Stagflation rears its ugly head
Date: Thursday, August 04, 2011
Author: Henry Thornton
Retail sales fell (in nominal terms) in July, and are now showing weakest growth since 1962, in the wake of a 'recession we had to have'. This recession, which almost bankrupted Henry's father's small business, was necessary to kill inflation. It ushered in a decade of non-inflationary prosperity and the Whitlam government, which quickly made Australia one of the high inflation nations, and ruined the economy far more thoroughly than adid the mild recession of the early 1960s. The Gillard-Swan government is orchestrating a repeat performance.
Roy Morgan Research has the most comprehensive and reliable employment statistics that exist for Australia, whose basis is explained here.
Now the Roy Morgan measure shows falling employment and falling work force, implying a rate of unemployment up 0.6 % to 7.6 %. In addition, the rate of underemployment is 7.3 %, confirming other indicators of a weak non-mining industrial base./
The unstoppable Michael Stutchbury has latched on to the useful but ugly concept of 'stagflation' to describe the dilamma faced by Glenn Stevens.
'SOME say the economy is so weak that interest rates should be cut. Some say interest rates must rise to snuff out inflation. What if both are right?
'What if the economy is weak but inflation is still bubbling up above the Reserve Bank's 2-3 per cent inflation target?
'What if the trade-off between economic growth and inflation has worsened?'
'Glenn Stevens didn't have to answer this question after Tuesday's board meeting....
'But the RBA's quarterly monetary policy statement tomorrow will need to provide more answers on where the economy, inflation and interest rates are heading'.
'Stalled productivity creates inflation as cost pressures do not get offset by rising productivity. And if cost pressures rise, as they must as the mining boom gathers strength, inflation will become a larger problem. The many costs of inflation work against productivity, creating a vicious cycle of rising inflation and falling productivity, with stagflation the inevitable outcome. Now the twins of economic policy are terrible twins
'Sensible reform of industrial relations could help break this ugly cycle, but this will not be seen from the Gillard government, whose predecessor Labor government so enthusiastically re-regulated labor markets'.
This is an unhappy time to be a certral banker.
Everyone likes to be liked, but that is not to be Glenn Stevens' lot in life.
They may like you in the RBA Glenn, why not given the wage rises you have delivered. But here is the average Joe and Charlene view of how you are doing your job.
courtesy The Australian
Reality mugs RBA boss
Date: Friday, October 05, 2012
Author: Henry Thornton
This was the week when RBA governor Glenn Stevens changed his mind.
In recent months, gov'nor Glenn has been keeping his powder dry in case of a nasty global shock. This week he bowed to the inexorable forces slowing growth in the USA, Europe Japan and China, and therefore the 'headwinds' afflicting them all. Here is Henry's account of the conversion.
It would be nice to think the RBA has also responded to the 'headwinds' afflicting Australia's economy, but the 'official view', including that of the RBA, still seems to be 'rate of unemployment 5.1 % = economy strong'.
There are enough good people on the case now that soon the fallacy of the complacent view shall become the new reason for cutting interest rates. Now that Australia is within one standard rate cut of record low cash rates, one is entitled to ask where it will end. After all, the US Fed and the Eurozone Central Bank (ECB) have cash rates near zero and are also applying unorthodox monetary policy with actions that amount to printing money.
Short of a disasterous domestic crunch, with zero or negative goods and services inflation, I would stop at 3 %. If monetary policy with 'real' (inflation adjusted) cash rates lower than (say) 2 % (ie allowing 3 % nominal minus 2 % inflation) cannot generate economic activity, negative real rates are unlikely to do so.
The risk, of course, is that a new housing bubble emerges, and this week the hawks on monetary policy have noticed that housing prices are again rising.
We are a long way from another housing boom, however, and there is no real and present danger of such a boom.
I notice that Alan Kohler has discovered the 'paradox of thrift' or, as Henry prefers to call it, the 'alleged paradox of thrift'.
Here is Henry's exposition from March of this year. Did high saving stop China from growing fast, comrades?
If you are a fan of politics, US-Iran relations or making fun of movie moguls, you will love Argo.
It is in fact a movie at the intersection of all three categories, and is not to be missed.
Hawaii - great place for Aussie tourists
Date: Thursday, October 04, 2012
Author: Nick Raffan
A few weeks ago the Raff and his better half spent 10 days in Hawaii. This was his fourth visit but the first in 25 years. Not surprisingly there were significant changes with more hotels at Waikiki which one might think not possible.
The price of cocktails had just barely doubled and are about half what you pay at a bar in Sydney or Melbourne. Takeaway mixes from one of the ubiquitous ABC stores were $3.00 a pop so what a treat with Diamond Head as a backdrop. The glass can be more than half-full far cheaper than in Australia.
The Raff figures that Honolulu tourism is at capacity judging from fixing the number of visitor’s daily to key locations like Pearl Harbor and Hanauma Bay. Waikiki is packed with tourists mainly by the 20-30s or +50s age groups. It seems that teenagers prefer destinations in Asia because living and activities are cheap. Asia might be cheap but with the AUD so strong against the USD, Hawaii is a paradise for shopping. Cosmetics and fine Hawaiian made clothes (Google Jams World) are half to a third of the price of the same or comparable item in Australia.
The price differential for most things is so huge the reasonable conclusion is that Australian shoppers are being ripped off and it’s no wonder online shopping is accelerating apace. Here is one example: a particular shampoo that the Raff’s eldest daughter buys in Sydney for nearly $30, cost $6.80 at a supermarket in Honolulu.
Beach settings like Waikiki are pretty well same the world over but the backdrop is iconic. The Raff likes the Big Island better and spent most days hiking or snorkeling. The volcanic landscape is extraordinary and there is no other place on earth (except Melbourne) where, in the space of a few hours, visitors can experience all the world’s climates except polar and permafrost.
Beautiful as it is, the Big Island is doing it tough. In six days not one player appeared on an adjacent golf course to the top floor condo rented in South Kona. Most of the condos were unoccupied but this might have been due to fact that it was outside school holidays. For $725,000 the top floor condo 20 metres from the ocean is for sale, and has been for many months. The Raff could not help but notice a small real estate office in Kailua Kona with a large number of properties under foreclosure. A piece of paradise can be yours for $150,000, a small cottage in a tranquil setting, and with a mai tai in hand what else could one want?
Jobs are in very short supply and workers are driving across Hawaii each day to work; in round figures this is at least 160 km each way. The Raff guesses that employment opportunities are no better in California. On its front page the New York Times carried an article on unemployment in California, which if the Raffs memory is right, is supposedly one of the largest economies in the world in its own right. Accountant Byron Reeves lost his job four years ago. Over that period Byron sent off around 1,600 resumes resulting in less than 20 interviews. The number of unemployed professionals is vast and the state unemployment rate is 10.7 % and higher east of Los Angeles at 12.6 %.
The unemployed have formed self-help and encounter groups in support of one another. Official unemployment figures are nonsense. The maximum period, after extensions, that an individual can receive an unemployment cheque is 99 weeks. Apparently some 930,000 people in California have been unemployed for over 27 weeks. This group accounts for 45 % of California’s unemployed. It’s no wonder that older workers in particular just give up looking for work and drop out of the labour force, reducing the participation rate. As in Australia, hidden unemployment is obviously far higher than official figures and it is equally obvious that the Obama administration has no solution to fix the problem.
Glenn Stevens sings a new song
Date: Wednesday, October 03, 2012
Author: Henry Thornton
Just a few short weeks ago the economic glasss was more than half full. Those of us concerned by the global outlook and calling for domestic reform were derided - yes, derided - by RBA chief Glenn Stevens, as he chirped in tune with Treasurer Swan.
Now it is all hands onto the job of understanding why China's economy might be far weaker than confidently believed throughout 2012 so far, and why the 'official' rate of unemployment is a misleading guide to the real state of the australian economy.
Even the worthies on the newly formed 'Shadow RBA' as recently as yesterday were asserting that the RBa should not change its tune.
Glenn Stevens having changed his tune, Australia's journalists have turned on a dime, and presumably the 'Shadow RBa' will be chirping according to his songbook in due course.
The most relevant comment came from The Australian's editorialist, who nicely parrotted (is that a word?) Henry's line for all of 2012, that what is needed is structural reform.
'THE Reserve Bank's decision to again ease monetary policy should be seen as a warning about the pressing need for a serious economic reform agenda. The RBA warns that global economic growth prospects have "softened" and the future risks "still seem to be on the downside".'
Here are the leading paragraphs from the latter source - cheeky possums.
'An influential group of former Reserve Bank of Australia board members, academics and market economists has urged the central bank to shun calls for an interest rate cut today.
'A nine-member board acting as a “shadow” RBA said on Monday that the best option would be for the bank to keep the benchmark cash rate at 3.5 per cent'.
Henry for over a decade has been a two (til 2006) or one man shadow RBA board, and now has some heavy support or perhaps they think opposition.
Noticed one of this esteemed group, recent RBAer Paul Bloxham, keeps speaking about the 'strong labor market', which it surely ain't, as yesterday's blog makes clear. Did they not teach you to delve, Paul?
While the weakness of the labor market is only one reason for Henry's rate cut call, it is perhaps the most important one.
Please refer to 'Three strikes for a rate cut', linked here. The other two reasons are the further detioration in global economic activity and low domestic inflation, which economic weakness is set to drive lower.
Please note that Henry calls for a cut of 50 basis points, or two 25 basis point cuts, this month and next month. No confusion here.
Henry must commend Paul Ham's brilliant open letter to the Emperor of Japan, published today as p 5 of the Australian.
It should boost sales of his new book Sandakan: The Untold Story of the Sandakan Death Marches, but this is one that deserves to be read by all Australians, and also by influential Japanese.
Australia`s supposedly `strong` labor market
Date: Monday, October 01, 2012
Author: Henry Thornton
I keep reading that Australia's labor market is 'strong'. The evidence is a rate of unemployment of 5.1 %.
That measure is, however, just the official headline measure.
Roy Morgan Research has for years now presented a far more informative measure. The the most recent figure, for August, shows an actual rate of unemployment of 9.8 % with a further 7.5 % who would like to work additional hours but lack opportunity.
Gary Morgan said: “Today’s Roy Morgan August employment estimates show Australian unemployment slightly higher at 9.8% (up 0.1% since July) — 1,205,000 (up 34,000). This is the highest number of Australians looking for work since a recent high of 1,278,000 in January 2012. A further 926,000 (down 16,000 in a month) Australians are under-employed — meaning a total of 2.131 million (17.3%) Australians are either unemployed or under-employed, the ninth straight month more than 2 million Australians have been looking for work or looking for more work. Most disturbingly, unemployment remains very high for those aged 18-24 with 387,000 (20.6%) unemployed in this age group and a further 268,000 (14.2%) under-employed — making a total of 655,000 (34.8%) either unemployed or under-employed.
“Despite unemployment being virtually unchanged at 9.8%, overall employment rose strongly in August to 11,074,000 (up 126,000 since July) driven by a strong rise in part-time employment to 3,811,000 (up 295,000). However, full-time employment dropped sharply to 7,263,000 (down 169,000 — the lowest full-time employment since October 2011)".
Here is an update. The latest figures, from September, show a rise of the unemployment rate to 10 % and another large drop in people who describe themselves as being in the workforce.
John Black, in the weekend AFR, has blown the lid off the 'official' story with a deep dissection of available official workforce data.
The key point is that for several months now people have been leaving the workforce faster than new jobs have been created. The apparent fall in the rate of unemployment hides this crucial point. John Black delved deeply into the labor market statistics to demonstrate that, over the past year, only 47,000 people joined the labor force, while a massive 190,000 left, to join the ranks of those classified as hidden unemployed or discouraged workers. Over the same year period, about 10,000 people previously defined as unemployed found jobs, implying that only 57,000 new jobs were created in the year to August 2012.
The picture in the three months to August is even worse. Since May, the unemployment rate has fallen by 0.2 % and the so-called participation rate has fallen by 0.6 % meaning people are quitting the workforce at an even faster rate. This analysis is consistent with the anecdotes, as the recent job losses (those in the past 3 months) are in areas such as agriculture, mining, utilities, media, real estate, consulting, education, arts and recreation. Areas where jobs have declined over the past 12 months include construction, retail, finance, public administration and other services.
There will be a new Roy Morgan extimate soon, worth keeping eyes and minds wide open for.
Tomorrow in The Oz, henry will put this data together with the international evidence to provide new advice for the board of the Reserve Bank.
Watch this space.
Saturday Sanity Break, 29 September 2012
Date: Saturday, September 29, 2012
Author: Henry Thornton
I am no fan of Paul Keating - after all, he effectively ended my career at the RBA following his 'Banana Republic' episode and then later told porkies about my role as what he called the 'principal architect' of the damaging interest rate cuts of the late 1980s. (There is a lesson there, not to regard a strong exchange rate as an equal contributor with interest rates to 'tight' monetary policy, but that is a matter for another day.)
Paul Kelly points out today: 'The Hawke-Keating tactic lay in policies and strategies to occupy and hold the middle ground. As Keating's top aide, Don Russell, said: "They controlled the debate, set the pace of economic reform and pushed the Liberals out to the Right."
'In his critique last year of the Rudd-Gillard era, Keating said: "It (Labor) has created a new society and it has to be the party of the new society. It can't be the party of the old society. Labor must be the party of those people who gained from the pro-market growth economy that we created. Labor must be open to the influences of this middle class, to people on higher incomes. And I don't think it is."
'That is an understatement. These days Keating's ideas are heretical. The strategy he propounds is antithetical to the Gillard Labor Party with its emphasis on the traditional Labor base, redistribution, big spending programs and seeking a surplus via new penalties on the investment class.
'Labor in office looks inwards to its roots rather than outwards to a more competitive world'.
A friend sent this gem during the week, as an antidote to emotional concerns in any sphere.
It is an excerpt from a meditation on life and Venice written in 1994 by Joseph Brodsky who was awarded the Nobel Prize for Literature in 1987.
It expresses my friend's attitude to life and that is to live it with a certain elegant detachment!!!!
'And so I worked. Happiness or unhappiness would simply come in attendance, although sometimes they would stay longer than I did, as if waiting on me.
'It is a virtue, I came to believe long ago, not to make a meal out of ones emotional life. There is always enough work to do, not to mention that there's world enough outside'.
Here it is, gentle readers - the Grand Final, the culmination of 9 or ten months of tears and laughs, defeat and truimph and massive work, and that is just for us spectators. The effort and pain of the players, coaches, umpires and, yes, even the club and AFL officials, is hard to imagine.
Henry and a select group of fellow couch potatoes are today trialling a view on the big screen of an otherwise empty cinema screen. Sadly, not yet 3D, so no-one should disrupt the occasion by leaping high for a mark. But the image of Buddy Franklin coming full steam toward the audience may test our nerve.
We confess to being torn about which team to support. Naturally we'd tend to support the home team, Hawthorn, except that we like the style of the Sydney Swans and their ancestry as the South Melbourne 'Bloods'. (That name, incidentally, did not refer to the main colour on their strip, but to the colour of the bodily fluid they spilt - their own and especially that of their opponants - in their battles for supremacy, especially against Caaaarlton! in the 1945 Grand final known as the 'Bloodbath'.
(Wikipedia's account says: 'The game, played in extremely wet, muddy conditions, is remembered as "the Bloodbath" for its overall continuous violence (on the field and amongst the fans), and its plethora of crude king hits and brawls (many of which were broken up with the assistance of team officials and the police). The Melbourne tabloid newspaper The Truth called it "the most repugnant spectacle League football has ever known", with ten players reported for a total of sixteen offences'. More here.)
Mostly today we hope for a close battle and a piece of footy magic by one side or another to win in the dying seconds.
Then on Sunday the Melbourne Storm, (cruely (sic?) deprived of two premierships over an infraction of socialistic rules about salary payments in 2010), travels to Sydney to contest the Rugby League against the Bulldogs.
We have no information about Rugby, except for the talented player who no longer wants to play for the Wallabies. Come to Caaaarlton!, Quade, Karmichael made the transition, and we can guarantee you will enjoy the journey.
Image of the week.
Courtesy The Australian
Economic round-up and rate cuts
Date: Friday, September 28, 2012
Author: Henry Thornton
It has been a dull week for economic news. Far more exciting to watch the PM and Foreign minister schmoozing with heads of tiny island nations and violent African hell holes to scrape up the votes to give us the right to sit on the totally ineffective UN Security Council.
The only economic release of note was the RBA's financial stability report.
This remains focused on the continuing Euro debt crisis and the potential there still for accident. In short, while policy steps are being taken, they see significant implementation risk with many of the underlying problems in the euro area yet to be resolved. Against those risks, the RBA concludes that the Australian banking system remains in a relatively strong position.
The RBA reports that Australian banks have relatively little direct exposure to the troubled euro area economies and, while they remain exposed to swings in global sentiment, they are becoming more resilient to such episodes. ('Practice makes perfect') That reflects the shift in their funding mix, notably the shift to customer deposits that now account for around half of funding as well as liquidity and capital improvements.
Households and businesses are still taking a careful approach to their finances. Households are paying down debt more quickly than required and measures of financial stress remain low overall and are limited to isolated pockets. The RBA would welcome further household consolation, deleveraging if you like, from a household and system resilience viewpoint. There was a separate fuss about low dock loans, but it will take a disaster to change attitudes to this matter
As for the business sector, the RBA noted recent (modest) pick up in credit growth and reports that business balance sheets remain in good shape across what is a multispeed economy.
Can the Treasurer produce a budget surplus, indeed, should he be trying so hard? That are the questions de jour, and the answers would seem to be 'Nein' and 'Nein'.
Henry was struck by the size of the turnround from a $44 billion deficit to a tiny assumed surplus, which blind Freddy can understand would be a massive demand given weak tax receipts, Julia Gillard's spending frenzy and the 'don't mention the war'promise that no public official's job will be axed, nor private office advisor's jobs either, one assumes. (More here on the Treasurer's night sweats on this matter.)
As to the 'should' question, things are tough out here in worker-land, and a large swing to a restrictive budget, even if it could be achieved, would seem 'inappropriate', Treasurer, even 'courageous'. Maybe this mob have given up and are just trying to make things as hard as possible for smokin' Joe Hockey.
Big anti-austerity riots in Greece and Spain show just how hard things are in Europe.
We still do not know how slow is 'slower' in China, though commodity prices have paused in their precipitate decline and even rebounded somewhat.
The US economy still faces a 'fiscal cliff', though it seems increasingly likely that Brother Obama will get another four years to test out his ideas on running the biggest economy in the world.
The Republicans are now trying to goad the president into launching a strike on Iran's nuclear facility or facilities - 'burn, baby, burn' is their implied advice.
Will the RBA cut interest rates next week?
Henry is still studying the tea leaves, gentle readers, but all should be clear by 2.30 pm on Tuesday. 'Probably' is what the coffee grounds say this morning.
We apologise for the late post today. It rained in Henry's leafy suburb this morning, and Telstra's dodgy connection failed, as it usually does. Plus the $28 left on the Telstra 'Turbocharge' device - the fallback capability - has maginally disappeared in what Henry regards as highway robbery. Mr Thodey declines to enter into rational correspondance on the matter.
US macro policy - a dissenting view
Date: Wednesday, September 26, 2012
Author: Henry Thornton
A reader has sent a link to a recent speech by the Chairman of the Dallas Fed, also a member of the US FOMC, Richard W. Fisher.
'I shall start my remarks with what I argued at last week’s FOMC meeting, then finish with some comments on the outcome of that meeting and what needs to be done next.
The Recent FOMC Meeting
It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week. I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course.
The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before.
This much we do know: Our engine room is already flush with $1.6 trillion in excess private bank reserves owned by the banking sector and held by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines in corporate coffers. On top of all that, a significant amount of underemployed cash—or fuel for investment—is burning a hole in the pockets of money market funds and other nondepository financial operators. This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy’s boiler when so much is presently lying fallow? ...
Most all of the FOMC members—the senior officer corps of the Federal Reserve fleet—have surveyed the horizon from their different watch stations and agree that inflation is not an immediately foreseeable threat. Over the past week, however, there has been a noticeable increase in the longer-term inflation expectations inferred from bond yields. These inferences can be volatile and are not always reliable, but a sustained increase would suggest incipient doubts about our commitment to the Bernanke Doctrine of sailing on a course consistent with 2 percent long-term inflation. I believe that even the slightest deviation from this course could induce some debilitating mal de mer in the markets.
Charting a Course to Full Employment with Businesses at ‘Sixes and Sevens’
In the current tumultuous economic sea, facing strong headwinds common in the aftermath of financial crises and balance-sheet recessions, our desired port is increased employment. Certain theories and various hypothetical studies and models tell us that flooding the markets with copious amounts of cheap, plentiful liquidity will lift final demand, both through the “wealth effect” channel and by directly stimulating businesses to expand and hire. And yet from the perspective of my watch station—as I have reported time and again—the very people we wish to stoke consumption and final demand by creating jobs and expanding business fixed investment are not responding to our policy initiatives as well as theory might suggest.
Surveys of small and medium-size businesses, the wellsprings of job creation, are telling us that nine out of 10 of those businesses are either not interested in borrowing or have no problem accessing cheap financing if they want it. ... With regard to business fixed investment and job-creating capital expenditures (capex), the math is pretty straightforward: Big businesses dominate that theater. Most all of these businesses have abundant cash reserves or access to money, many at negative real interest rates. I have repeatedly reported to the committee that the CEOs I personally survey will simply not be motivated by further interest rate cuts to invest domestically—beyond their maintenance needs—in job-creating capex. ... The responses of those I surveyed are best summarized by the comments of one of the most highly respected CEOs in the country: “We are in ‘stall mode,’ stuck like Velcro, until the fog of uncertainty surrounding fiscal policy and the debacle in Europe lifts. In the meantime, anything further monetary accommodation induces in the form of cheaper capital will go to buying back our stock.” ...
Another CEO of a large corporation provided me with an additional source of uncertainty. In this CEO’s words, China “may be transitioning toward becoming the caboose of the global economy rather than its engine.” This may be a tad bit hyperbolic, but it indicates there is growing uncertainty about the great emerging economy that was once considered an eternal fountain of future demand.
With the disaster that our nation’s fiscal policy has become and with uncertainty prevailing over the economic condition of both Europe and China and the prospects for final demand growth here at home, it is no small wonder that businesses are at sixes and sevens in committing to expansion of the kind we need to propel job creation. ... In the period between the August FOMC meeting and the meeting last week, some very prominent academic and policy sophisticates also questioned the efficacy of large-scale asset purchases. Among them were Michael Woodford of Columbia University—a former colleague of Ben Bernanke’s when they were at Princeton—and Bill White of the Organization for Economic Cooperation and Development and formerly of the Bank for International Settlements, and others.
Like me, Professor Woodford argues that the economy would not benefit from additional liquidity. Like me, he argues that large-scale asset purchases and maturity-extension programs like Operation Twist are unlikely to appreciably stimulate private borrowing activity through portfolio-balance or term-premium effects. And as for Bill White—a globally respected economist who stood up to convention and predicted in 2003 that policies being pursued at the time would engender the financial crisis of 2008–09—here is what he wrote in a particularly thought-provoking paper a week before the Fed’s annual symposium last month at Jackson Hole, Wyoming.
“In this paper, an attempt is made to evaluate the desirability of ultra easy monetary policy by weighing up the balance of the desirable short run effects and the undesirable longer run effects—the unintended consequences … It is suggested that there are grounds to believe that monetary stimulus operating through traditional (‘flow’) channels might now be less effective in stimulating aggregate demand than is commonly asserted … It is further contended that cumulative (‘stock’) effects provide negative feedback mechanisms that also weaken growth over time … In the face of such ‘stock’ effects, stimulative policies that have worked in the past eventually lose their effectiveness.
“It is also argued … that, over time, easy monetary policies threaten the health of financial institutions and the functioning of financial markets, which are increasingly intertwined. This provides another negative feedback loop to threaten growth. Further, such policies threaten the ‘independence’ of central banks, and can encourage imprudent behavior on the part of governments. In effect, easy monetary policies can lead to moral hazard on a grand scale. Further, once on such a path, ‘exit’ becomes extremely difficult. Finally, easy monetary policy also has distributional effects, favoring debtors over creditors and the senior management of banks in particular. None of these ‘unintended consequences’ could be remotely described as desirable.”
I do not necessarily agree with all of either Woodford’s or White’s arguments, but in light of my soundings of unsophisticates and sophisticates alike, I felt an urge at the meeting last week to tie the chairman to the mast, Odyssean-style, and to stuff wax in the ears of my fellow committee members, in order to resist the Siren call of further large-scale asset purchases.
But I have no such powers. I am only one officer in the loyal crew that sails under the command of Admiral Bernanke. My reports were given a fair hearing. But neither they, nor the arguments of others who questioned the need to provide further accommodation, carried the day, and a decision was made.
Our Dysfunctional Congress and Drunken Sailors
The FOMC is doing everything it can to encourage the U.S. economy to steam forward. When we meet, we consider views that range from the most cautious perspectives on policy, such as my own, to the more accommodative recommendations of the well-known “doves” on the committee. We debate our different perspectives in the best tradition of civil discourse. Then, having vetted all points of view, we make a decision and act. If only the fiscal authorities could do the same! Instead, they fight, bicker and do nothing but sail about aimlessly, debauching the nation’s income statement and balance sheet with spending programs they never figure out how to finance.
I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors. But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors. ... Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, “You are the only game in town.” I thought the chairman showed admirable restraint in his response. I would have immediately answered, “No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good of our country—for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught.”
But, then again, I am not Ben Bernanke. And I imagine that after listening to me this evening, you might be grateful I am not.
The disappearing Arctic Ice.
Date: Tuesday, September 25, 2012
Author: Henry Thornton
We all know that mainstream scientific consensus that the earth is warming at an unseemly rate is a giant socialist conspiracy, don't we?
Well most people on the right say that, or something equivalent like: 'It's just a way for socialistic climate worriers to get their research funded', as if right-leaning scientists suffer from no equivalent bias.
Well, here is a bit of evidence that seems so simple that even this (admittedly 'unsound' in the eyes of the Rightists) commentator can see it - the shrinking of the Arctic ice in summer.
The Economist is a careful magazine, not noticably socialistic in its content, and it has noted the fact, the basic aspects of which are shown on the above graphic.
'In 2007 climate scientists were shocked when the regular summer retreat of the Arctic’s sea ice went far farther than they had ever seen before. In the spring of that year ice covered just under 15m km2 (5.8m square miles) of ocean—an area 90% as big as Russia. By mid-September, when it reached its minimum, there were just 4.17m km2 left. That is about the area of the European Union minus Greece. Since 1979, when satellites made such measurements possible, there had been no melt like it.
'Until now. Though the extent of the September sea ice did bounce back a little from 2007’s nadir, in every year since then the minimum has been lower than it was in every year before 2007. And this year 2007’s record has not been merely broken, it has been smashed. Coverage fell below 4.17m km2 as early as August 26th. By September 16th, which America’s National Snow and Ice Data Centre (NSIDC) thinks marked the low point, it was down to 3.41m km2 (see map). That is the European Union minus Greece, Portugal, Ireland, Britain and Germany'. Read on here.
While the facts of the shrinking Arctic ice are clear, what it means is less so. The venerable mag points out that the causal mechanisms operating, or likely to operate, are far from certain. Climate change worriers say the net effect might form a worrying positive global feedback mechanism, while deniers will say, if extreme, that the photos have been doctored, while milder types will say it is just part of normal climatic variation.
But the basic fact seems clear - 'Clear as an empty ocean'.
The venerable mag points out that central banks have done their best to stimulate recovery.
* On September 13th the Federal Reserve said it would buy mortgage-backed securities and other assets without limit, until it had made clear progress in bringing down unemployment.
* A week earlier the European Central Bank (ECB) promised to buy as much sovereign debt as necessary to squelch fears of a euro break-up.
* And last week the Bank of Japan extended its asset-purchasing programme by ¥10 trillion ($128 billion).
There is, it seems, 'Nothing to fear but fear of inflation'.
But not goods and services inflation, not yet. 'Loose monetary policy fuels inflation when the economy is overheating, not when it has lots of spare capacity, as now'.
Quite right but, as the graph shows, asset inflation does respond to loose monetary policy, and so the old Alan Greenspan game goes on.
It is not just shares whose values are rising sharply.
The twenty-day moving average for various commodities have risen as follows: gold 6 %, copper, 8%, nickel 10 %, aluminium 10 %, zinc 12%, iron ore 7 %, natural gas 7%. Oil has fallen by a tiny 3.4 % over the same period.
Courtesy The Economist
Slash interest rates when assets fall in value, generate asset price inflation to cheer confidence, and let the markets deal with goods and services inflation when the asset boom is followed by the inevitable asset bust. If the asset bust has sufficient negative effect on confidence, goods and services inflation will remain low, at least until confidence reaches the unstoppable bubble territory.
Far better to halt the monetary easing with 'real' (inflation adjusted) interest rates that are slightly positive rather than driving them into negative territory.
Better still, create a modern version of the gold standard to provide sensible automatic control of monetary policy. (More on this subject here.)
Ditto of course for fiscal policy, and here the world is in an even bigger tangle.
Japan has been striving unsuccessfully to kickstart its economy with fiscal stimulus for twenty years now.
The Eurozone is trying to solve the consequences of twenty years of overspending, especially in the so-called 'Club Med' nations, by imposing strong fiscal austerity in return for bailouts.
America is facing a 'fiscal cliff' in which the Republican opposition would, on the face of it, handle the US economy like its warriors tried to handle Vietnam - destroy the economy in order to save it.
The Economist sees US fiscal indiscipline as a major flaw in the otherwise clear glass of US economic policy.
'America urgently needs a medium-term plan that both raises revenues by reforming taxes and arrests the long-run growth of spending on entitlements such as pensions and health care for the elderly (Medicare). It also needs the process to be gradual. Accomplishing this will require the Republicans to erase their red line against raising taxes, and the Democrats to erase theirs against touching Medicare benefits. If they do not agree to that, there is nothing Mr Bernanke can do to help them'.
One hopes that the Teapot Republicans are sufficiently humbled by the failure of their gaff-prone presidential candidate to agree to sensible bipartisan reform.
But on recent form, this is highly unlikely. Keep the seat-belts tight, gentle readers, the asset market recovery is not signalling the growth of a new garden, just accelerating growth of the weeds.