Ahead of tomorrow's Jackson Hole appearance of the Chairman, a quick riff by Dylan Grice.
First though, a free gift for the audience. If you embed this headline in your worldview you won't go too far wrong:
Dec. 2010
Société Générale's Dylan Grice-"Commodities: ‘Their Expected Long-Run Real Return is 0%’"
Because of substitution effects at both the producer and consumer levels and incentives to allocation decisions from price signals for producers (price up - produce more etc.) commodities are different from other things you can put money into—I'm hesitant to say 'other assets' because, despite Goldman's huge framing exercise 2004 -2008, commodities aren't really an asset class.
Now on to Mr. Grice at Zürich's Neue Zürcher Zeitung's The Market.ch:
Skin in the Game: FOMC Style
All people are driven by incentives, including senior officials at the most powerful central banks. A look at Jerome Powell's portfolio shows what incentives might drive the chairman of the Federal Reserve.
«You show me the incentives, I’ll show you the outcome.»
Charlie Munger (*1924, Vice Chairman of Berkshire Hathaway)James M. Buchanan won the 1986 Nobel Prize in Economics for his pioneering work in public choice theory, the systematic study of the efficacy with which representative organizations act on behalf of those they represent.
Its starting point is simply that the presumption of some kind of higher benevolence or public-spiritedness on the part of political agents is a bad one.
Decades before Nassim Taleb had written «Skin in the Game», and without so much of the literary flair, Buchanan argued that agents should be expected to accommodate their own interests pari-passu with those of the group only to the extent that their incentives were accurately aligned. To the extent that there was a misalignment, the agent’s private interests would trump those of the public. The challenge of designing institutions to efficiently achieve that alignment was one Buchanan made his life’s work.
When it came to central banks, Buchanan, writing in 1984 in «Can Policy Activism Succeed? A Public Choice Perspective», when the inflation of the 1970s loomed large in the rear-view mirror (and therefore in most people’s forecast of the imminent future), was clear on what had to be done:
«There is relatively little to be gained by advancing arguments for «better informed» and «more public-spirited» agents, to be instructed by increasingly sophisticated «economic consultants» who are abreast of the frontiers of the «new science». All such efforts will do little more than provide employment for those who are involved.»
Instead, the circumstances faced by central banks must be aligned with those destined to live with the consequences of central banks actions. Thus, for example, Buchanan believed that anyone working in a central bank should be paid in a fixed nominal salary, ensuring their purchasing power would decline inversely and proportionately to each years’ rate of CPI inflation. Such an arrangement would give central bankers skin in the game in the delivery of price stability.
Incentives for continued asset price inflation....
....MUCH MORE
HT: Jemima Kelly at FT Alphaville whose entire Further Reading post is worth perusing.
Here's another Grice op-ed at The Market.ch from 5 1/2 months ago:
March 15
Dylan Grice: "The Bubble is Just Beginning"
I think he gets an 'A' for accuracy
