Reports of declining inflation have led to a lively dispute: what should Fed policy be? Should it increase interest rates again, leave them the same, decrease them? Scott Grannis thinks it’s time for the Fed to cut rates:

There is absolutely no reason the Fed needs to raise rates further, and every reason they should begin cutting rates—beginning with the May 3rd FOMC meeting if not sooner.

Barry Ritholz seems to think they should leave them where they are:

If the FOMC were plugged in, they would realize that their work is done, there is no need to throw millions out of work because we have a shortage of houses, semiconductors, and workers of all kinds. Most goods have returned to pre-pandemic price levels. The biggest driver of apartment prices is the shortage of homes and the high price of mortgages. (Gee, whoever is responsible for that?)

Based on the Economist’s “Big Mac index”, the Fed still has some work to do (it has been suggested that the CPI systematically understates inflation).

So too hot, too cold, or just right? I don’t know. I do know that would ordinary people buy is significantly more expensive that it was in 2019.

The one thing we should be able to take away from all of this is that Modern Monetary Theory has been a siren’s song. Although what MMTers prescribe may be technically correct, it’s also politically impossible. You can always spend more but cutting spending or raising revenue is politically fraught.

Wall Street Journal journalists Byron Tau, Sadie Gurman, and Aruna Viswanatha report on the recent leak of classified documents:

WASHINGTON—The U.S. government is treating the apparent disclosure of classified material surrounding the war in Ukraine as an insider’s leak, people familiar with the matter say, but hasn’t yet homed in on key suspects for a massive intelligence breach that has exposed the challenges of safeguarding sensitive U.S. information and tested ties with some of America’s closest allies.

The bulk of the more than 60 documents, if genuine, appear to originate from the Central Intelligence Agency’s Operations Center and the Pentagon’s Joint Chiefs of Staff. Such documents are typically briefed to senior-level decision makers at the Pentagon in an environment protected from electronic surveillance and secured against leaks.

The Federal Bureau of Investigation is using clues in the images that have circulated online in recent weeks to aid its criminal investigation, law-enforcement officials said. Some of the documents would be accessible to several hundred people, while others would be restricted to a much smaller group, U.S. officials said. Focusing on the access to the more-restricted documents gives investigators a way to narrow the field of potential leakers, they said.

That’s the point I have been making since the news of the leak broke. Additionally, the number of individuals who have access to all of the most highly classified documents in the cache should cause that number to decline. If that’s not the case it sounds like an even greater security problem to me.

I sincerely hope the Department of Justice is taking this matter seriously. Failing to do so would call executive branch credibility into question.

Walmart has announced that it is closing four Chicago stores: three on the South Side and one on the North Side:

Today we have made the difficult decision to close four of our stores in Chicago.

The decision to close a store is never easy. The impact is greater than just closing a building. It affects people — people who work in, shop in and live in communities near our stores — and we never take that lightly. Treating people and communities with respect and compassion during this transition will guide everything we do.

All four stores are “underperforming” but it is widely bruited about that security is also a factor.

The closures highlight the risks involved when such major retailers enter a neighborhood. Their entry displaces dozens of small stores. They come; they go; the decision is made on purely business grounds. When they leave, they leave a desert in their wake.

In his latest offering George Friedman declaims that the streams are crossing and that the United States is in for a social crisis, followed by a “massive economic crisis”, followed by a political crisis and a “once every 80 years institutional crisis in the federal government”.

That isn’t the actual point of his piece. His point is that when the U. S. sneezes the world catches a cold.

Here’s his conclusion:

The current political system cannot manage this situation. A solution must emerge now, to be presided over by the next president. It is impossible to explain all the details of a system failure or the need for a new political order. At this point, the only thing that can be said is that we are heading into failure, and a new president, filling everyone with joyous hope, will oversee what must be done. But what must be done remains murky, taking its bearing only from the breadth and seriousness of the failure.

I wish he wouldn’t sugar-coat it like that.

There’s a lot of fulminating over Chicago’s hosting the Democratic National Convention in 2024. Some think it’s a coup and brilliant; others think it’s colossal mistake.

I think it’s too early to tell. 2024 is a year away and we’ve just elected a new mayor. In a year Chicago’s downtown might be the safest major city downtown in the United States or it might be a combat zone. We just don’t know. We don’t even know how or if the new mayor will try to ensure the convention’s success.

I only have one thing to add. Chicago’s nickname, “the Windy City”, probably doesn’t come from the weather.

AI can’t predict the movements of the stock market. That’s the message of Gregory Zuckman’s Wall Street Journal story:

Wall Street has long used automated algorithms for tasks such as placing trades and managing risk. But investors haven’t made much progress relying on AI to tackle their biggest challenge: beating the market. While some see ChatGPT as a way to boost sales and research efforts, the investing results using AI haven’t been especially impressive.

“Progress in applying AI to investing has been limited, though innovations in language modeling could change that in the years ahead,” says Jonathan Larkin, a managing director with Columbia Investment Management Co., which manages the $13 billion endowment for Columbia University and invests in various funds.

Wall Street had a head start in AI. Four decades ago, mathematicians-turned-quants including Jim Simons, founder of Renaissance Technologies, developed algorithms to turn investing decisions over to their computers.

He and other quants have spent years using machine learning, a type of AI. They have built trading models that can extrapolate from past data to identify patterns and develop profitable trades, with limited human intervention.

But few firms have found success turning all of their operations over to machines, quants say. And they haven’t enjoyed dramatic advances with self-learning or reinforcement learning, which entail training computers to learn and develop strategies on their own. Indeed, Renaissance and others rely on advanced statistics rather than cutting-edge AI methods, say people at the firms.

“Most quants still take a “theory-first” approach where they first establish a hypothesis of why a certain anomaly might exist, and they form a model around that,” says Mr. Larkin.

One big problem: Investors rely on more limited data sets than those used to develop the ChatGPT chatbot and similar language-based AI efforts. ChatGPT, for example, is a model with 175 billion parameters that uses decades—and sometimes centuries—of text and other data from books, journals, the internet and more. By contrast, hedge funds and other investors generally train their own trading systems using pricing and other market data, which is limited by nature.

Personally, I doubt that the problem is data. I suspect it’s more that the market isn’t rational as well as being susceptible to manipulation.

You may not be following it but the dispute over reductions in the amount of water taken from the Colorado River by Arizona, California, Colorado, New Mexico, Nevada, Utah, and Wyoming is still a matter of urgent discussion. At the Wall Street Journal Jim Carlton reports on a new development:

California would have to reduce its use of Colorado River water more than current agreements require under a proposal the Interior Department unveiled Tuesday that could upend a longstanding system of water rights.

The federal agency proposed two methods by which water usage could be reduced as much as 25% next year. The seven states that tap the Colorado have been negotiating with each other since August to make voluntary cuts that could offset any new mandatory ones.

One proposal calls for equal percentage cuts for the three states at the bottom of the river: California, Arizona and Nevada. That would upend current agreements that give water districts in California more senior rights. The cuts would take effect in 2024.

The Bureau of Reclamation, part of the Interior Department, warned in August it would impose large cuts if the states that rely on the river didn’t come up with a satisfactory plan by Jan. 31. Six of the seven states—Arizona, Colorado, New Mexico, Nevada, Utah and Wyoming—in January submitted a possible framework for an agreement that would call for voluntary cuts and conservation totaling between 2 million acre-feet and 4 million acre-feet annually.

As you might imagine California officials aren’t happy with this development—they don’t want the Golden State to be treated equally with Arizona and Nevada.

The dispute pits agricultural, home building, and environmentalists at odds with one another. The DoI proposal is presumably intended to provide an incentive for the states to arrive at their own solution.

I have a question of law. Why aren’t the proceedings of the House Judiciary Committee shielded from exactly the sort of suits that Manhattan District Attorney Alvin Bragg has apparently filed against Jim Jordan under Article I Section 6 Clause 1 of the Constitution?

SECTION 6. Clause 1. The Senators and Representatives shall receive a Compensation for their Services, to be ascertained by Law, and paid out of the Treasury of the United States. They shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place.

The emphasis is mine. My question is not about whether Rep. Jordan should meddle in Mr. Bragg’s prosecution: I don’t think he should. It’s about the legality of the suit filed by Mr. Bragg.

Update

I think that the House subpoenas of documents relating to Mr. Bragg’s investigations are a stretch, something it’s quite possible the House has no authority to do. I would think they’d need to show that federal money was being used in the investigation.

Walter Russell Mead in his Wall Street Journal column thinks he has found the culprit responsible for killing nuclear non-proliferation—Barack Obama:

As President Clinton told the Irish news service RTÉ last week, the Ukrainians resisted American pressure to denuclearize: “They were afraid to give them up because they thought that’s the only thing that protected them from an expansionist Russia.” But Americans, as Mr. Clinton’s secretary of state Madeleine Albright once put it, “stand tall. We see further than other countries into the future.” And so the Clinton administration pushed another message on the Ukrainians: The rules-based international order would protect Ukraine’s future better than anything as anachronistic as nuclear weapons.

“I feel terrible about it,” Mr. Clinton told RTÉ, arguing that now Americans must help Ukraine in a crisis brought on in large part by their trust in our word.

The real situation was complicated. Russia still controlled the nuclear weapons left on Ukraine’s territory. They were less a Ukrainian hedge against Russian adventurism than outposts of Russian power on Ukrainian soil. Nevertheless, with hindsight it appears that trusting the word of a U.S. president and the rules of the international order rather than relying on a nuclear deterrent was a blunder of historic proportions.

Bill Clinton’s reflections come as the barriers to nuclear proliferation are rapidly weakening around the world. Russia and China are abandoning all pretense of opposing the North Korean arsenal. In South Korea, polls show that 70% of the population believes that the time has come to follow the North’s lead. In the Middle East, Iran’s relentless progress toward nuclear weapons is touching off the long-feared regional proliferation cascade. Saudi Arabia and the United Arab Emirates are taking the first steps toward acquiring the capability to enrich uranium. Turkey is unlikely to lag far behind as nuclear weapons become a normal part of the arsenal of middle powers. Nationalists in countries such as Brazil and Argentina will want their countries to join the expanding nuclear club.

The fight against nuclear proliferation has been a centerpiece of American foreign policy since the first bombs fell on Japan in 1945. American diplomacy tried and failed to stop the Soviet, British, French, Chinese, Israeli, Indian, Pakistani and North Korean programs. The Non-Proliferation Treaty went into effect in 1970 and was permanently extended five months after the 1994 signing of the Budapest Memorandum. In that memorandum, Russia, the U.S. and U.K. agreed not to threaten or attack Ukraine, Belarus and Kazakhstan, and to consult on helping if they were attacked; also, the three former Soviet republics joined the NPT as nonnuclear states. The NPT has been hailed as a cornerstone of the rules-based international order. Backers hoped that nonproliferation was only the start. Ultimately the nuclear powers would follow the example of Ukraine and give up their nuclear arsenals in the service of world peace.

History will name Barack Obama as the man on whose watch nonproliferation definitively failed. His waffling response to Russia’s 2014 invasion of Ukraine not only marked the end of the post-Cold War holiday from history; it also marked the death of the dream that the leaders of the democratic world had the strength and vision to uphold the principles of the rules-based international order in the face of a ruthless opponent. It further taught the world that nuclear weapons are a better defense than American pledges. Coupled with the failure to address North Korea’s nuclear progress and the Iran deal’s sunset clauses, which made the treaty about delaying rather than blocking Tehran’s nuclear advances, Obama-era diplomacy made clear that, despite high-flown rhetoric to the contrary, Washington had no plan to stop the spread of nuclear weapons.

I think that nuclear non-proliferation was killed long before 2014 and the blame belongs to none other than Bill Clinton. To the clue mentioned by Mr. Clinton himself I would add:

• NATO expansion
• Failure to react to North Korea’s obvious prevarications regarding nuclear weapons
• the “Agreed Framework”

Much of North Korea’s nuclear development activities took place under Bill Clinton’s and George W. Bush’s watches. You can’t blame Obama and let them off the hook.