In response to an FT article by Martin Wolf on 8th December 2015, entitled 'The challenges of central bank divergence'
"The Fed may find the US economy is not as strong as it believes"
The US economy is clearly not as strong as the Fed claims to believe. I say ‘claims’ because given the last 12 months of contradictory jawboning from voting and non-voting members alike, I'm not even sure THEY know what they believe.
Back to the data - there is plenty of data that indicates that the economy is not strong. Dr. Yellen is a labour economist, so unsurprisingly she appears to focus on jobs. The jobs number looks healthy enough, until you pull back the covers and look at what consists of a 'job' - 1 hour a week or more....until you look at who is taking these jobs - people 55 plus....until you look at where the bulk of the gains are - part-time low wage jobs...until you look at where the bulk of the losses are - high paid middle class jobs. So it seems to me that either Dr. Yellen is a very poor labour economist, or she's convinced herself that this is the best that the US economy is capable of. I suspect it's the latter. Personally I totally disagree. A country as innovative and entrepreneurial as the US didn't just turn into a nation of part-timers. Something else is up, and Dr. Yellen doesn't know what it is.
Putting job numbers to one side - a strong economy would not be emitting the following signals, a full six years into a so-called 'recovery':
1. Between the pre-crisis peak in Q3 2007 and Q3 2015 labour productivity has grown at 1.1% per annum. The historic average is 2.3%
2. During the same period total labour hours worked has risen by less than one half of a percent
3. Business start-ups outpaced business failures by 100,000 per annum until 2008. In the past 6 years that trend has reversed - the net number of start-ups vs. failures is now minus 70,000 per annum.
4. Real net investment in US Business is 8% below that it was at the 2007 peak, and a full 17% below what it was in 2000.
Contrast these four figures with the following one:
5. The net worth of households and nonprofit organisations in 2008 was $68,000. It is now...drumroll...$86,000.
What could possibly explain an economy that produces the first four of those signals in combination with the fifth one? How can an economy that is losing it's productive flair, that is doing barely any more work than it was 8 years ago despite a higher population, that is closing down it's businesses and failing to start new ones, that is not investing in its future...possibly have achieved a 25% increase in its household net worth?
The answer is QE. Asset price inflation. The Fed's main achievement over the past 6 years has been to inflate another bubble, just like they did after the dot-com bust. Every time they do this, it gets bigger. This one is enormous - when it bursts it will take down the bond market. This is an ersatz recovery, concocted by a group of ersatz economists.
Something is up and Dr. Yellen doesn't know what it is. The root of this malaise is not the productivity, or the willingness to work, or the entrepreneurial spirit of the American people. The root of the problem is the central planning philosophy at the core of US political and economic life: Crony capitalism and socialism for the rich. Debt for Guns and Butter. Ponzi monetary policy and tooth fairy, 'something for nothing' economics.
Personally, I don't think it matters what the Fed believes about the economy, or what they do next week - we are way past that. But if and when the US shakes itself free from this travesty of central planning, there will be a real recovery. It will be very messy, but it will be real.
A fellow reader replied:
Looks like you have been reading Andrew Mellon's political economy tool kit, during the time he was a secretary treasury of the US to President Herbert Hoover, during the height of the great depression, which was when, he - Mr Mellon - said to Hoover (and in fact wrote to him in memo) that: the President should "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system.
Hence, your prescription, is essentially the liquidationist school of economics. Hence, although, the QE, may have inflated the assets prices, but, since, a fiscal stimulus (on a rolling basis) that can sufficiently up-lift things, after the Great recession was out of the question in Washington due to the GOP's political philosophy, then, the weight of things, invariably, have fallen on the monetary muscle of the Fed, which invariably meant, the Zero-pound rate and the unconventional policy along the lines of the QE.
Now, do not misunderstand me, when I say this. Since, I do believe, that, the recovery was at best anemic and at worst, it was essentially indicating, that perhaps, a prolong period of deflationary reality may be upon us, regardless of what monetary magic-wand the Fed gets up to. Which means, a repeat of Japan's 20 years experience may be what we are looking for. But that itself, as miserable and niggling a prospect may be, is still, a small mercy to be had, particularly when you compare it, the very real chance that the great recession would have turned into a great replay of of the depression, if your prescription of "liquidating-the-rottenness-from-the-system" were to have been follow. Hence, yours is essentially a prescription of saying a gulping a poison will have cure the patients, even if he were to have run the risk of the patient dying.While, others, were saying, that, admittedly, we do not have a good option once the great recession struck, hence, the only option was between this sort of dog's breakfast of a recovery, which still has the prospect of turning into a dust when the normal business circle turn into inevitable recession on one hand. And on the other hand, we had the prospect of turning that financial-instigated recession into a great depression, if we have tried to take a a leave from Andrew Mellon's play-book, which is what you are advocating in this argument of yours.
“the only option was between this sort of dog's breakfast of a recovery, which still has the prospect of turning into a dust when the normal business circle turn into inevitable recession on one hand. And on the other hand, we had the prospect of turning that financial-instigated recession into a great depression, if we have tried to take a leave from Andrew Mellon's play-book, which is what you are advocating in this argument of yours”
I know what you mean…but…no and no! Seriously, I don’t think there are only two options and I’m not advocating Andrew Mellon’s strategy.
I think we need a conscious re-set of global debt and the global monetary system – a new Bretton Woods if you like. I don’t think politicians have the wisdom or the stomach for that, but I do believe it will be forced upon us by systemic collapse.
Again, as regards 2007/08 I do not think there were just two options – Global wipeout or the Committee to Save the World. In brief, I believe they could have done the following:
Lehman could have been 'ring fenced', the shareholders wiped out, the bond holders given a haircut, the management sacked, anyone who committed crimes could have been prosecuted under the rule of law...meanwhile...the deposit holders could have been fully protected.
The junk could have been segregated and allowed to die peacefully or recover on it's own merits. The good stuff could have been returned to private ownership with new shareholders and new management, and the world would have had a wonderful opportunity to re-learn the lesson of free capital markets. Moral Hazard would have been defeated not glorified.
In his book 'The Great Deformation - The Corruption of Capitalism in America', David Stockman describes what could have been done in detail, and describes the story of what did happen. E.G.: how a clueless President and a frightened Congress surrendered in the face of the melodramatic 'Blackberry Storm' that was whipped up by Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. It's a fascinating read.
MarkGB in a later post:
I just came across a recent interview with Dr Bernanke which may speak to the 'will she, won't she' question, and also the issue of so-called Federal Reserve independence and indeed 'integrity'.
The interview was released last Sunday on radio WNYC, America's most listened to public station. Dr Bernanke was being interviewed by Stephen Dubner of Freakonomics. About half way in Mr Dubner played Dr Bernanke a tape of his interview in 2005 on MSNBC - the part where he talked about the lack of any housing bubble. The tape included this statement:
Ben Bernanke: "But I do think that this is mostly a localized problem and not something that’s going to affect the national economy"
After listening to the tape, Mr Dubner asked the Chairman how he felt listening to that. His first response was this:
Ben Bernanke: Well, it was partly the result of the fact that I was representing the administration. And you don’t really want to go out and say, “Run for the hills,” right?
...'I was representing the administration'...
In my view, anyone who still thinks the Federal Reserve is anything other than a political organisation, anyone who trusts their forecasts or their denials, or indeed pretty much anything of substance they say, is really not paying attention.