The Trolley-Car Problem, Part 1: The Fed’s Predicament, by Michael Lebowitz

Fed watching is usually as fun and pointless as watching grass grow, but this is a well-written article that does a good job of outlining the current situation. From Michael Lebowitz at realinvestmentadvice.com:

An unstoppable trolley car is barreling down the track. As the switchman, you stand at the junction where the track branches into two and you must choose which path the trolley will follow. Unfortunately, people are tied to both tracks, making the decision incredibly difficult.

The trolley car problem is an ethical question that forces one to choose between two poor consequences.

The Fed and many other central banks face trolley car problems, albeit lives are not on the line. With inflation running hot and economic activity faltering, years of questionable monetary policy force central bankers to make tough decisions. The last time such tricky decisions were made most policymakers were in school or just starting their careers.

Given the extreme debt accumulation of the last 40 years and the heightened speculative nature of financial markets, their choices may be the most important monetary policy actions we see in our lifetimes. These decisions will likely have outsized effects on the investment environment today and possibly for some time.

Rubber Band Theory

Let’s move from ethics to physics and introduce a second theory, the rubber band effect. When you stretch a rubber band, it builds up energy. The longer the stretch, the more energy it builds. When the rubber band can’t be stretched anymore, energy releases forcefully in the opposite direction.

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