Tag Archives: Federal Reserve

A dark age coming

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The headline story in The AFR today begins:

The federal government has slammed plans by business to go it alone on climate and energy policy but industry leaders are holding their ground and have the backing of Labor and the Greens.

It’s a new world out there.

Meanwhile, in the US: Is The Fed Trying To Tank The Trump Economy Before The Midterms? Want to breed uncertainty? Try this on for size:

Dallas Fed President Robert Kaplan said he still favors the central bank raising short-term interest rates three more times before deciding whether more increases will be necessary to keep the economy on an even keel.

This suggests the Federal Reserve should lift rates at its December, March and June policy meetings “unless something changes,” Mr. Kaplan said Tuesday in a Wall Street Journal interview.

Fed Chairman Jerome Powell said then that rates remain low enough to continue stimulating economic growth. But according to the Wall Street Journal other officials have expressed a range of views, and some uncertainty, about how high rates would have to go to reach a so-called neutral level that neither spurs nor slows growth.

A COMMENT ON RISING RATES: I have been asked about rising rates in the comments. And as I have said in the past, rates have been too low for too long which has lowered the productivity of our array of investments. The issue is not whether rates should rise – they should – but whether they should rise now immediately before an election. The effect on share markets was obvious enough. Front-page treatment of a falling market can move voter sentiment, specially the way it can be played on by the media. The Fed kept rates down throughout the Obama presidency and there was never any doubt it would push them up once PDT was elected. Optics is all, and even if the adjustments brought on by higher rates are positive for the economy, it may not look that way to anyone who is paying out more on their mortgages or small-business loans.

The trick to picking winners is not to pick losers – how easy is that!

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It is a big part of what I try to teach – that the future is unknown and all decisions are made before the consequences of those decisions can be known. So people take inferences wherever they can, and in this case the inference is that McDonald’s tells us why the market will collapse. It seems to tell us more than just what is happening to the market:

We had, essentially, very poor sales from McDonald’s. Now, McDonald’s is a very good indicator of the global economy. If McDonald’s doesn’t increase its sales, it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income, and so people have less purchasing power.”

Faber has long argued that the policies of the Federal Reserve and other central banks simply increase asset prices and create inflation rather than actually stimulating the economy. But while the long-predicted inflation has not come to pass, Faber says that the McDonald’s results reflect the fact that inflation is rising faster than income, reducing the amount that individuals can spend.

Who can be in any doubt that the cost of living is rising around us? But whatever else, very few of us are able to maintain our living standards, with plenty of shifts in expenditure patterns to accommodate the harder going. I was reading The Senior the other day and its front page was on “Living in ‘energy poverty'” with the subhead, “Disconnections up: more seeking hardship plans”. The example given was of a 77-year old woman who received a $1500 gas bill. Not that long ago such a notion would have been impossible. Now we are all being careful of this and so many other things.

Our living standards are being chiselled at in countless ways, only some of which show up as a rise in the price level. It’s not just monetary policies that are failing but the entire range of policies which divert resources away from value adding production and into the usual low-productivity nonsense aimed at by governments. The wonderfully whimsical headline in this morning’s AFR captured it all:

Abbott to pick winners not losers

No doubt this will appeal to everyone, a political winner. One can only hope that those who are promoting the policy understand it can never do anything but waste money so will be very restrained in following up on this:

Federal cabinet has approved a “competitiveness agenda” that will lead to government support for parts of the economy where Australia is strongest and require greater collaboration between businesses, schools, universities and training colleges.

Mercantilists all.

Modern economics is such junk

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I was once again reminded about the multitudinous things that are wrong with economics today by two stories this morning. The first: Fed: US consumers have decided to ‘hoard money’. And then there was this: Cramped seats and angry passengers lead to diverted flights. Let me start with the first.

“Hoarding money” amongst all of the Keynesian idiocies is the most idiotic. Q: Why are people not spending? A: Because they are hoarding money. Q: What does it mean to “hoard money”? A: People are literally hanging onto cash rather than spend. And literally means literally. It means keeping money on hand and not even putting it into a bank.

It was idiocy in the 1930s when Keynes said it even though bank failures were not uncommon in the US. It has been a stupidity ever since as a cause of anything, and so far as I know, most textbooks tend to overlook this notion because it is so stupid. But not the Federal Reserve of St Louis:

One of the great mysteries of the post-financial crisis world is why the U.S. has lacked inflation despite all the money being pumped into the economy.

The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their “willingness to hoard money.” The paper also cites the Fed’s own policies as a reason for consumers’ unwillingness to spend. . . .

“Why did the monetary base increase not cause a proportionate increase in either the general price level or (gross domestic product)?” economist Yi Wen and associate Maria A. Arias asked in the St. Louis Fed paper. “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money.”

These people are clueless about what’s going on, absolutely clueless. The lack of real income is crushing the American economy as the ersatz version driven by government spending has replaced the real kinds of income that are based on value adding production.

So what’s this got to do with the cramped seating on planes? Inflation means that what a unit of currency will buy diminishes. The same things cost more money, or the same amount of money will buy you fewer things. If you think of an airplane seat as a specific amount of room on an aircraft as you go from place to place, the inflation is coming in the form of less legroom and reduced space. On a cost per inch basis, prices have rocketed, but the CPI will never pick such things up.

The other way that the suppressed inflation is affecting things is in the way out capital structure is being run down. Again invisible using the national accounts or the CPI, but if you have travelled on an airplane in the US, just to give you one example, you can see just how decrepit the stock of capital in the US is becoming. The US, along with the rest of us, are finding our living standards declining because we are drawing down rather than building up.

Economic theory is such junk! But on a brighter note, the 2nd ed of my Free Market Economics will be released at the end of the month.

Never too old to learn

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There was an article on Alan Greenspan the other day in The Business Australian about his new book The Map and the Territory in which he made an interesting set of observations, both political and economic. First the political:

ALAN Greenspan, the former chairman of the US Federal Reserve, goes to a lot of parties. He and his wife, the TV journalist Andrea Mitchell, ‘sort of get invited everywhere’, he says, sitting in front of the long bay window in his office in Washington.

Lately, though, cocktails and dinners seem to have guest lists drawn almost exclusively from one political party or the other. ‘It used to be a ritualistic 50-50 at parties – the doyennes of culture and partying were very strict about bipartisanship,’ he adds. ‘That doesn’t exist any more.’

Talking to each other is what much of politics is about. Although there’s not a lot to say for Canberra, it is small enough that you are always bumping into people and the informal side of making contacts helps. Now we find the former more collegial atmosphere in Washington has been superseded by a poisonous rancour to such an extent that people don’t even meet each other any more.

Even here, the kind of viciousness that seems to have invaded Gillard’s speech on misogyny was personal and would have made it much more difficult for Abbott to even pretend to have a friendly relationship with the then-Prime Minister. As I learned in industrial relations, you can only settle a dispute by sitting down with the other side. Turning opponents into visceral enemies cannot be good for getting on with the business of getting things done. “Electricity Bill” Shorten travelling to Afghanistan with Tony Abbott is how these things ought to be.

But it was what Greenspan says about economics that I found perhaps even more interesting.

‘I’ve always considered myself more of a mathematician than a psychologist,’says Greenspan. But after the Fed’s model failed to predict the financial crisis, he realised that there was more to forecasting than numbers. ‘It all fell apart, in the sense that not a single major forecaster of note or institution caught it,’ he says. ‘The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works – and it missed it completely.’

Econometric models are based on the past so that they can really only forecast the kinds of events that have happened before. But even after the event, I would have to think that the linkages from the housing market to the world’s financial system would have made forecasting what did happen all but impossible, which is why no one did. Many claim they did but no one did. So the story goes on:

‘A few days (after the crisis hit), I run into an article, and it is titled, “Do we economists know anything?”‘ he says.

Greenspan set out to find his blind spot step by step. First he drew the conclusion that [A] the non-financial sector of the economy had been healthy. The problem lay in finance, [B] because of its vulnerability to spells of euphoria and irrational fear. Studying the results of herd behaviour provided him with some surprises. ‘I was actually flabbergasted,’ he says. ‘It upended my view of how the world works.’

He concluded that fear has at least three times the effect of euphoria in producing market gyrations. [My letters and bolding.]

A bit of economic history and a study of the history of economics would not go amiss. The man who invented the term “irrational exuberance” now says he’s just discovered that “irrational fears” drive markets. Middle stages of dementia, obviously.So please let me point out that so far as [A] was concerned, the problem was the housing market which had over-produced and found a sub-prime market amongst those who could never repay their debts. This was a real problem, not financial and not psychological. The underlying structure of the American economy was fantastically distorted and has become even more so with the coming of the stimulus. He needs to read a bit of pre-Keynesian business cycle theory, or if he would like a short cut, he could read my Free Market Economics.

And so far as [B] goes, if he thinks that fears that mounted at the end of 2008 were mere shadows with no substance then he is even more off centre than he thinks he is. If this is the new wisdom in Washington, I can only think it would be better if both sides stop inviting him to parties if that is what he now has to say.

Right questions wrong answers

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Thomas Sowell and I have many things in common most importantly of which was that we both did our PhDs on Say’s Law and for both of us this was the subject of our first books: here’s his and this is mine. And once you understand Say’s Law, you will never again think of economics in the same way. Rather than Keynes having disproved this law, he made it unfashionable, and thus it has remained for the past three-quarters of a century. But unfashionable or not, it is the indispensable core of economic reasoning which is why its original name was the law of markets. If you want to understand how a market economy works, you must understand Say’s Law.

Anyway. Sowell has put together a column on the nomination of Janet Yellen as the next Chairman of the Federal Reserve (found here) and structures his comments around her incorrigible Keynesian approach to matters economic in much the same way I did myself the other day. This is from Sowell.

The Keynesian economists have staged a political comeback during the Obama administration. Janet Yellen’s nomination to head the Federal Reserve is the crowning example of that comeback.

Ms. Yellen asks: ‘Do policy-makers have the knowledge and ability to improve macroeconomic outcomes rather than making matters worse?’ And she answers: ‘Yes.’

The former economics professor is certainly asking the right questions — and giving the wrong answers.

The amazing part of the way Thomas Sowell writes is how much he can pack into a few hundred words. If you can read what he writes and still not at least start to think that maybe, just maybe, there is something to that classical economic theory after all then you are as incorrigible as Janet Yellen and about as clueless on how to manage an economy as well.