Free Markets, Free People

Ben Bernanke

So, is America “back” economically?

Two good jobs reports back to back has got the Obama campaign trying out some new campaign rhetoric about how what they’ve done has worked and that America is “back”.

Is it?  Or is it premature to make that claim?  Well, on the one side, most economists will tell you that job growth is usually a lagging indicator and good job growth usually means the other underlying numbers for positive growth are good too.

But are they? 

Well, not necessarily.  In fact, one of the other leading indicators of a strong economy, GDP growth, isn’t going to be so hot according to many economists.  David Leonhardt reports:

But the jobs report isn’t the only measure of economic activity, and another major measure — of gross domestic product — doesn’t look quite so cheerful. The most likely situation is that job growth will slow in coming months, economists say, which will make President Obama’s economic narrative a bit more complicated than it now is.

On Friday, Macroeconomic Advisers, one of the most closely watched forecasting firms, reduced its estimate of economic growth in the current quarter to an annual rate of 1.8 percent, from 2 percent. And 1.8 percent growth does not generally lead to very strong job growth. In the fourth quarter of last year, by comparison, the economy grew 3 percent.

Beyond the current quarter, forecasters expect the economy will grow at an annual rate of 2 to 2.5 percent for the rest of the year, according to Bloomberg.

Based solely on the gross domestic product numbers, the obvious conclusion is that job growth will slow in coming months. Over the last six months, the average monthly gain in nonfarm employment has been 201,000; over the last three months, the average gain has been 245,000.

Sure enough, most forecasters do expect job growth to slow. Barclays Capital expects 200,000 jobs a month for the rest of the year. IHS Global Insight forecasts a slowdown to 180,000 jobs a month. Macroeconomic Advisers says it will slow to 140,000 jobs a month in the final three quarters of this year.

So what’s the drag on the GDP?  What is it that is causing this less than optimistic forecast for job growth?

A combination of things:

Why do economists expect growth to slow? The warm winter has probably pulled some spending forward into the last few months and will reduce spending in coming months, says Joshua Shapiro, an economist at MFR Inc. in New York. Rising oil prices also play a role. So does the continuing debt overhang, which makes a sustained recovery difficult.

Spending slowdowns, rising oil prices and the debt overhang all combine to slow growth.  Of course there are other things too that will effect it – increased regulation, for instance. 

Annie Lowrey reports on other concerns:

First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Inventories have been restocked and oh yeah, there’s the European sovereign debt crisis to contend with.  As well as:

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

And finally we have the Chairman of the Federal Reserve:

He acknowledged that rising oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.” But the Fed expects the overall pace of increases in prices and wages to remain “subdued,” Mr. Bernanke said …

Bernanke also mentioned the continued depression of the housing market as a factor and he believes growth this year will be between 2.2 to 2.7 percent.  Such growth would indeed put a damper on employment growth.

Whether or not the forecasts will prove true obviously remains to be seen.  However the elements that should slow growth seem to be in place.  Consequently, the forecasts are less optimistic than Obama’s political campaign would have you believe.

After many “false dawns” (remember “green shoots”?) the possibility of another one looms large.  Sure, the economy is making progress. And yes, that’s good.  But overhyping that progress and then seeing the numbers go south again could be very damaging to an incumbent president’s reelection hopes.  Not that I expect that possibility to slow him down a bit from claiming to have saved the country from the abyss when in fact we’re simply crawling out from the one he helped create.


Twitter: @McQandO

Observations: The QandO Podcast for 26 Jun 11

In this podcast, Bruce, Michael, and Dale discuss the Libya vote in the House of Represenatatives, the economy, and Gunwalker.

The direct link to the podcast can be found here.


As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

QE2 is unlikely to save the day

In fact, it may set in motion inflationary pressures that will blow up in the Fed’s face.

Randall Wray has put together one of the best summaries I’ve seen on the subject, and it doesn’t give me a warm fuzzy at all.  Essentially QE2 (“quantitative easing”) has the Fed buying up toxic bank assets to push up their excess reserves.  The thinking is that pushing those reserves into excess will stimulate loans.  But it will also stimulate inflation. 

Bernake’s claim is the reserve creation will be “temporary”.  But – and this is the crux of the problem – it will have difficulty buying back those reserves because of the quality of the assets the Fed is sucking up to create them:

Bernanke carefully tries to navigate these waters by agreeing with the hawks that in the long run, Fed creation of too many reserves would be inflationary, but argues that in current circumstances the greater danger is deflation. Still, he reassures markets that reserves creation is temporary, and that the Fed will “exit its accommodative policies at the appropriate time”. Yet, if the Fed buys junk assets that will never have any value, it will not be able to sell these back to markets later — so there is no way to remove the reserves it created when it buys trash.

Indeed.  So without the ability to sell back marketable assets, the reserves remain out there and inflation does too.  You might think “deflation” is the biggest threat until you see run-away inflation reduce your retirement funds to zip and push your wages to poverty level.

This is a mess.  And as we discussed in this week’s podcast, screwing with the economy at the central bank level is very delicate thing and could go wrong quickly and dramatically. 

And what I’m hearing and reading – to include this article – says the possibility of that happening is high.


The looming debt crisis

The other day Federal Reserve chairman, Ben Bernanke, addressed a meeting of the Rhode Island Public Expenditure Council. During his speech, he did something Fed chairmen don’t usually do. He spoke about US fiscal policy. His words don’t really relay anything most of us don’t really know, but it is the fact that he felt compelled to say them that make them newsworthy. After I read them, I felt his uneasiness and, like many Americans, his frustration that the political leadership doesn’t seem to understand the problem or its urgency.

A few excerpts from his speech:

[I]n the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it–meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.

Whether you agree or not that government must address health care and “retirement security”, there’s not much to argue with in the highlighted last sentence. This is Econ 101 stuff. This is something Americans running their own households know almost instinctively. The problem – and frustration- is that Americans suppose this point must be just as obvious to their elected leaders, yet with the wild spending continues. While politicians talk about fiscal sanity and pass bills like PAYGO (that they then promptly ignore or make exceptions too), nothing is really being done about the looming economic and financial instability in the debt load brought on by excessive and persistent government spending.

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. [...] In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment. And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. [...]

Again, almost everyone recognizes the truth of Bernanke’s words. If you run household, you know that if you amass huge credit card debt you are going to see an increasing amount of your income stream going to service that debt and less of it available for your use. That means less consumption because you are sending that money to a “foreign lender” – the credit card company. That in turn may translate into less of a house than you wanted, a smaller car or no college for the kids. If you run a business you know that increasing the amount of debt you carry and service means an increasing limit to your ability to expand, invest, hire new employees, improve benefits or give raises. At some point, your priorities take second place to the priority of paying back what you owe.

That’s where we’re headed as a country and more quickly than we might want to admit. Most would like to believe that this problem is understood and a high priority for our leaders. But that doesn’t seem to be the case and we see budget projections out 10 years that pile more and more debt on our already staggering economy.

The politicians continue to tell us it is necessary. They assure us that once the crisis passes they’ll address this problem in earnest. But will it then be too late? James Bacon Jr. addressed that recently in the Washington Examiner, discussing the “tipping point” in which the percentage of debt to the GDP hurts economic growth. According to a paper he cites by the World Bank, that assumed tipping point occurs when public debt equals around 77% of the country’s GDP.

Where are we?

According to International Monetary Fund calculations, the U.S. debt/GDP ratio in 2009 was 83.2%, above the tipping point, and will climb to 109.7% by 2015. […] That implies that the U.S. is experiencing a small growth penalty today: about one-tenth of a percentage point yearly. By mid-decade, however, the growth penalty could swell to 0.56% yearly — more than a half percentage point.

Unfortunately there’s no end to deficit spending in sight. Part of that is because politicians in this culture are not rewarded for doing tough and unpopular things. They’re usually turned out of office. And with the rise of career politicians who enjoy the trappings and perks of power and don’t want to give them up, most politicians are risk averse. Their preferred method of dealing with the “difficult decisions” and “sacrifices” Bernanke says need to be made is to kick the can down the road.

The point Bernanke is making is we can no longer afford to do that. Which brings me to the final excerpt from his speech:

Herbert Stein, a wise economist, once said, "If something cannot go on forever, it will stop." One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

We have a choice right now – but either way, this is going to hurt. We can take charge and attempt a controlled crash landing to try and save as many as we can, or we can fly this problem until it naturally runs out of gas and deal with the consequences then. Unfortunately, it appears the latter choice is likely to be the only choice, given the current fiscal policy of this administration.


A cold day in Georgia in non-recovery summer

Well, not really, but that pretty much describes metaphorically how often Paul Krugman and I agree on things.  But today, Krugman, wondering what Ben Bernanke of the Fed is going to say today in his big speech believes it will probably be more of the same.  Albeit, we’re in a recovery, more slowly than we’d like and things will soon get better.  Krugman isn’t buying it (and neither am I.  If this is a recovery, I’d hate to see a recession). :

Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

Krugman also zeros in on the main problem that those policy makers should focus on:

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead.

In fact, the GDP number for this past quarter is 1.6%. That’s revised sharply downward from the original 2.4% reported and touted by Democrats recently.  That, as Krugman points out, isn’t a good number when you are looking at unemployment.

Krugman then chastises those who are pumping sunshine up our skirts when the real economic news doesn’t warrant it – like the President and VP.  Bernanke and Geithner:

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

Ya think!  Gee wish I’d been saying that for, oh, I don’t know, 18 months.  For 12 of that it was Bush’s fault.  For the past 6, it’s been all sunshine, roses and “recovery summer”.  In effect, although not at all as blatantly, Krugman is validating John Boehner’s call to fire Obama’s economic team.  Because it is clear that the policy makers haven’t a clue of how to fix this mess.

At this point in his op-ed, Krugman reverts to his old self – a hack.  After talking about evading responsibility, he goes for the “obstructive Republicans” canard. 

And when he finally gets around to saying what he’d do, as you might suppose, it is spend more money that we don’t have.

Addressing the Fed he says:

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

In layman’s terms he’s saying let inflation loose and buy more debt (borrow).  He then covers his rear by saying “hey, it may not work, but it is better than doing nothing”. 

I’m not at all sure that’s the case.  In fact, my guess is if you let the inflation dragon out of the cage, you’ll never recapture it until it has ravaged the economy.  All that money that’s been pumped into the economy has to be wrung out at some point.  And there are no painless ways to do that of which I’m aware.

As for the administration his advice is as follows:

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Sure, let’s hand even more money to the two financial black holes – Freddie and Fanny – that have already sucked down half a trillion dollars we don’t have trying to shore up their loses and return them to solvency. Republicans have every reason to howl about Freddie and Fannie.  If Krugman were anything but a hack, he’d have to admit that.

And if he thinks the Chinese – who are actually in a real recovery – are going to stomp on their economic progress to fix ours, he’s dreaming.  Both proposals are absurd on their face.  But then when it comes to actual solutions, I’ve come to expect that from him.

However, at least in the first part of his column, he and I were in pretty much perfect agreement.  I need to go take a bath now.


It’s Bush’s Fault. And Paulson’s. And Bernanke’s. And ….

John McCain, under attack for his part in approving TARP, is now claiming he was “misled”:

In response to criticism from opponents seeking to defeat him in the Aug. 24 Republican primary, the four-term senator says he was misled by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. McCain said the pair assured him that the $700 billion Troubled Asset Relief Program would focus on what was seen as the cause of the financial crisis
, the housing meltdown.

“Obviously, that didn’t happen,” McCain said in a meeting Thursday with The Republic’s Editorial Board, recounting his decision-making during the critical initial days of the fiscal crisis. “They decided to stabilize the Wall Street institutions, bail out (insurance giant) AIG, bail out Chrysler, bail out General Motors. . . . What they figured was that if they stabilized Wall Street – I guess it was trickle-down economics – that therefore Main Street would be fine.

Well one reason it wasn’t used only for the “housing meltdown” is because the law apparently didn’t specify it must be. Consequently one has to conclude it was McCain and those who wrote the law and voted for it who are responsible for what happened.  They a wrote bad law.  They fell for the drama.  They threw almost a trillion dollars out there and are now complaining that it wasn’t used as they “thought” it would be used.  Really?

If they were going to pass this travesty anyway, why wasn’t it limited to what the people who brought the problem to them (Paulson and Bernanke) said constituted the problem?  How did it end up bailing out auto companies and AIG?

Bad law.  And the ones responsible for writing th law include this guy trying to pass of the blame to others.

Secondly, there’s this:

McCain said Bush called him in off the campaign trail, saying a worldwide economic catastrophe was imminent and that he needed his help. “I don’t know of any American, when the president of the United States calls you and tells you something like that, who wouldn’t respond,” McCain said. “And I came back and tried to sit down and work with Republicans and say, ‘What can we do?’

Responding is one thing. But when your constituents are dead set against it, to whom should he really be responding? Well, who does he supposedly represent?  What McCain is really saying is “when the president tells you he wants you to pass a bad law, you salute and do what he says”.  Really?  “Response” apparently means saying ok to unconstitutional spending.  Not that Mr. McCain/Feingold has much use for the Constitution.

So, bad law, ignoring his constituents and now blaming others.

Sounds like a pretty typical politician who has spent way too much time inside the beltway to me – a politician well past his “incumbent expiration” date.


Assuming Predictability

There is a reason that economists are so rarely featured in jokes. They tend to be rather dry people, who can and will estimate anything under magical “assumptions” designed to prove their point. In fact, the only jokes with economists I know involve them making assumptions. Which is really a shame because they make hilarious statements like the following all the time:

Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman, and they said there is a 71% chance that President Barack Obama will ask him to stay on, according to a survey.

Wow. Seventy-one percent, eh? That’s an awfully exact number for a prediction isn’t it? It suggests there was some real numbers computed and weighted in order to arrive at a probability slightly less than 5 out of 7 that Bernanke would be reappointed.

But where did those numbers come from? And what exactly would they be? Moreover, who were the “economists” that are so “nearly unanimous” who arrived at this prediction? Inquiring minds want to know.

Of course, per the article, these same economists are all enthusiastic about the economy having bottomed out, and that Bernanke is largely responsible for that, er … “success”. Perhaps they only interviewed family members of the Fed Chairman who also happen to be economists? “Five out of 7 Bernankes agree!

By the way, there is a 26.3% chance that only economists and statisticians will comment on this post, but I’m keeping my top-secret formula for arriving at that conclusion all to my self. I’ll give you a hint, though: assume I know what you’re thinking.

“Bernanke Bucks” And The Danger Of Hyper-Inflation

I saw the following two quotes in a Patrick J. Buchanan piece. Now I’m not much of a Buchanan person by any stretch, but the quotes resonated with me and I found myself agreeing with much of what Buchanan said.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” -Ernest Hemingway

Hemingway wasn’t an economist, but there are plenty out there consider John Maynard Keynes a fairly good one, even now. And he said much the same thing about the economic side of the Hemingway quote:

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Right now, in lieu of dollars, our Federal Reserve is in the midst of printing trillions of “Bernanke Bucks”. I hesitate to call them dollars, even though they’re similar in their look and feel. But in essence they are worth little more than the paper they’re printed on. And although you can’t tell them from the dollars circulating out there, their presence makes the those dollars worth less. The more BB’s there are out there, the less the remaining dollars are worth.

It is called “monetizing the debt”.

Or to pick up on Keyne’s point, we’re right in the middle of debauching our currency.

Now, there are several reasons for doing what is being done, and you may or may not agree with them. But it really doesn’t matter. Whether you agree or disagree, printing money for the right reasons or the wrong reasons still has the same effect.

If you think taxation is theft, inflation is no less than that. And in this case it is a calculated theft. Those printing the “Bernanke Bucks” know precisely what the effect on your net worth will be.

Buchanan concludes his piece pointing out what we’ve talked about here for months – this is all about the belief we can avoid the pain:

Yet one senses that we are doing again exactly what we have done before in this generation. Rather than endure the pain and accept the sacrifices to cure us of our addiction, we are going back to the heroin. And this time, with Dr. Bernanke handling the needle, we may just overdose.

The road to hyper-inflation is paved with good, but seriously misguided intentions.