Why the Fed Should Raise Rates and Purchase More Assets

Here is a link to my Bloomberg TV segment today on "What'd You Miss" with Scarlett Fu, Alix Steel and Joe Weisenthal:  In which I
argue that the Phillips Curve is like the Planet Vulcan. Although observed by eminent astronomers in the early twentieth century: it was never actually there. 

 The Phillips curve seemed remarkably stable in a century of UK labor market data. But as soon as Phillips published his eponymous article, it vanished.  That didn't stop economists from seizing on the Phillips curve as a building block of macro theory to prop up the neoclassical synthesis; Samuelson's attempt to connect Keynesian economics with classical ideas.

 Why is this relevant? Because central bankers think that by lowering interest raters even further they will create inflation. This is a bad mistake. We need to raise rates now and support the value of risky assets by trading an ETF in the stock market.

 Much more to come in my forthcoming book "Prosperity for All", coming in September from Oxford University Press.

So you believe the stock market can directly affect the economy?

Here is a link to an LA Times interview by James Peltz that features my work on link between confidence, the stock market and unemployment. Here is an excerpt. 

So you believe the stock market can directly affect the economy?
"Yes: When people lose confidence in the market and when the market stays down for three, six months at a time, people start paying attention."

Paying attention in what way?

"Imagine you're a 65-year-old couple and you have money invested in a 401(k). Now if your 401(k) drops for a week and then it comes back up again, you're probably not going to do very much. But if your 401(k) drops for three months or six months or a year, maybe you're not going to take that cruise you were going to take. Maybe you're not going to put money into your grandchild's college education.
Those decisions impact the economy. When people feel less wealthy they spend less. When they spend less, firms lay off workers and unemployment increases, and the fall in wealth becomes self-fulfilling. I believe when we feel rich we are rich."

Why is confidence so critical?

"If people are not out in the shops buying things, then firms are not going to be hiring people and one of the ways they respond is laying people off. And when people get laid off, profits fall along with demand and the drop in profits validates the original belief that their wealth was worth less. The stock market is a reflection of how wealthy we all think we are."

Does the Economy Ruin the Stock Market or Does the Stock Market Ruin the Economy?



John Carney of the Wall Street Journal has written a well researched thoughtful piece featuring my research on the connection between the stock market and the unemployment rate and he asks? 

 Does the Economy Ruin the Stock Market or Does the Stock Market Ruin the Economy?

 The ideas he talks about are discussed in much more detail in my new book Prosperity for All: How to Prevent Financial Crises coming this year from Oxford University Press.