Free Markets, Free People

What a difference a percentage point makes

Especially when you’re talking about GDP growth:

The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.

"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says. And the heart of the problem is job creation.

Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That’s because the productivity of current workers is rising at about 2 percent a year. "In other words a company can produce 2 percent more goods and/or services a year even if it doesn’t increase the number of people it employs," he says.

Smaller Incomes Mark Zandi, chief economist at Moody’s Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than one growing 3 percent. "In a 3 percent world we’d create roughly 1.6 million jobs a year," he says. But he says that in a 2 percent world, job creation would be less than half — around 700,000 jobs.

Meanwhile, in China, growth hit 9.5%.  So what is China doing, policy wise, that the US isn’t?  Well, for one thing it is encouraging businesses and has established a positive business climate.  Additionally, it isn’t borrowing money to pump into some black hole it calls “stimulus” at a rate faster than we’ve seen in recent history. Etc.

It’s pretty bad when you have to look to China to point out what the US should be doing.   As Henry Kissinger recently said, the Chinese used to think we had the financial side of things pretty much figured out.   Then this mess and resultant stupidity in reaction to it.   The one thing we should have had the inside track on, we didn’t, because we chose to recreate the failed policies of the Hoover/FDR era without a world war to finally pull us out of the mess (or at least I hope that’s the case).

Is this the “new normal” as Crescenzi claims?   PIMCO, btw, is the world’s largest bond fund (almost 2 trillion).  PIMCO also recently announced that it would no longer be buying US debt.

Why?  Because no one is confident the Federal Reserve knows what it is doing:

Some Fed officials at the June meeting also said additional monetary stimulus would be appropriate “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated,” according to the minutes.


So they are considering a “QE3”?  Note the change from “last August” to now. 

Last August, when Bernanke signaled in a speech in Jackson Hole, Wyoming, that the Fed would embark on a second round of Treasury bond purchases, employers were cutting jobs, pushing up the unemployment rate to 9.6 percent. The weakness in the economy prompted Bernanke to focus on the possibility of deflation, or a broad-based drop in prices and asset values including homes and stocks.

The economy is in better shape now than in August, though hiring remains “frustratingly slow,” Bernanke said at a June 22 news conference. Employers added 18,000 jobs to their payrolls last month, the fewest in nine months, the government reported last week.

The Fed’s $600 billion Treasury bond-buying program, completed in June, was designed to spur economic growth, employment and consumer spending by lifting stock prices and reducing borrowing costs.

Is the economy in “better shape now than in August”?  I say ‘no’. And so do most of the economic indicators.  Dr. Robert Barro, Paul M Warburg Professor of Economics at Harvard University makes it clear where the current policy is leading:

Turning to quantitative easing, he warned that the US and UK are storing up inflation and that the Bank of England may be too complacent. Although there is no threat to inflation now, he said: "You have to have an exit strategy. Ben Bernanke [chairman of the US Federal Reserve] and [Bank Governor] Mervyn King are aware of this, but I think they are a little over confident about how they can accomplish it. Because you want to have this exit strategy without having a lot of inflation.

"That’s when the inflation would occur. If there’s a recovery and there’s all this liquidity and somehow the central bank has to reverse it."

That’s precisely where this is all headed – somehow at, at some point, the Fed has to wring out all this money it pumped into the economy.  And that stored up inflation is likely to explode during that process – a real economy killer.  Barro is saying he has little confidence in the Fed, deeming them “over confident” in their ability to do that while avoiding letting the inflation dragon out of the cage.

Meanwhile, in Europe …

Yeah, it’s a mess.  And given the propensity of our policy makers to recreate the policies of the Great Depression, I don’t see it getting better any time soon.  So yes, for at least the foreseeable future, the “new normal” may be 9.2% unemployment.  Because there is still no reason or incentive for US businesses to take the chance of expanding and hiring in such an uncertain economic atmosphere.

Until they are much more confident in the policies of this administration and the Federal Reserve, few if any are going to change the status quo.


Twitter: @McQandO


7 Responses to What a difference a percentage point makes

  • PIMCO increased US Treasuries (announced this morning).
    By Susanne Walker and Wes Goodman
    July 13 (Bloomberg) — Bill Gross, who runs the world’s
    biggest debt fund at Pacific Investment Management Co.,
    increased holdings of Treasuries and bonds outside the U.S. last
    month while cutting money-market securities.
    Gross boosted his $243 billion Total Return Fund’s
    investment in U.S. government securities to 8 percent of assets
    in June from 5 percent in May, according to Newport Beach,
    California-based Pimco’s website.

  • “What is China doing that the U.S. isn’t?”
    Well for two things, it’s devaluing the crap out of its currency and hiding the toxic assets on the state bank books.  But that growth is going to slow independent of the above due to rising labor costs.

    • Yes, Bruce is imagining China to be really, really free market where the government is “pro-growth” or something.
      China is rife with regulations. The good news is that you can bribe your way around them, or you can ignore them and hope you never get caught. If you are a foreign company – well, good luck sir.
      Their currency is massively manipulated, and I suspect the distortions caused by this are causing the inflation that just won’t go away. I also don’t think the wage increases represent productivity but stealth revaluation of the Yuan.
      China has a lot of low lying fruit to pick. Like imagine there was not highway between Boston and NYC. How much growth would building that road cause? A lot. But once you have roads everywhere and electricity everywhere, and schools everywhere, you need to have growth that’s qualitative. That’s much harder to achieve. China faces this problem now.
      Still, the overall point is valid – how can we spur growth and job creation?

      • “Still, the overall point is valid – how can we spur growth and job creation?”
        And the problem for politicians is that this is hard work and not fun to do. Its not passing new laws but reviewing old ones and tearing out bad sections, hopefully without harming the good ones.
        Its about avoiding the temptation to fund projects directly through subsidies that prove as ephemeral as the solar power panel plant that opens in the USA while subsidies exist, and promptly closes once they go away…and moves to China where the state can offer free land, etc. for subsidy.
        Its about being bold, and slashing at regulation, and doing serious, serious tax reform. You want companies to book profits in the USA? Lower the corporate income tax. Get rid of it. Replace it with a small VAT. Then you will see companies invest in the USA for their global operations, instead of considering an offshore location for global operations and subsidiary that just imports to the USA as a regional office.
        I was thinking about this in regards to medical devices, which will now be taxed under Obamacare. They will tax the manufacture or import of such devices. Say the USA is 50% of your market and you manufacture the product here…wouldn’t it now be better to move production to Canada, and then just send the 50% of your production to the USA as imports? You’d save 50% of the tax you’d be paying if you keep production in the USA.
        I think a freeze on new regulations for 5 years would be a good first step as well…we already have far more than we can digest, and Congress could the focus on fiscal matters entirely rather than making new rules.

  • I’d be leery about using China as an economic model.
    1) they regularly inflate positive numbers and low ball negative numbers.  Chinese economic data should be taken with a grain of salt when the source is the government itself.  They put the BLS to shame.
    2) they’re the kings of ‘make work’ projects.  They build stuff only to turn around and tear it down.
    3) they have an advantage in pure GDP growth due to outdated production methods.  They can grow simply by trying to catch up.
    4) their political and economic freedoms are still in a terrible state.  They’re not as bad as they used to be but it is still a very repressed country.

    • High growth can mask a lot of their sins and I think people in the US forget that.

  • “Meanwhile, in China, growth hit 9.5%.”

    If you believe a government not known for strict adherence to the truth.

    It seems like only yesterday that Obama et al. were complaining that businesses were sitting on piles of cash that they refused to spend, that the economy would take off like a rocket if only those skinflint corporate pigs would start circulating their ill-gotten hoards.  I guess the Obami decided that the hoards were not large enough.

    I think Bernanke need to go back to his undergrad econ books and relearn the concept of ‘velocity’ wrt money.