The Inflation Straw Man

March 2nd, 2015

 “When real interest rates start to move up, that’s when the crisis could hit.”

                                                  Alan Greenspan

So the Federal Reserve Board spent six years and boosted its bond portfolio to $4 trillion in an effort to boost the rate of inflation to 2%.

How did that go?  Not so well.

This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis.  It was the third consecutive month of decline; over the past year, the “all-items index” decreased 0.1% before seasonal adjustment. CPI

In other words, the U.S. has joined Europe and is in deflation mode.  It’s the first time the CPI hit negative territory for the year since the beginning of the financial crisis in 2009.  Imagine how low prices would be if the Fed didn’t buy all those bonds!

That dropping oil prices caused U.S. deflation underscores the foolishness of the Fed fantasy about a 2% inflation rate.

As David Stockman’s Contra Corner put it, “the CPI measure of inflation is so distorted by imputations, geometric means, hedonic adjustments and numerous other artifices, that targeting to 2% versus 1% or even a zero rate of short-term measured consumer price inflation is a completely arbitrary, unreliable and unachievable undertaking. Yet, (Fed Chair Janet) Yellen’s latest exercise in monetary pettifoggery is apparently driven by just that purpose … ”

Read the rest of this entry »

AP Poll: Americans Want Less Economic Growth

March 2nd, 2015

Well, here’s a shocker.  A new AP poll shows that a majority of Americans want a higher minimum wage.  They also want paid sick leave and parental leave, free community college and more gender equality laws.  And, of course, they want wealthy taxpayers to pay for all of it.

Who wouldn’t?  The poll doesn’t ask about the resulting economic impact of these feel-good policies.

Polls are supposed to be objective.  They rarely are.  Asking Americans if they support a higher minimum wage isn’t too far removed from asking, “Do you want to help poor people?” Transfer Payments

Pollsters will never ask questions such as, “Studies show that increasing the minimum wage results in fewer jobs and slower economic growth.  Do you favor an increase in the minimum wage?”

The Poll That Will Never Be

To provide some balance, perhaps AP should poll Americans about the following questions.

Do you favor higher unemployment and lower economic growth?

It’s basic economics that when the price of something goes up, demand falls.  Increasing the minimum wage, and requiring paid sick leave and parental leave may be desirable for employees, but many would lose their jobs as a result.

Read the rest of this entry »

Alexis the Not-So-Great

February 16th, 2015

A lot can happen in 2,500 years.

Back in its day, Greece ruled the world – albeit, it was a much smaller world.  But that was a long, long time ago.  So long ago, we routinely refer to the Greece of those days as “ancient Greece;” the only thing it has in common with the Greece of today is its geography.

Greece has gone from Alexander the Great to Alexis the Not-So-Great.  That would be Alexis Tsipras, leader of the Coalition of the Radical Left, who was elected prime minister in January.  Tsipras’ plan for bringing his country back to solvency is to pretend its debts don’t exist and to keep on spending.  After all, that worked so well for Argentina.Greek debt

After being bailed out twice by Eurozone leaders, Greece is no closer to solving its economic problems.  The only difference now is that it has more debt.  If Greece were a person, you’d cross the street if you saw him approaching, because you know he’d bum money off of you and use it to bet on the ponies.

The Eurozone’s bailouts were contingent upon Greece following an austerity program.  But Greeks have had enough of austerity and elected Tsipras as the anti-austerity candidate.  So after two bailouts, Greece is still an economic failure – and it’s all Germany’s fault, since Germany actually wants Greece to stick to its austerity program and pay back its loans.

Read the rest of this entry »

Economic Dissonance

February 9th, 2015

In today’s economy, the theory of cognitive dissonance is itself dissonant.

Social psychologist Leon Festinger believed that humans strive for internal consistency, and that two or more contradictory beliefs cause mental stress.  Yet in today’s world, it seems that every policy, every vote, every executive order is designed to contradict rationality and add to our collective mental stress.

We’ve given a few examples of economic dissonance in the past:

The stock market.  During six years of quantitative easing (QE), bad economic news caused the stock market to rise and good economic news caused the stock market to fall.  That’s because bad news meant more Fed bond buying and good news made bond buying unnecessary.

Higher inflation.  Lower oil prices have done more to give the economy a boost than trillions of dollars in bond buying – yet the Federal Reserve Board has fretted that the U.S. is headed toward deflation.  Its policies were designed to increase inflation to the magic rate of 2%.  Why 2%?  No one seems to know.College Costs

The unemployment rate.  The widely used U-3 unemployment rate drops when people give up looking for work and leave the workforce.  As a result, we have absurdities such as this latest report from The Boston Globe:

“U.S. employers hired at a stellar pace last month, wages rose by the most in six years, and Americans responded by streaming into the job market to find work.

“The Labor Department says the economy gained a seasonally adjusted 257,000 jobs in January. The unemployment rate rose slightly to 5.7 percent from 5.6 percent.”

So Americans are “streaming into the job market” – causing an increase in the unemployment rate! Read the rest of this entry »

Another Year of ZIRP?

February 2nd, 2015

When the economy recovers, interest rates will go up, right?

That’s been the Federal Reserve Board’s line for years now.  Yet as the Fed gushes about an allegedly booming economy, some are saying that interest rates are unlikely to increase this year.

So what gives?Interest Rate Chart

Last week’s Federal Open Market Committee Statement, which summarizes monetary policy, noted that since the FOMC’s December meeting, “the economy has been expanding at a solid pace.”  The statement notes that the unemployment rate is declining, consumer spending is increasing and, if not for that troublesome housing market, everything would be just dandy.

As if to put an exclamation point on the FOMC statement, Fed Chair Janet Yellen met with Congressional Democrats last week to reiterate just how fine the economy is doing.  (The real purpose of the meeting may have been to explain the FOMC statement to members of Congress, as it contains phrases such as, “underutilization of labor resources continues to diminish;” which could have been worded more clearly by saying, “Many former middle managers are still working as greeters at WalMart.”) Read the rest of this entry »

The United States of Europe

January 26th, 2015

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Does this look like deflation to you?

Does this look like deflation to you?

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets. Read the rest of this entry »

Swiss Diss

January 20th, 2015

“It is said that the Swiss love only money … this is not true. They also love gold.”                                                                                                                          Anonymous

 The last time we checked, Switzerland was still part of Europe.

Then again, Switzerland has long been different from its European brethren.  Switzerland is historically an observer, not a participant.  Neutrality gives the country points for ethics among the peace-loving folk – although it didn’t stop the Swiss from dealing with the Nazis during World War II. Swiss Franc

Switzerland is also “the vault of the world.”  It’s where money and wealth are omnipresent, but never talked about.  “Swiss” and “bank” go together like “Swiss” and “watch.”

But there’s a big difference between the Swiss National Bank and the European Central Bank.  While the ECB is likely to announce a quantitative easing program to fight deflation next week, Switzerland this week strengthened its currency with a surprise announcement that it was removing its cap on the value of the Swiss franc.

Read the rest of this entry »

The Year of “May”

January 12th, 2015

We’re well into January, but 2014 demanded a bit of reflection before commenting.  Was it a good year or a bad year?

We still don’t know.  We’re calling it the Year of “May,” although that title could have gone to 2013, 2012, 2011 or even 2010.

Using “may” in a sentence illustrates why 2014 was the Year of “May.”  The economy may be improving, but it may not be improving by much.  Interest rates may go up, but they may stay put for a while.  The Federal Reserve Board may be done with quantitative easing, but it may be using other easy money measures to keep the stock market lovefest going.  Europe may also begin quantitative easing.2014

In 2015, we may find out what Fed Chair Janet Yellen means by “macroprudential supervision.”  During 2014, we may have joined the rest of the world in moving toward deflation, or, if the economy really is improving, we may soon be meeting – or even exceeding – the Fed’s inflation expectations.

See how useful that word “may” is?  It sums up a year in three letters.  It’s so noncommittal, so indefinite, so milquetoast … so 2014.  We may be at war with the Islamic State, Russia may be taking over eastern Europe and the Middle East may be in worse shape than it was before the Arab Spring.  Then, again, it may not be. Read the rest of this entry »

It “Eats Societies Alive”

January 5th, 2015

“Oh, no!” you’ve probably been thinking.  “The cost of filling my gas tank dropped again!”

Falling prices are a good thing for the cash-strapped American consumer, whose income on-average has fallen to where it was in 1994, as we’ve reported.  But behind every silver lining, there’s a black cloud and leave it to us to find it. Deflation

Deflation is typically a sign that all is not well with the economy.  Prices drop when the economy is so weak that consumer demand drops.  When prices drop, profits decrease, stock prices drop, and unemployment and bankruptcies increase.  Consumers put off purchases and wait for prices to fall further, which contributes to even further deflation.  Deflation was an issue during the Great Depression and every period of deflation has been accompanied by a recession.

Raúl Ilargi Meijer of The Automatic Earth says deflation “eats societies alive,” explaining that “Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power.”

Read the rest of this entry »

Do You Believe in Santa Claus? You May Be A Keynesian.

December 29th, 2014

The Christmas season is an appropriate time to reflect on Keynesian economics, given this: believing in Keynesian economics is a lot like believing in Santa Claus.

Most Americans grow up believing some chubby guy in a red suit has the stamina to deliver gifts worldwide to billions of people in a single night.  Young children, by their nature, are self-absorbed and gullible enough to think that Santa knows how they behaved throughout the year and will deliver presents accordingly. Santa Keynes 2

Most of us grow up and realize that reindeer can’t fly, Santa would freeze to death in the North Pole and his elves would unionize.

But not everyone outgrows gullibility.  Some become Keynesian economists.  As Keynesians, they don’t quite understand unemployment, because they never experience it – there is plenty of demand for Keynesians, who can find jobs working for the government, in academia or as journalists.

Keynesians believe that increased government spending (aka “aggregate demand”) stimulates the economy and money can be handed out, like Christmas presents, with only positive consequences.  They even believe that a dollar spent by the government results in many dollars being spent throughout the economy (the “Keynesian multiplier”).  Since they believe there is a Santa Claus, they give little thought to the reality that someone, somewhere has to pay for this largesse.

Read the rest of this entry »