House testimony and the concept of New Oikonomia

The US Treasury Secretary Janet Yellen and Fed Chief Jerome Powell appeared before the House Committee on Financial Services during the oversight hearing. All their observations during the testimony were parsed by the markets for the potential signals. Leaving aside what they said exactly we just look at the how market reacted. Dow Jones ended close to 1% down from previous close. The US treasury yields were down slightly, the 10-year trading around 1.59 levels which is a far cry from 1.75 seen post FOMC last week. Though the temptation is there to attribute a reason to these small movements too, but we will hold ourselves back and won’t paste any as of now.

During the testimony the debate raged on the issue of free money, targeted relief, is post pandemic economy a new type of economy etc. The last one regarding “the new economy” deserves a bit more investigation. The word economy gets derived from the Latin word Oikonomia which means the household and the financial management of the household activities. The modern word economics thus has its roots in the how an individual household goes about managing its finances. The household behaviour then gets aggregated at the level of the society which gives rise to social behaviours regarding money, thrift or splurge, consume or invest. Hence it can be safely surmised that the economy will evolve as the household behaviour will evolve.

The question about the current economy being a “new economy” is not a new one. It gets debated with amazing regularity. There is a speech by Former Fed Chief Alan Greenspan on September 4, 1998 which was titled “Question: Is there a New economy?”. The context of the speech was the booming stock markets, falling inflation and sky-high valuations of technology stocks (later dubbed as dot com bubble).

Greenspan starts by saying what is the definition of new? He defines by saying “a profound and fundamental alteration which has happened in the way our economy works which has created a discontinuity from the past” is new. Then he goes on to discuss what has changed and what has not. He refers to the technological advancement, globalization, just in time inventories etc to signify that how the US economy is evolving in a high growth low inflation regime which is unprecedented in history. But then he counters that by saying the human psychology which moulds the value system of any market economy remains the same. The fear and greed which guided our forbearers still pervades among us and in that sense the economy is still the same.

In the later part of the speech in a Greenspanish way he alludes that the current high valuations of assets are due to less disciplined evaluation of the future and not based on knowledgeable judgement of true value. This was his roundabout way of describing the formation of a bubble. We all knew what happened later, the dot com bust happened, GFC happened but at the same time the inflation remained non-existent even with ultra-low rates. So, Greenspan was proved right in both his arguments. The speech is available on the Federal Reserve website and is a recommended read.

On the markets wrap up, the Dollar index is strong, the Rupee has opened weaker against the Dollar, Indian bond yields are down, 10-year is trading at 6.12 currently. Brent oil is down around 61 $/bbl helping Indian yields. The tax bill which the Treasury Secretary hinted is one thing which can trouble the equity markets.