianromanchuk.bsky.social