U.S. Economy: Is the Fed Predicting Stagnation? 23 comments
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For sometime now I have been pointing out that things would be bad, not because I prefer gloom to joy but because the Fed's disgraceful monetary shenanigans over the years made the current situation inevitable. In the meantime, the profoundly ignorant Obama and his statist cronies are making things far worse. And what do we get from the Fed? Well, allow me to refer you to Janet Yellen, President of the San Francisco Fed, who opined that the US can look forward a very slow recovery marked by high unemployment.
What was particularly interesting was her other comment: "It's not outside the realm of possibility that the fed funds rate could stay at zero for the next couple of years". It seems to me that Yellen is telegraphing economic stagnation. When a sustained recovery gets underway interests tend to rise. Keeping rates low for too long would cause inflation to accelerate, forcing the Fed to prematurely slap on the monetary brakes. So if the Fed thinks it will have to keep rates low for at least two years, one must presume the worst. This cannot be good news for Obama, let alone the rest of the country.
I predicted that this recession would be different. Economic laws never change but governments do — and the Obama administration has created the most anti-business climate since Roosevelt, which definitely proves that elections have consequences. The monetary rule of thumb is that manufacturing should start recovery six to nine months after a monetary expansion begins. The stock market usually responds within the first quarter. Well, we got our monetary injection last year, and the job situation is still deteriorating while manufacturing — which is now down to 65 per cent capacity — is still contracting. How can this be so? The yield curve is very steep, indicating that monetary policy still remains extremely loose.
Pundits are pointing to "green shoots" and other "bright spots" as evidence that recovery, no matter how sluggish, is underway. But it all sounds very desperate. What they cannot point to is evidence of a broad-based recovery. Despite so-called green shoots, there can be genuine recovery while unemployment continues to grow. Judging by some articles I've read a few commentators still expect monetary policy to kick in any day now. They point out that thanks to Bernanke the banks are holding about $800 billion in excess reserves.
They believe that when this money finally comes down the pipe consumers will be able to jump-start the economy. But this is not how it works. Monetary policy operating through artificially low interest rates has always stimulated recovery through manufacturing, never through consumer borrowing. Moreover, lending out the banks' excess reserves would cause the money supply to explode, resulting in surging inflation and a depreciating dollar. Even if the Fed were able to engineer a consumer boom this would only succeed in keeping manufacturing depressed. So what we need to know is why manufacturing in particular and business in general is not borrowing. Economists should always keep in mind the fact that
while there is always some rate of money interest which will check an eager borrower, there may be no rate of money interest in excess of zero which will stimulate an unwilling one. (D. H. Robertson, Banking Policy and the Price Level, Augustus M. Kelley, 1989, p. 81, first published 1926).
We already have part of the answer: manufacturing is still contracting. The economic punditry has frequently written of financial imbalances. What it doesn't realise is that even more importantly, real imbalances exist. I think these imbalances — distortions in the capital structure — are so severe that it is taking a considerable time to liquidate them, a vital process that the administration's fiscal policy is seriously retarding.
The continuing rise in unemployment is, I believe, clear evidence that the liquidation of these malinvestments is still proceeding, which brings us back to the unemployment situation, a situation that is even more dire than the statistics suggest. We now know that the average number of hours worked per week has dropped to 33, the lowest in 40 years or so. What this means is that if the working week had been maintained the official unemployment rate would probably exceed 12 per cent, meaning that underemployment is keeping the official unemployment figures down.
That the situation is still deteriorating was rammed home by the fact that not only were 467,000 jobs lost in June, but business investment plummeted by 37.3 per cent in the first quarter. When an AP reporter asked Obama's opinion on last month's job losses he replied with the incredibly asinine comment:
If we're weatherising every building and home in America, if we are creating windmills and solar panels and biofuel facilities, that is a huge promising area not only for jobs here in the United States, but also for export growth.
This is pure unadulterated rot. What he is proposing will — if fully carried through — result in the massive destruction of capital and a savage cut in living standards.
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This article has 23 comments:
Why not go the whole hog and call from dragging Bush back from Crawford, if you are so anxious to return to the good old days.
Too much vitriol clouds any appearance of objectivity...
On Jul 06 03:54 PM nobby73 wrote:
> Ok, so you are no fan of the President, I get it.
>
> Why not go the whole hog and call from dragging Bush back from Crawford,
> if you are so anxious to return to the good old days.
>
> Too much vitriol clouds any appearance of objectivity...
You mentioned the large reduction in business investment in Q1. This is a very important point because during the 1930's business investment plummented due to "regime uncertainty" during the years of the New Deal. This is happening now and will continue. The business investment rate did not recover to the level of the 1920's until post 1946 when the economy finally recovered from the Great Depression. Gross Private Investment (GPI) will continue to contract during thie New, New Deal.
On Jul 06 01:24 PM Dave Wrixon wrote:
> The basic problem is that monetary policy normally targets consumer
> liquidity by making money easier or more difficult to obtain. But
> as has been said before, it is no longer a question of liquidity,
> as so many times in the past. It is is now a question of SOLVENCY
> and the only way you are going to crack that in double quick time
> is hyper-inflation.
The only thing being stimulated is the public sector which could be characterized as inherently stagnant.
65% manufacturing capacity: Businesses are not borrowing because consumers have pulled back purchases. Few businesses borrow money to increase inventory. The manufacturing exceptions to this are the statist entities now evolving such as GM.
Until we figure out a way to get those manufacturing jobs back, or create new ones, the recovery will never bring us back to where we once were or should be.
Walmart & McDonalds can only create so many jobs that don't pay anywhere near a living wage.
If we're undermined by Free Trade, then obviously we've been perpetuating incomes and lifestyles that are unsustainable. Foreign labor is cheaper because frankly, American workers are grossly overpaid compared to everyone except the EU.
I see it as closely related to the general US crisis. The US is at a tipping point, after piling on a bunch of debts and spending (government and private) that we couldn't afford. China shipped us the goods, instead of enjoying the stuff themselves. Now we owe them
All across the board, there's an Equalization happening which has been long overdue
On Jul 07 11:08 AM goldbug101 wrote:
> The underlying problem with any recovery is that our nation's manufacturing
> sector has basically been gutted by "free trade" and offshore plants.
>
>
> Until we figure out a way to get those manufacturing jobs back, or
> create new ones, the recovery will never bring us back to where we
> once were or should be.
>
> Walmart & McDonalds can only create so many jobs that don't pay
> anywhere near a living wage.
On Jul 07 01:33 PM pdub271 wrote:
>
> If we're undermined by Free Trade, then obviously we've been perpetuating
> incomes and lifestyles that are unsustainable. Foreign labor is
> cheaper because frankly, American workers are grossly overpaid compared
> to everyone except the EU.
>
> I see it as closely related to the general US crisis. The US is
> at a tipping point, after piling on a bunch of debts and spending
> (government and private) that we couldn't afford. China shipped
> us the goods, instead of enjoying the stuff themselves. Now we owe
> them
>
> All across the board, there's an Equalization happening which has
> been long overdue
todays environment is all about cost. nothing else matters.
innovation will not override that cost factor.
nor does productivity either.
its real simple
we Americans cost to much
and there is nothing short of reducing incomes by 50% across the board that will suffice to resolve that cost problem
On Jul 07 02:51 PM robert.b.ferguson wrote:
> Every one is deleveraging as fast as they can. Those who have already
> done so are not eager to borrow again (including businesses large
> and small) and so they won't even if the banks wanted to lend (Which
> apearently they don't). Free trade is not necessarily a bad thing
> as a rising tide lifts all boats. The problem is that globalization
> takes time the developed economies have a head start on developing
> a middle class. Developing economies are playing catch up and they
> will eventualy catch up. The question then becomes can we as a developed
> economy keep inovating and creating brand new products and technologies
> to sustain us while they are catching up?
but about 60% of this stimulus package you mentioned
was tax cuts.
and thats all that has been so far.
with miserable results
as usual
On Jul 07 09:18 AM dixie wrote:
> FED policy has little relationship to the "stimulus" passsed by Congress
> and enacted by Obama. This misguided public pork spending package
> will all by itself result in "stagflation."
>
> The only thing being stimulated is the public sector which could
> be characterized as inherently stagnant.
business investment plummeted during the 30s do to some thing called the great depression
not regime change as you called. if that was the case, then every time we had an election we would have a recession/depression just like clock work. but it didn't work that way.
and this recession like the GD, was triggered by stupidity in the private sector, with an assist this time from their public sector friends
On Jul 06 06:48 PM austrian63 wrote:
> Gerard,
>
> You mentioned the large reduction in business investment in Q1.
> This is a very important point because during the 1930's business
> investment plummented due to "regime uncertainty" during the years
> of the New Deal. This is happening now and will continue. The business
> investment rate did not recover to the level of the 1920's until
> post 1946 when the economy finally recovered from the Great Depression.
> Gross Private Investment (seekingalpha.com/symbo...) will
> continue to contract during thie New, New Deal.
WHO THE HECK IS GOING TO GIVE THESE MILLIONS OF PEOPLE JOBS???
Manufacturing? Oh yeah our plants have been shuttered for 20+ years.
Technology? India, Singapore, China maybe...
Retail/Service? That'd be nice except the American consumer is straight-jacketed with so much debt.
On Jul 07 11:08 AM goldbug101 wrote:
> The underlying problem with any recovery is that our nation's manufacturing
> sector has basically been gutted by "free trade" and offshore plants.
>
>
> Until we figure out a way to get those manufacturing jobs back, or
> create new ones, the recovery will never bring us back to where we
> once were or should be.
>
> Walmart & McDonalds can only create so many jobs that don't pay
> anywhere near a living wage.
Complaining that manufacturing hasn't picked up in this overleveraged environment .... is missing the point in the EXACT same way as the curren admin and their "re-start borrowing" windmill-tilting. That's just pushing on a string, big fella. There will be no real recovery until debt ratios return to something resembling a mean.
On Jul 07 01:33 PM pdub271 wrote:
>
> If we're undermined by Free Trade, then obviously we've been perpetuating
> incomes and lifestyles that are unsustainable. Foreign labor is
> cheaper because frankly, American workers are grossly overpaid compared
> to everyone except the EU.
>
> I see it as closely related to the general US crisis. The US is
> at a tipping point, after piling on a bunch of debts and spending
> (government and private) that we couldn't afford. China shipped
> us the goods, instead of enjoying the stuff themselves. Now we owe
> them
>
> All across the board, there's an Equalization happening which has
> been long overdue
I propose also that the GD and the current crisis was caused largely by (1) cheap credit and (2) vast expansions in the amount of bank credit. Who caused this?
On Jul 07 03:35 PM dw57 wrote:
> nope, the economy recovered from the GP much earlier. about 35 not
> after WW2.
> business investment plummeted during the 30s do to some thing called
> the great depression
>
> not regime change as you called. if that was the case, then every
> time we had an election we would have a recession/depression just
> like clock work. but it didn't work that way.
> and this recession like the GD, was triggered by stupidity in the
> private sector, with an assist this time from their public sector
> friends