Perry Mehrling - We will miss you

 

Perry Mehrling suddenly died this week, and the monetary economics world will be diminished. He was a monetary theorist and an important economic historian, though his work in history was largely accidental. 

Mehrling’s defining intellectual contribution is his "money view", an alternative analytical framework designed to make sense of the modern, highly integrated global monetary and financial system. Rather than relying on traditional macroeconomic equilibrium models, the money view approaches the economy through the lens of monetary reality (using balance sheets, ledger accounts, and cash flows).  His view focused on the link between short-term funding and long-term capital markets, the hierarchy of money, and the importance of liquidity over solvency. 

He often expressed his ideas through intellectual biographies and histories of economic thought, bridging abstract financial theory with the real-world evolution of central banking and capital markets. Two examples, Fischer Black and the Revolutionary Idea of Finance (2005), an influential intellectual biography of Fischer Black (of Black-Scholes fame), exploring how modern quantitative finance transformed Wall Street and academic economics, and The Money and the Empire: Charles Kindleberger and the Dollar System (2022), a definitive intellectual biography of economist Charles Kindleberger (author of Manias, Panics, and Crashes), tracing the historical mechanics of how the U.S. dollar displaced the British pound to become the world’s dominant reserve currency.

His writing is not easy and requires strong focus, but i think it resonates with anyone who works in finance and wants to get a good feel on how the financial system works. 

Hall and Woodford - great choices for Nobel Prize

                                  

Robert Hall and Michael Woodford are excellent choices for the Nobel Prize in Economics. They have influenced generations of macroeconomic scholars. They were at the forefront of New Keynesian economics through their work on the microfoundations of macroeconomics, grounding macroeconomic policy and economic models in how individual households and businesses actually make decisions over time.

Robert E. Hall: Consumer Expectations and Consumption Theory

Forward-Looking Behavior: In his landmark 1978 research, Hall fundamentally changed how economists view household consumption. He demonstrated that if consumers are forward-looking and base their spending on expected future income, changes in consumption should be largely unpredictable (following a "random walk") because consumers only adjust their spending when they receive entirely unexpected news.

Additionally, Hall was an important contributor to business cycle analysis through his work as chairman of the NBER dating committee. 

Michael Woodford: Monetary Policy and the New Keynesian Framework

Unified Policy Models: Woodford integrated forward-looking microeconomic behavior into cohesive, quantitative macroeconomic frameworks that could actually be used by policymakers.

Interest and Prices book (2003): In his foundational book, Woodford analyzed how individual firms set prices and how monetary policy affects the broader economy through expectations. He was influencual at focusing monetary policy thinking on the natural rate of interest. Central banks should focus on rate management.

The Power of Central Bank Communication: Woodford highlighted that the success of monetary policy depends heavily on how the public and financial markets perceive future interest rates and policy intentions. Clear, credible central bank communication is vital for controlling inflation and managing economic shocks, heavily influencing how central banks worldwide handle crises today.

Credit to GDP ratios - Telling the fiscal story

The BIS uses the credit-to-GDP ratio as an early warning indicator of financial excess. It clearly showed extremes before the GFC. You can also see the explosion of credit after the Great Pandemic, which was a man-made surprise. Currently, the private credit-to-GDP ratio looks tame, although there is a clear movement to higher levels. 

The story looks very different when we look at public credit-to-GDP. The public debt usually spikes after a market peak as fiscal policy kicks in to support the economy. The public debt is increasing but not at levels that seem excessive, yet there has never been a reversal of the Pandemic extremes. 

What is most interesting is when we difference the private and public change as a percentage of GDP. There is a large secular change in the composition of debt from private to public. The issue with this switch is whether the government can afford its spending. Get ready to pay through more taxes or through a debasement of the debt. 

 

Convenience yield is falling for Treasuries

Interest rates have been rising with what some may call the "Great Bond Sell-off" of 2026, yet there are other underlying problems that will have much longer-term implications for US debt markets. There has traditionally been a convenience yield associated with US Treasuries because it has been viewed as a safe asset. The safe asset problem is arising because the supply of Treasuries has been increasing relative to demand, thereby reducing the convenience yield. Additionally, other policies affect Treasuries as a safe asset. If the reserve currency is also perceived as less safe, global investors will be less inclined to hold US Treasuries.

The reserve currency status and safe asset status are not the same thing, yet they are closely connected. In the paper, "Tariff war shock and the convenience yield of US Treasuries - A hedging perspective", the authors document the erosion of the convenience yield for long bonds because of the rising stock-bond covariance. They find that the rise in long-bond yields is associated with a deterioration in the convenience yield, driven by the withdrawal of safe-asset investors worldwide and a shift toward shorter-term Treasuries, which still serve as a safe asset. 

The data surrounding last year's tariff wars show a shift in perceptions of safety. Policy choices matter and will impact US credibility and reputation. Markets will look for other safe havens such as gold or shorter-duration Treasuries relative to traditional safe assets.