In the Financial Times today, Martin Wolf comes out swinging (free registration required) against those who are afraid the Fed’s Quantitative Easing programs carry a danger of sparking serious inflation.
The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending. Why is such privatisation of a public function right and proper, but action by the central bank, to meet pressing public need, a road to catastrophe? When banks will not lend and the broad money supply is barely growing, that is just what it should be doing (see chart).
The hysterics then add that it is impossible to shrink the Fed’s balance sheet fast enough to prevent excessive monetary expansion. That is also nonsense. If the economy took off, nothing would be easier. Indeed, the Fed explained precisely what it would do in its monetary report to Congress last July. If the worst came to the worst, it could just raise reserve requirements. Since many of its critics believe in 100 per cent reserve banking, why should they object to a move in that direction?
Now turn to the argument that the Fed is deliberately weakening the dollar. Any moderately aware person knows that the Fed’s mandate does not include the external value of the dollar. Those governments that have piled up an extra $6,800bn in foreign reserves since January 2000, much of it in dollars, are consenting adults. Not only did no one ask China, the foremost example, to add the huge sum of $2,400bn to its reserves, but many strongly asked it not to do so.
Everything he says is correct, but that’s not really any help, because the implications are pretty severe, even if he’s completely right.
First, let’s assume the Fed can, via repos or changes in reserve requirements, sterilize the increase in the money supply. The problem then becomes when does the Fed do this sterilization. let’s go back to 1981-1982. When the Fed was looking at monetary aggregates in the wake of the 1981 recession, they saw the money supply growing far faster than their target. At the time, the Fed’s primary tool was securities sales and purchases to control the rate of growth in the money supply directly, while letting the markets set interest rates. (Today, the fed primarily uses changes in the Discount Rate and Federal Funds target rate to run monetary policy.)
When the Fed saw those big increases in money supply, they immediately moved to sterilize the increases, to keep inflation in check. Sadly, the lack of velocity in the money supply, i.e., its actual rate of use in transactions, was near zero. as a result, the Fed’s tightening threw the economy into another recession, with unemployment rising to 11%. The policy may have been correct, but the timing was wrong.
So, what guarantee do we have that the Fed will perform sterilization at precisely the right time? If they move too early, the economy shuts down, a la 1982. Too late, and inflation takes off. Then the Fed would really have to tighten, which would probably result in another recession to wring out the extra inflation.
The trouble with the Fed is that monetary policy moves take 6-18 months to fully percolate through the economy. And they make these decisions based on economic data gathered in previous months. It’s like driving down the street by looking only at the rear-view mirror.
That makes proper timing by the Fed…hard.
Perhaps the Fed will operate as if run by infinitely wise solons, who know precisely when to sterilize their quantitative easing, either through repo operations, or raising the banks’ reserve requirements appropriately.
If it doesn’t, however, we’re looking at either another steep recession, or a bout of serious inflation, follwed by another serious recession to tame the inflation.
Oh, and even if the Fed is that good, it doesn’t address the problem of how the Chinese will react to any increased currency risk they face by holding dollar-denominated securities if the value of the dollar falls in the FOREX. As Mr. Wolf admits, the Fed’s mandate has nothing to do with the foreign exchange value of the dollar. So, maybe, the Chinese will decide to sell as much of their holdings in Treasuries as they can. That implies a serious decline in treasury prices, and a concommittant rise in bond yields, i.e., interest rates. Aaaand, we’re back to a possibility of a steep recession again Especially if they do it while the Fed is already in the middle of money supply sterilization operations.
So, I guess the question is, “How much to you trust in the ability of the Federal Reserve to do exactly the right thing, at exactly the right time?” And, “How much do you trust the Chinese to go along with all this?”
That’s what the National Bureau of Economic Research (NBER), our official arbiter of when we’re in a recession and when we aren’t, says the recession ended.
The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.
So all those who essentially said leave it alone and the economy will pull itself out of the recession were correct. Remember, June of 2009 was approximately 6 months after the administration took office and 5 months after the stimulus package had been approved by Congress. Or said another way, well before any of the money it has squandered had yet been dumped into the economy.
Also note the beginning date. The recession began in December of 2007. By the time the Obama administration got to it, it had pretty much bottomed out and was beginning to recover. The stimulus plan was signed into law on Feb. 17, 2009. The recession officially ended in June of 2009 per NBER. That’s not to say, however, that “things are better” necessarily:
In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
Or, an easier way to say it is that we experienced and are experiencing now what is normal to experience in a recession, but, as usual, the business cycle turns and we begin an expansion. Note the last line – “Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.”
So again, I stress, any claim that the “stimulus” was the reason for our beginning to recover has a bunch of inconvenient determinations by NBER to overcome. And anyone who thinks the government can get out of its way in approximately 4 months time to have any real effect (mid Feb to June) on the economy – regardless of the size of the spending it has planned to inject – simply doesn’t have a clear understanding of how this government operates.
That said, I hope NBER is correct and that we are indeed expanding. As it stands now, though, most of the unemployed out there looking for scarce jobs most likely don’t give a rip what NBER says. Until they’re again employed, they’re still suffering from a recession. And that doesn’t bode well for Democrats at all in November.
From The New York Times:
President Obama on Wednesday will make clear that he opposes any compromise that would extend the Bush-era tax cuts for the wealthy beyond this year, officials said, adding a populist twist to an election-season economic package that is otherwise designed to entice support from big businesses and their Republican allies.
Mr. Obama’s opposition to allowing the high-end tax cuts to remain in place for even another year or two would be the signal many Congressional Democrats have been awaiting as they prepare for a showdown with Republicans on the issue and ends speculation that the White House might be open to an extension. Democrats say only the president can rally wavering lawmakers who, amid the party’s weakened poll numbers, feel increasingly vulnerable to Republican attacks if they let the top rates lapse at the end of this year as scheduled.
But the problem is that raising taxes in a recession is considered by all objective thinkers to be folly. In fact, the President said so himself as I reminded you recently:
Normally you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is—his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”
But they are going to raise them in a recession now. “Scott”, by the way, was a person who submitted a question at an Obama townhall through MSNBC’s Chuck Todd. Obama admitted that it was the wrong thing to do in a recession. And folks, we’re still in a recessionary period whether or not the spin artists with the administration prefer “recovery summer” (another flop) or not.
The NYT goes on:
It is not clear that Mr. Obama can prevail given his own diminished popularity, the tepid economic recovery and the divisions within his party. But by proposing to extend the rates for the 98 percent of households with income below $250,000 for couples and $200,000 for individuals — and insisting that federal income tax rates in 2011 go back to their pre-2001 levels for income above those cutoffs — he intends to cast the issue as a choice between supporting the middle class or giving breaks to the wealthy.
Of course, he’s presenting a false choice. There’s a third choice – keep the tax cuts for all and cut spending. But, you can’t stir up class warfare and spend more money unless you demonize the rich and claim you’ll be spending their money for the benefit of the “middle class”.
Any American that falls for the sort of populist class envy nonsense is most likely fine with the government we have and any silver pieces they can siphon off as a result.
That said, the NYT’s first sentence in that paragraph says a lot. Does Obama have the heft to carry this off. We all know the GOP will be the whipping boy for any failure, but unless every Democrat in both chambers of Congress stand up and vote for it, it will be a difficult thing to sell to a skeptical electorate who’ve heard all this nonsense before.
Politically, however, the president is, in effect, daring Republicans to oppose the plan, in that way proving Democrats’ contention that they will block even their own ideas to deny Mr. Obama any victories. And by proposing business tax breaks that, according to nonpartisan analyses, would do more to stimulate the economy than extending the Bush tax rates for the wealthy, Mr. Obama hopes to buttress Democrats’ opposition to extending those rates.
Let him dare the Republicans. If they’re smart (and that’s always debatable) they’ll use the President’s own words against him. That would be their most effective tool. And that would also put Democrats in marginal districts on notice that if they vote not to extend the cuts, they’re doing what their President once admitted was a terrible idea in bad economic times. And, they should understand, they can count on hearing that repeated in ads in their districts along with how they voted.
I know, you’re going,” say what!? “
A year ago, probably when Obama thought we’d be out of the recessionary woods by now and only 20% of the “stimulus” had been spent, he was questioned while in Elkhart, IN, about the economics of a tax hike during a recession. The question was submitted by an Elkhart resident (Scott Ferguson) and asked by Chuck Todd of SNBC. Todd asked, “Explain how raising taxes on anyone during a deep recession is going to help with the economy.”
Obama said it wouldn’t:
“Well—first of all, he’s right. Normally you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is—his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”
Absolutely true to that point. But the larger point is the admission – “you don’t raise taxes in a recession”.
Todd riposted with “But you might for health care. You might for the high—for some of the wealthiest.”
Obama responded very emphatically:
We have not proposed a tax hike for the wealthy that would take effect in the middle of a recession. Even the proposals that have come out of Congress—which by the way, were different from the proposals I put forward—still wouldn’t kick in until after the recession was over. So he’s absolutely right, the last thing you want to do is to raise taxes in the middle of a recession because that would just suck up—take more demand out of the economy and put businesses further in a hole.
Emphasis added, but wow – exactly. It is “the last thing you want to do” and it will “put businesses further in a hole”.
So that was then and this is now – everyone who is actually having to deal with what is going on know we’re still in a recession. But technically, we’ve had the “two consecutive quarters of growth” necessary to claim we’re in a recovery. The fact that the “growth” was pretty much all government spending – borrowed money – doesn’t count. The technical definition wins out.
That means he can, with a straight face, claim that letting those tax cuts expire is OK because we’re no longer in a recession.
Of course that’s just ludicrous to anyone who has two brain cells to rub together. It is unwise and economically the wrong thing to do. But, as Turbo Tax Timmy Geithner has decided, when asked about those expiring tax hikes, “The country can withstand that. The economy can withstand that. I think it’s good policy.”
Is it? Or is it good “ideology”?
Tax the rich – a liberal mantra for decades. Take the seed corn and pass it out to those who will eat it instead of plant it. Ensure that those of the investor class have less to invest. Put businesses in a deeper hole. Give the money to government which can obviously spend it more wisely than can the private side.
The $787 billion dollar “stimulus”?
Move along, citizen – nothing to see here.
Not to beat a dead horse (we here at QandO would never do that – heh), but a picture to go along with Dale’s post below about unemployment to sort of give it a context which should scare the living hell out of you:
Just in case you were wondering.
Have a nice weekend.
Of course you an find “experts” who will point to each and say that’s our future. USA Today has a list of them in an article which explores the title question. It appears most believe it will be the latter – a slow recovery. But some are worried about signs that the present situation compares very closely with the 1930s.
And, in many ways it does. We continue to see weakness everywhere. And it appears until we get the housing market squared away (housing starts down 5% this month) and some other areas cleaned up, plus get some hiring going on, it is going to continue to be rough out there.
Jobs continue to be key to the recovery (we are a consumer driven economy – no job, no money. No money, no consumption) so the faster we can employ the jobless, the faster we see the recovery take off. However, that’s a huge undertaking:
The national unemployment rate stands at 9.5%, or more than 14 million Americans, says the Department of Labor, far below the peak unemployment rate of 25% during the Great Depression. But those numbers don’t fully convey the jobs weakness. Another 8.6 million people are working part time because they can’t get full-time jobs. And 3.8 million, discouraged by the dearth of job opportunities, are out of work but were not counted as unemployed.
So while not at 25%, we’re most likely somewhere in the 14% range in real terms (not the politically motivated U3 of 9.5%).
"If you’re not making money, it’s pretty hard to spend it," or pay bills, Johnson says. "There’s no fuel in the economic engine to make it grow. People are spending less and saving more."
This, of course, is where the impetus comes from to claim if the people can’t spend, the government should. We’ve seen, first hand, how that’s worked out – unemployment went up and stayed up. And “more” wouldn’t have made any difference as is now being argued.
The answer isn’t government spending – not in a consumer driven economy. No, the way you help solve this problem, if you’re government, is to incentivize business expansion and thereby hiring to drive consumer spending. Instead, the policies of this administration, at least to this point, have businesses on the sidelines sitting on both their hands and their money.
Further crimping the outlook for future growth is the fact that cash-rich U.S. companies, despite improving profitability, are still leery of the recovery and are reluctant to deploy that money to grow or hire new workers.
"Companies have pared their expenses dramatically, upgraded their technology, improved their profit margins," Johnson says. "But they are not hiring more people, because they would have to see greater demand to do so."
Once again, the government can’t create that “greater demand” via “stimulus”. That demand has to come from consumers. Those are the customers businesses rely on to generate demand, and with about 14% in the unemployment/underemployment mix, that demand simply isn’t there – or, at least, not enough to expand and hire.
Catch 22? In a way. So what can government do?
Cut business taxes. Get out of the way. Provide incentives to expand and hire (accelerate capital equipment depreciation for instance, if bought now).
There are lots of ways short of spending us into oblivion that the government can positively effect the market and the business climate. Unfortunately, as Mort Zuckerman has stated and the business community as a whole believe, we have an “anti-business” administration in charge right now – and that further unsettles the situation. Perception being reality, as long as the business community believe that, not much is going to change.
So, there’s your day’s sunny outlook on the economic front. As Donald Luskin says:
"The only way to get out of debt is to earn money," Luskin says. "The only way to get out of recession is to grow. If you kill growth, you are" in trouble.
And right now, we’re in trouble.
In this podcast, Bruce and Dale discuss the dissatisfaction about President Obama’s competence, the oil spill, and the American stranded in Egypt.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download 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 2009, they can be accessed through the RSS Archive Feed.[ad#Banner]
Apparently the only jobs the massive "stimulus" may have saved, at least temporarily, were government jobs. Now, even those are in jeopardy as state and local governments are forced to deal with the reality of their fiscal situation:
Up to 400,000 workers could lose jobs in the next year as states, counties and cities grapple with lower revenue and less federal funding, says Mark Zandi, chief economist for Moody’s Economy.com.
Layoffs by state and local governments moderated in June, with 10,000 jobs trimmed. That was down from 85,000 job losses the first five months of the year and about 190,000 since June 2009. But the pain is likely to worsen.
States face a cumulative $140 billion budget gap in fiscal 2011, which began July 1 for most, says the Center on Budget and Policy Priorities.
While general-fund tax revenue is projected to rise 3.7% as the economy rebounds in the coming year, it still will be 8%, or $53 billion, below fiscal 2008 levels, according to the National Association of State Budget Officers.
And that means that states will not be able to afford some of the services or staff they presently employ. And that, of course, means layoffs and even more workers seeking jobs. While to this point, many state and localities have been able to avoid layoffs by offering furloughs, that option is no longer viable for most.
And economic growth isn’t looking all that hot either. Wells Fargo economist Mark Vitner is amending his third quarter economic growth estimate from 1.9% to 1.5%.
If this is a recovery, I’d hate to see a depression.
If you were wondering why the stock market tanked yesterday, look no further than June’s consumer confidence numbers. Not good:
The Consumer Confidence Index came in at 52.9 in June, a jarring decline from 62.7 in May, according to a survey released Tuesday by the Conference Board, a private research group. It was the biggest drop since February and came on top of several gloomy economic developments in recent days.
Those “gloomy economic developments” of recent days include a 1Q GDP of 2.7%, housing sales that dropped 33% and unemployment numbers that while a tiny bit lower, showed nothing to indicate employers are hiring. Now consumers are indicating that they’re not willing to buy much of anything at the moment. That all adds up to bad news for the recovery – if in fact, we’re actually in one.
And the future isn’t looking much brighter:
In another troubling sign, forecasters expect U.S. auto sales to decline for June after growing every month since January. The Conference Board’s report showed that fewer people surveyed plan to make many major purchases, from homes and autos to refrigerators, over the next six months.
Again, not a good sign. In fact, what it is a sign of is something we’ve all been fearing:
"The more evidence that we get that consumers are losing their confidence and growing more tentative about things, the odds of a double-dip recession start to rise a little bit," said Tim Quinlan, economist at Wells Fargo.
Indeed. Wait … wasn’t all that stimulus money supposed to fix this?
In this podcast, Bruce, Michael, and Dale discuss whether President Obama’s “Jimmy Carter Moment” is approacjing as a result of the BP Oil spill, and his proposal to eliminate the mortgage interest rate deduction.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download 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 2009, they can be accessed through the RSS Archive Feed.