Micro-Sense vs. Macro-Mania
As I round out the Economics studying for the exam, I have to take something back from an earlier reading. The eminent reasonableness that I had noticed in the CFA's official voice seems to stop at the Micro's edge. In macroeconomics, it's replaced by bland conventional wisdom - from about 20 years ago. The Phillips Curve is in, while the Laffer Curve is out. Deficits "crowd out" borrowing and raise interest rates, which effect mysteriously vanishes when they're recruited in support of Keynesian recession-busting. Inflation means both cyclical price increases and monetary incontinence. As a result, the term "deflation" is almost never used.
The Phillips Curve example is more ink-blot dynamics than market dynamics. Take a look at his chart:
I've colored in the dots for his groupings in time, and I've been exceedingly generous, coloring them in for his groupings. And they still don't work! The lines he's got remind me of the imagination that produced the northern constellations. (Yeah, that looks like a lion...sort of...a little....Oh, wait! You say the head's at the other end?) If I really wanted to be mean, I'd say let's lump the yellow, red, and green dots together for an unbroken 20-year run of positive correlation.\
And what's this with lumping 81 and 75 together, ignoring both 1980 and the 1982-83 peregrination? The 70s seem to hang together well enough, until you see that 1975 gets a Curve of Its Own. I suppose the author could claim that the green 1990s dots are the transition from one curve to another, but if so, they're the only one. Every other jump from curve to curve is in one year.
The one curve that really does work is curve A, the 1960s. Which is when the theory was formed, probably why it was formed then. The curve really should just ignore monetary inflation and focus on business-cycle price changes. It would then operate more like a four-stroke engine, as well as actually making sense. There clearly is a short-term negative correlation between price changes and unemployment. But the sort of broad, sweeping general application produced through narrowly-squinted eyes and heavy drinking has long ceased to inform the Fed.