Bernanke's Vices Continue

by: Karl Denninger

I usually reproduce the entire thing. This time it's simply not worth it; read it here.

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8% at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

Uh huh. Moderate pace eh? What about all the excessive debt, including that taken by the government?

Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers - a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed--fell, remarkably, by nearly 10% from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6.5% below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6%. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture.

Employment never recovered after 2000.

What recovery? There wasn't anything to recover. The employment rate fell into the 00-03 recession and never went back up to where it was previously. Why do you think we had to blow a huge debt bubble to pretend we were doing OK in the "aught" years?

Now employment is back at levels last seen in the 1970s. This is a key problem as it is this ratio that controls whether the government can raise more money via taxation. All taxes are paid by people; no employment growth in real terms, no taxing power.

It really is that simple.

The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital.

Where's the spending on communications? You know, every desk needs a phone, people need cell phones, etc? It's missing, that's where. I've been highlighting this for months, and it in turn has shown that the so-called "improvement" in hiring was a chimera.

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment.

See that employment graph above? It also applies to state and local governments.

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.

Absolute bunk. The federal government's spending trajectory was intended to "tide over" the economy for a year or so. It's gone on now for more than three years. The attempt has failed.


As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation.

Yeah, and we know that The Fed always allows those "inflations" to reverse back to the mean, right? Like it did in the 1970s and 80s? Oh wait - it didn't, we just screwed the common man, which in turn led to the insane "pull forward" pyramid from 1983 onward.

The basic facts are familiar. Oil prices have risen significantly, with the spot price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40% from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months.

What has the dollar done during that time?

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities.

Yes, it's called a divisor. Or, if you prefer, that old adage you fall back on when it suits you, "supply and demand." Of course when it doesn't suit you, then there are claims that you didn't have anything to do with it - like here:

Indeed, since February 2009, the trade-weighted dollar has fallen by about 15% . However, since February 2009, oil prices have risen 160% and non-fuel commodity prices are up by about 80%, implying that the dollar's decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world's major currencies, not just the dollar.

Right; Oil is up 160% and the leverage in an oil futures contract is? (Hint: About 10:1) Hmmm ... I see a mathematical relationship here. I wonder how that happened?

For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008;

Why yes, and we saw the price of oil cut from $150 to $35.

Again, the leverage in an oil futures contract is?

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the committee would respond as necessary.

Oh my ... a hawkish comment?

Maybe Bernanke does know what the leverage in a futures contract is ... Hmmmm....

Then there was this astounding exchange in the Q&A with Jamie Dimon.

Let us note that Dimon, as the head of a primary dealer (NYSE:JPM), pretty much has Bernanke on speed dial. So what was the purpose of this exchange other than to present a public complaint session where everyone could hear it?

And who believes, if I may ask, that all these "evil things and people" are in fact gone or addressed? Certainly not I and certainly not Dimon, if he was going to be honest. Just as one example: "Mortgage underwriting has gone back to what it was 30 years ago." Oh really Jamie? You can still get low or near-zero down payment loans - 30 years ago it was 20% down, in cash, no games.

Hmmm ...

Note: Even Steve Liesman, who is typically all for whatever sort of knob-jobbing banksters and Bernanke might do on any given day, was incredulous at this exchange. I'll be polite and not use the language that I believe is appropriate to describe it.