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.
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That’s the central theme of a Ken Langone op/ed in the Wall Street Journal. Langone is a co-founder of Home Depot who gives Obama a lecture he’s long deserved. He does a good job of summarizing the absurd rhetoric used by Obama and his administration and the attitude they project that has done nothing to help and everything to hurt the recovery:
Your insistence that your policies are necessary and beneficial to business is utterly at odds with what you and your administration are saying elsewhere. You pick a fight with the U.S. Chamber of Commerce, accusing it of using foreign money to influence congressional elections, something the chamber adamantly denies. Your U.S. attorney in New York, Preet Bahrara, compares investment firms to Mexican drug cartels and says he wants the power to wiretap Wall Street when he sees fit. And you drew guffaws of approving laughter with your car-wreck metaphor, recently telling a crowd that those who differ with your approach are "standing up on the road, sipping a Slurpee" while you are "shoving" and "sweating" to fix the broken-down jalopy of state.
That short-sighted wavering—between condescending encouragement one day and hostile disparagement the next—creates uncertainty that, as any investor could tell you, causes economic paralysis. That’s because no one can tell what to expect next.
Again we confront the difference between a politician in a permanent campaign and a leader. And we see the result.
Obama seems mystified by the role of the president. He seems not to understand that leaders don’t use the old, divisive and politically charged rhetoric of the campaign trail, but instead have the job of doing (and saying) what is necessary to move things in a positive direction. That has not been something Obama has done at all when it comes to business.
There’s another point Langone made that is worth featuring:
A little more than 30 years ago, Bernie Marcus, Arthur Blank, Pat Farrah and I got together and founded The Home Depot. Our dream was to create (memo to DNC activists: that’s build, not take or coerce) a new kind of home-improvement center catering to do-it-yourselfers. The concept was to have a wide assortment, a high level of service, and the lowest pricing possible.
We opened the front door in 1979, also a time of severe economic slowdown. Yet today, Home Depot is staffed by more than 325,000 dedicated, well-trained, and highly motivated people offering outstanding service and knowledge to millions of consumers.
If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the ever-rapacious trial lawyers.
Regulations, taxes, compliance and mandates cost businesses billions each year. That’s billions that aren’t spent on employees, customers, expansion or growth. And it is especially stupid to increase all of those in a recession – yet that’s precisely what is going on now. And it keeps the market unsettled and at least defers or may in fact kill any possible action by businesses which may benefit the overall economy.
Obama’s actions and rhetoric are a case study of someone who doesn’t understand his job, doesn’t understand the power of the words he utters (because he doesn’t understand his job) and has been very irresponsible with his rhetoric at a time when the damage that rhetoric can do are compounded by the situation (recession).
OJT is not something a president should be doing – especially in a recession. And for the supposed “smartest guy in the room”, he sure seems like a slow learner when it comes to his job and the requirements of leadership.
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Today’s release of the Producer Price Index raises some interesting and scary questions. The core PPI was up only 0.1%, but a 1.2% increase in good prices and a 0.5% increase in energy prices brought the overall PPI up by 0.4%.
Now, the reason that food and energy are excluded from the core PPI and CPI is that they often show a lot of monthly volatility. Those prices simply rise and fall quickly, so, on a month-to-month basis, they may not mean much. Ultimately, however, a trend of price increases in, say, energy will trend to raise prices across the board, as that increases the cost of production.
The traditional Keynesian argument about inflation is that it tends to decrease when the economy is struggling, as aggregate demand is stifled. Sadly, in the 1970’s we learned that simply wasn’t true, and the existence of stagflation sent the Keynesians back to the drawing board for about 15 years to reformulate a Neo-Keynesian economic model. Essentially what happened in the late 60’s and early 70’s was that the Fed pursued a very accomodative monetary policy. Ultimately, even a slow economy couldn’t prevent that monetary expansion from showing up as inflation.
It should, because the housing boom was kicked off by a similar policy, and since the collapse, the Fed has pursued a policy of “quantitative easing”, i.e., buying $1.2 trillion of securities with hastily printed money. Overall, the monetary base has more than doubled over the past two years, also, as the Fed has kept short-term interest rates at 0%.
So, I guess the question is whether today’s PPI is just a monthly outlier due to the volatile sectors, or whether it’s a sign that monetary expansion is beginning to kick off an inflationary spike that will soon begin to show up in the CPI as real, noticeable inflation.
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Tis the season where absurd and wild claims are made (to be fair – by both sides) hoping they’ll hold up at least until the election has passed. Some, however, just are too off the wall and blow up immediately upon being uttered. An example is this claim by Democratic Congresswoman Debbie Wasserman Schultz:
“On the pace that we’re on with job creation in the last four months — if we continue on that pace — all the leading economists say it is likely that we will — we will have created more jobs in this year than in the entire Bush Presidency,” Wasserman Schultz, a Democrat from Weston, said on FOX News.
On its face, you immediately say –wait a minute, that can’t be true. To make that claim, one has to ignore the jobs lost prior to the “last four months” and disregard the total jobs created during the Bush era. Obviously the same process was going on during the Bush administration (job losses vs. job gains) which ended with a net positive. Wasserman Schultz would like you to ignore the meaning of “net” and job loss numbers in favor of only focusing on the pace of job creation. And I’m not sure she’s right about that.
As Veronique de Rugy points out over at NRO, while the jobs picture during the Bush administration was nothing to brag about, there’s no way that Wasserman Shultz’s claim has any credibility in the face of an economy that has shed almost 3 million jobs in the private sector during Obama’s presidency.
In effect, it’s a shot at getting a meme started with low information voters hoping they’ll accept it at face value and it will influence their vote. You have to love the “all the leading economists” appeal to authority she dropped in there. But if you want hard numbers, well, forget it.
They do exist however. Instead of providing them (you can see them in de Rugy’s post at NRO), a graph will do a much better job of pointing out the absolute nonsense of the Wasserman Schultz claim. While it is possible that more than 675,000 jobs created in the next 4 months somewhere, as we just saw with the latest numbers, the economy is still shedding jobs (95,000). It is the net that counts – not just one side of the ledger. If you “create” 1,000,000 jobs but lose 2,000,000 during the same period, it’s a net loss. And that’s what we continue to suffer right now. So her’s is an empty and meaningless claim that is disingenuous because ignores the whole picture in a transparent attempt to drag the left’s favorite punching bag back into the argument.
While total employment rose slightly (675,000 net jobs) during the Bush presidency, most of it was government employment. During the Obama presidency there’s been no overall growth of employment except slightly at the federal government level and no net increase. What Wasserman Shultz wants you to ignore is the blue bar on the left and the negative net job numbers we continue to see. If you do that, the claim sounds good. If you don’t, then her claim is nonsense.
Bottom line is Wasserman Schultz’s claim is selective statistical nonsense, but I expect to see it somewhere, sometime repeated as gospel.
UPDATE: Dale sends along the Bureau of Labor Statistics spread sheet which shows:
- From Jan 01 to Jan 09, a net of 1,080,000 jobs were created.
- From Jan 09 to present, 3,348,000 jobs have been lost.
- The low point in non-farm employment was Dec 09, when there were 129,588,000 payroll jobs
- Since that low, 613,000 jobs have been created.
- There are 580,000 fewer payroll jobs today than there were in January of 2000.
Make sure you understand that last line. In a nation that has increased its population during the last 10 years, we have a net job loss of 580,000 jobs since 2000.
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As I expected, the official unemployment numbers showed little change from last month. The big spikes in private-sector unemployment came at the end of September. The government’s statistical collection period ends in the middle of the month, however, so all of that was missed by the official number. And today’s release is the last one prior to the election.
Still, it can’t be said that this is a good number, with the official rate hovering at 9.6%.
My personal calculation of the unemployment rate, using the historical average of labor force participation, shows the rate of unemployment also holding steady at 13.2%.
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.
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According to Gallup’s private read on unemployment, we currently stand with an unemployment rate of 10.1%. Gallup says:
Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September — up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month — the unemployment rate was 9.4% in mid-September — and therefore is unlikely to be picked up in the government’s unemployment report on Friday.
The government’s final unemployment report before the midterm elections is based on job market conditions around mid-September. Gallup’s modeling of the unemployment rate is consistent with Tuesday’s ADP report of a decline of 39,000 private-sector jobs, and indicates that the government’s national unemployment rate in September will be in the 9.6% to 9.8% range. This is based on Gallup’s mid-September measurements and the continuing decline Gallup is seeing in the U.S. workforce during 2010.
So, when looking at the numbers we have from ADP, showing a 39,000 job loss for the month, plus the sharp spike upward in the last half of September, tomorrow’s unemployment figures from the BLS will miss most of the job losses, and will show a national unemployment rate that is smaller than it truly is.
Gloria Borger, although she apparently doesn’t know it, has described why Obama and the Democrats are looking at the distinct possibility of an electoral avalanche that will sweep them out of the majority in the House in November. As Borger notes, when Obama took office, it seemed it was a Democratic majority built to last for years. Now “years” is down to “two”.
She points to one reason that is typical of any politician who wins an election – they read more into their win than is actually there:
Obama was elected as the corrective to the Bush years. Yet when you’re the winner, the temptation is always there to see yourself as something more than just an alternative — something larger, like a paradigm-changer or a transformational political figure. And Obama wanted nothing less than a change from conservatism to his own brand of 21st century activism.
"When you win an election," says political scientist Bill Galston, "you are always inclined to believe you won for the reasons you wanted to win."
In other words, you believe you won for the big stuff, not just because the voters didn’t like the other guy.
Watching Obama’s fading approval numbers and the ever increasing resistance to his agenda, it becomes clear that it was mostly about ‘the other guy’.
But there’s a larger point to be made as to why Obama and the Democrats are in the electoral shape they enjoy today:
Think back to the beginning. There’s an economic crisis, which the public believes Obama inherited. Then there’s his bucket-list of things he wants to get done. He has a choice: Handle the crisis or do the campaign to-do list.
And what does Obama decide? To do both. That is, the economy plus the rest of it — including health care.
"The irony is he didn’t even run on health care," says one Democratic pollster. "In truth, it wasn’t a large part of the general election campaign."
Interesting point. “He didn’t even run on health care”. Well he mentioned it, but it wasn’t his signature campaign issue. But it sure was Nancy Pelosi and the liberal caucus’s number one priority – a wet dream they’d had all their lives. And so while the economy was melting down and should have been the single dominant issued for the White House (and Congress), Obama allowed himself to be seduced into using all his political capital for something that wasn’t that important to the American people.
Borger attempts to make excuses for Obama that simply don’t ring true and certainly don’t pass the smell test:
Obama became convinced that solving the health care mess was key to solving the nation’s economic problems, especially bringing the deficit under control. In fact, when he first spoke of the importance of health care reform, it was all about "bending the cost curve," a slogan lost on most of the public.
BS. Any sane person, with even a cursory understanding of economics, knew that the program outlined in the monstrosity that has since become known as ObamaCare had as much of a chance of “bending the cost curve” down as Togo becoming the first nation in the world to land a man on Mars. Obama’s agenda was hijacked by Pelosi, et al, and he refused to stand up to them and say, “no – it’s the economy stupid”.
Democrats instead quickly passed an ineffective trillion dollar pork laden stimulus bill guaranteed to keep unemployment under 8% (or so they claimed) and then essentially turned away from the nation’s most pressing problem – other than to occasionally give it lip service – to their pet project, health care “reform”.
Borger claims it was Obama’s “ambitious agenda” that did him in and that the agenda “fed into the GOP narrative”. Unfortunately, at the point this was done, the GOP had no narrative. They were in a state of disarray and both powerless and voiceless.
No, the “voice” came out of townhalls. The “voice” showed up at “Tea Parties”. The “voice” expressed anger and frustration.
And what the “voice” was saying and continues to say is Obama and the Democrats made the wrong choice when they chose health care reform over working on the economy.
Nothing’s really changed either. Most of it – the position Democrats are now in – isn’t a result of any GOP narrative. It isn’t even necessarily because of the bad economy. It is a result of a poor leader caving into a special interest caucus within his party and putting that caucus’s priorities in front of the people’s priority.
Pretending it was anything else is simply nonsense. Democrats are facing an electoral avalanche in November because Obama let Pelosi and Reid usurp the leadership role that was his. And now they get to pay the butcher’s bill.
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Pending sales of existing homes rose 4.5% last month. They’re still 18% lower than the same month last year, however.
Factory orders declined for the third time in for months. Orders decreased by 0.5% to $408.94 billion, the Commerce Department reported. The decline was led by a 1.5% decrease in durable goods orders.
However, capital good orders rose more than expected. Orders for non-military capital goods, excluding aircraft, rose by 5.1%.