In 2014 my youngest daughter Jasmine, a classicist, enrolled in Alan Blinder's macroeconomics course and sent me an e-mail asking "Who is Janet Yellen?" Herewith my reply. ----------------------------------------------------------- Jasmine the answer requires a bit of background: [I] The real economy operates in the real world of making things and performing services. It existed as barter before the financial economy. It operates according to two principles: productivity as the basis of production (so much water, seed and weeding produce so much corn) and voluntary exchange. Adam Smith described how technology and the division of labor increase productivity. These are the only bases of real income--a flow--and then wealth--the accumulated savings from the flow. [II] The financial sector's mechanisms facilitate voluntary exchange by creating fungible and highly divisible tokens for real goods and services. By itself the sector produces nothing but it adds value by enhancing the real economy's efficiency. You rent the tokens (exchangeable for productive resources) by paying interest. Mispricing productive resources (interest on the tokens to exchange for resources) below their actual yield diminishes the economy's productivity. [III] The tokens have value from both their fungibility/ divisibility aspect and also from the mutual expectation historically that the token will retain its value for future exchange or consumption, as could the physical product before the adoption of financial exchange mechanisms. In times when it was still politically correct, sovereigns imposed ghastly tortures on coin clippers and counterfeiters. [IV] Cyclic processes by definition revert toward a mean. Some cycle times are very long. [V] All actions have consequences. Interim conclusion: Real wealth arises only from production and so at the rate set by productivity. Financial effects can only modulate the productivity of the real economy. Every aspiring economist is taught these realities in Economics 1. I as an aspiring political economist learned them at the feet of Otto Eckstein. Janet Yellen espouses a policy which violates these realities. (See the two long articles about her in the New York Times issues of October 9 and 10.) Her main appeal to the president is her policy to create money out of nothing, because credit availability influences consumption, deemed a proxy for "well-being." This very troubled assumption forms the basis of present-day economics but economists generally refuse to engage the philosophic and epistemological issues underlying this presumed equivalency. Her proposed policy violates reality in multiple ways: (1) From [II] financial mechanisms only modulate the rate of income generation; they produce nothing. (2) From [III] creating money in this way violates the store-of-value function of the tokens by diluting the value of the existing token stock, and it violates the pricing rule, so diminishing rather than increasing the economy's productivity. Yellen's money-creation policy assumes that [III] and [V] do not operate, but in fact dilution strongly affects the real economy. (3) From [IV], the policy cannot continue ad infinitum because the values of the economy's basic metrics must revert toward their means. If artificial measures block reversion, some values will move to a limit--in common-language terms a catastrophe. (4) Most important of all, her policy preference violates the basic principle of an efficient economy: voluntary exchange [I]. Economists understand this fact very well, even contriving a clever term, "financial repression," to describe what they deem a clever policy, a series of measures too complicated to describe here, which use the threat of force, and ultimately state violence (for example home seizures), to expropriate weakened actors and enrich the influential. In the present context it precisely meant ruining Grandma (who expected to live on the income from her savings) in order to enrich Goldman Sachs and the other financial firms your Princeton classmates aspire to join. Economists clearly label the exact mechanism by which inflation "works" as "the money illusion." For reasons you can figure out yourself, these intelligent and highly credentialed experts don't make the entailed connection. No such program can be, or ever has been, dependable and durable, because it is based on an intangible illusion. It attempts to generate products without production, impossible in principle just like a perpetual motion machine. So moving from scientific to ordinary language, Yellen's way of thinking delivers you to the mess we face now, where public expectations and business decision-making depend on continuation of interest rates far from their mean ("financial repression"). Allowing the natural reversion process to operate will quickly produce a crisis in the economy, so the president chose Yellen to perpetuate Helicopter Ben's money-creating policies in order to postpone the reversion. Since the crisis must occur, the only scientific question is whether its intensity later will exceed its intensity now. If equal, then Janet Yellen's policy is defensible (no matter what, we're going to die so we might as well postpone it) but if the crisis will worsen in some proportion to the length of the forced delay in reversion toward the mean, then her appointment raises significant policy questions. For some reason press and scholarly discussions are never framed to highlight the essential simplicity of this situation. I'm putting up a link to this text in case you want to pass it to any of your friends: . Daddy [slightly edited October 23, 2024]