Hello everyone! I hope you’re all well and enjoying what’s left of the summer. By now probably all of us in the northern hemisphere are longing for some cool, crisp air, but summer always goes by way too fast.
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NEWSLETTER STUFF
🌻Some news! Substack seems to think I am a bestseller (I know, I’m also bewildered), which means I can now offer you, my valued reader, free access to some gated posts.
All subscribers to the free tier of Crypto is Macro Now will get free access to three posts a month, of their choosing. I think, this is all new to me.
Anyway, if any of you try it out (and I hope you will!) and it doesn’t work, let me know. Worth noting that you have to be logged in to Substack to unlock a post.
I think it’s a great idea, and I congratulate Substack for helping us do better for our readers. I would, of course, love to make all posts open to everyone, but this is my only source of income, and so I will keep hoping that one day it will cover my living expenses. Meanwhile, I love what I do, and I’m beyond grateful that you give me some of your time. 🌻
In this newsletter:
Fed communication and the Maradona theory of interest rates
What is the fiscal price theory of inflation?
Assorted links: Data centres, AI predictions, slop and the “optimize” backlash
Weekend: nostalgic yet iconic ‘70s-’80s movie soundtrack videos
Some of the topics discussed in this week’s premium dailies:
Coming up this week: beyond a White House crypto event, not much
What custody has to do with ownership
A tale of two markets
Fed communication and the Maradona theory of interest rates
Term of the day: the fiscal price theory of inflation
The Treasury Twist accelerates
Term of the day: yield curve control
Opening doors: crypto rules and market reform
Markets: a different vibe
Fed communication and the Maradona theory of interest rates
There are task forces, and there are task forces.
As you know, Fed Chair Kevin Warsh has set up a few of these to re-examine how the US central bank should do its job. There’s one on data, another on the Fed’s balance sheet, one on inflation frameworks, on the impact of AI on productivity and jobs… but arguably the most consequential for markets is the task force on communication.
Since markets price in likely future Fed actions, expectations matter. These are inevitably going to be influenced by communication from the central bank, whether deliberate or inadvertent – when deliberate, it can be used as a market lever. What’s more, consensus around expectations is likely to contribute to market stability. So, for the past couple of decades, we’ve gotten used to “forward guidance”, in which the Federal Reserve lets us know what it expects interest rates to be going forward. It guides the market’s expectations.
The new Fed Chair has made clear he would like to do away with forward guidance. He believes it locks in forecasts and slows central bank action when conditions change; that it should not be necessary outside of crises; and that the Fed should be taking signals from the market rather than the other way around.
Other officials have gone further, accusing journalists of being too lazy to analyse monetary policy on their own (not a journalist’s job, but whatever).
In sum, Fed communication is important, and it’s going to change.
To get an idea of what that might look like, I turned to the head of the communications task force Lord Mervyn King, former governor of the Bank of England and author of easily the best book I have read to date on the philosophy of finance – The End of Alchemy: Money, Banking and the Future of the Global Economy, published in 2016.
Given its renewed relevance, I pulled it off the shelf to see what Lord King has to say about how central banks should interact with the public.
To sum up his view in two words: they shouldn’t.
When King joined the Bank of England in 1991, he asked Paul Volcker for advice. Volcker was succinct: “mystique”.
This was in a time before social media, Substack, video everywhere – a time when newspapers and news anchors were trusted, when life was less financialized and money less mobile. Until 1994, the Federal Reserve did not even reveal what the official interest rate was, let alone whether it had changed.
Today, trust in almost all institutions has weakened – this may be well-deserved, but it adds friction to the effective functioning of society, weakening trust even further. The central bank has hoped that greater transparency would have restorative powers – let the public see how we do what we do, the theory goes, and they’ll be more understanding.
To some extent, I think it worked. We may strongly disagree with decisions taken, but feeling like we know what they’re thinking weakens our assumptions that they’re idiots. Former Fed Chair Jerome Powell’s folksy and grandfatherly image at the press conferences helped many overlook his involvement in Operation Choke Point 2.0 and the colossal “transitory inflation” error.
Put differently, transparency can open the book, but can also obfuscate important details with a flood of words.
King alludes to this in his book. Transparency, he argues, should not be the objective. It needs to be a tool: does it improve the quality of central bank decisions?
The publication of the FOMC meeting minutes, for example, adds a layer of accountability – but it can also hinder open and frank discussion as members know the public will pore over every word, and even just the suggestion of a change in approach could trigger market volatility.
As for “forward guidance”, King points out that it is misleading: there is no way FOMC members can know what’s ahead, but the issuance of guidance suggests that they do. And their attempt to reduce uncertainty has morphed into interest rate predictions, from the very people tasked with adjusting rates in the face of uncertainty. One of my favourite summer reads has been Carissa Véliz’s “Prophecy” in which she points out that predictions are really about control – they subliminally lock us into a certain path of behaviour, which can give the illusion of preparedness while making us more vulnerable before an unknowable future.
This is also a theme Lord King comes back to often, especially in his other excellent book, “Radical Uncertainty: Decision-making for an Unknowable Future”, co-authored with John Kay and published with ironically prescient timing in 2020.
So, we will most likely soon see the end of the dot plot which reveals FOMC member rate expectations (to which, tellingly, Chair Warsh refused to contribute in the most recent publication). This week’s publication of FOMC minutes could be one of the last, at least in the current format. We might even get fewer post-FOMC meeting press conferences – if they’re going to be as boring as the last one, I’m all for it.
Many will protest as we’re in a content-hungry age in which most of us toil under the illusion that more information will make us smarter and better prepared for what’s ahead.
King argues that, when it comes to monetary policy, it won’t. While he may not fit the typical profile of experts who spout sporting analogies, in “The End of Alchemy” he manages to tie in a football anecdote that will resonate with anyone missing the spectacle and tension now that the World Cup is over.
In the 1986 World Cup, Diego Maradona scored two goals against England to win Argentina the quarter-final victory (it would go on to win the championship). One should not have been allowed as he used his hand, but the referee’s attention was apparently elsewhere and did not catch the foul. Obviously, that doesn’t apply to monetary policy, but the second score, later voted the “Goal of the Century”, does: Maradona ran with the ball from his own half to the English goal in a straight line. How was that possible? It turns out the opposing team assumed he’d zig and zag. It did not occur to them he’d hold a steady path – and he was able to do so, because they were busy reacting to a different strategy.
Financial markets work in a similar way. They react to what they expect the central bank to do. This can be enough to stabilize private spending without the central bank having to do anything at all.
Put differently, expectations do the central bank’s work. And Warsh wants the market to derive its own expectations of what the central bank will do, based on its interpretation of the data.
In his first press conference as Fed Chair, Warsh was clear in his reasoning:
“I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask a question: How will the Federal Reserve react to that incoming information? … Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information, and we’re being blind to it.”
Combining Warsh’s views with those of the head of the Communications Task Force leaves little room for doubt as to where Fed transparency is heading – back into the murky recesses of the Eccles building.
A more relevant question is to what extent this key task force will be merely performative. Hopefully, it will allow enough debate to craft a workable compromise and a smooth transition to the new central bank regime.
See also:
Warsh’s heavy-hitting task forces (July 2026)
The performance (July 2026)
What is the fiscal price theory of inflation?
(In macro, crypto and geopolitics, there are so many terms we often use without fully understanding them, so many we regularly hear without knowing their meaning – so, most days, I choose one and do my best to explain it.)
The ideas behind the “fiscal price theory of inflation”, popularized by economist John Cochrane and others, have been gathering momentum in recent years along with the post-2008 and post-pandemic fiscal expansions.
The basic premise, as the term suggests, is that inflation is largely determined by fiscal policy.
This may feel intuitive – more government spending = more money sloshing around the economy = more inflation – but it flies in the face of the long-held assumption that monetary policy determines inflation.
The term may sound like a fancy way of saying “fiscal dominance”, which I’ve often written about before as it explains why, with US rates much higher than a few years ago, inflation is still above the 2% target and is resisting coming down further.
But there’s more to it. It’s about government liabilities relative to public trust in its ability to cover obligations via future revenues.
Economists like equations, and proponents of this theory came up with a relatively simple one to describe the mechanism:
Real value of government IOUs = Present value of expected future repayments
Here, government IOUs include issued bonds and outstanding money.
Put differently, the amount of outstanding government debt adjusted for inflation has to equal the present value of expected future federal net income (excluding interest payments). Simplifying further, total liabilities must equal the ability to repay.
When the former climbs above the latter, people will want to reduce the value of the government IOUs they hold. They will do so by spending more. This pushes up prices which lowers the inflation-adjusted total value of the government IOUs, until the equation is again in balance.
Put differently, inflation increases when people don’t expect the government to be able to fully repay its debts. This brings down the real value of the total IOUs.
So, effectively, inflation is a function of a government’s debt and money issuance, and public trust.
This largely fits in with what we’re seeing now in the US: rates are much higher than a few years ago, and so is inflation. Continued fiscal stimulus will keep inflation high, whatever the Fed does on rates.
ASSORTED LINKS
(A selection of reads I came across this week that I think are worth sharing, not about crypto nor macro. I try to choose links without a paywall, but when I feel it’s worth making an exception, I specify.)
Jasmine Sun paints a nuanced portrait of why there’s no “right” or “wrong” in the datacentre-in-my-backyard debate. A lot of municipal income is at stake; but many people just don’t want the hulking cement monstrosity in their neighbourhood, at any price. (no data centers in my backyard, @jasmine’s substack)
Why are Americans against building more AI datacentres when the economy depends on it? Derek Thompson talks to Jasmine Sun about the relationship between the construction backlash, the Silicon Valley mindset, social media and non-disclosure agreements. Eye-opening. (The Great American AI Rebellion, Derek Thompson – paywall)
A sample of AI-related predictions from the archives, all of them so definite and certain. (The Archive of Incorrect AI Predictions)
A Pew Research report suggests that over a third of web pages published since the advent of ChatGPT are written by AI. That’s not surprising, but it’s also depressing. And we have to wonder if these pages are optimized for being picked up by AI queries. (How Much of the Internet Is Written With AI?, Pew Research)
More signs that the social media-fuelled pressure to “optimize” is getting the long-awaited backlash, and that we’re getting tired of the influencer lifestyles. The article suggests that it’s out of boredom and over-flooding, and that may be – but my working theory is that the digital acceleration of AI everywhere is subliminally boosting our interest in the authentic and the personal, also seen in a growth spurt in retail spending at hobby-book-music stores. (The Optimization Backlash Has Begun, Bloomberg – paywall)
HAVE A GREAT WEEKEND!
(in this section, I share stuff that has NOTHING to do with macro or crypto, ‘cos it’s the weekend and life is interesting)
Time for some more iconic movie soundtrack songs from the ‘70s and ‘80s that are also fun (if somewhat dated) music videos. I last shared some back in January, can’t believe it’s been that long… Back then I said there were more coming, and here – finally – they are:
Hot lunch, by Irene Cara (from Fame)
Take My Breath Away, by Berlin (from Top Gun)
The Power Of Love, by Huey Lewis & The News (from Back to the Future)
DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold some BTC, ETH and a tiny amount of some smaller tokens, but they’re all long-term holdings – I don’t trade. Also, I often use AI for research instead of Google, but never for writing.