Upending the World

Logic has taken a 180-degree turn, running at full sprint in the opposite direction from where it should be.

As one small example, consider the good fortune of Hans Peter Christensen, recently profiled in The Wall Street Journal, who is currently being paid by his bank to borrow money.  Christensen owns a home in Aalborg, Denmark, where negative interest rates resulted in his bank paying him the equivalent of $38 in interest for the quarter for borrowing money.

Meanwhile, in other countries with negative interest rates, some banks are charging customers for their deposits.  So the bank pays you to take its money and charges you to take your money. Zero Rates

Such is the logic of today’s central bankers in much of Europe and Japan, where rates have been negative for more than a year.

The United States has not adopted negative interest rates—but Fed Chair Janet Yellen said in February that the Fed is studying the feasibility of doing so, “to give the economy an extra boost,” according to The Wall Street Journal.

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Fed Family Feud

Is it a mutiny?  A family feud?  Sibling rivalry?  Or an attempt to provide more accurate estimates of economic growth?

Greater accuracy would certainly be a good thing, but that may be the least plausible explanation for the New York Federal Reserve Bank’s launch of Nowcast.

Traders need real-time economic data that they can use to guide trading decisions.  Providing it has been a role that the Atlanta Federal Reserve Bank took on when it created GDPNow in July 2014. Today, GDPNow is widely used by traders—even though, as we’ve previously noted, Fed projections of economic growth are almost always overly optimistic.Fed v. Fed

So why add a second source of inaccurate estimates of GDP growth?  There are several possible explanations:

  • New York is the center of the universe and New York Fed Chair William Dudley found it unacceptable that the Atlanta Fed was grabbing all of the attention with its GDP forecasts.
  • With two different forecasts, the Fed doubles its probability of getting it right (although two times zero is still zero).
  • The Fed wants to show that it does more than just manipulate the stock market and buy bonds.
  • The New York Fed needs to justify its budget and figured it is a good use of taxpayers’ money to produce two separate and distinct GDP growth estimates.
  • The New York Fed wants to prove that it is as capable as the Atlanta Fed of producing inaccurate estimates of GDP growth.

Whatever the reason, the second Fed GDP growth estimate was added “to the puzzlement of some traders,” as The Wall Street Journal put it. 

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Let’s Ignore the Central Banks

What if we all decided to ignore the central banks?

Granted, they have provided material for this blog non-stop from the day it started.  They keep financial journalists, economists, analysts, pundits and other financial fortune tellers employed.  They keep the stock market pumped up when it can’t achieve new records of its own merit. They appear be the only people in the world tasked with managing the economy (even if they are mismanaging it, rather than managing it).

So why should we ignore them?

They’re frequently wrong.  The Federal Reserve Board, our country’s central bank, has a history of causing, not solving crises.  Former Fed Chair Alan Greenspan is not even mentioned in “The Big Short,” but some give him top blame for causing the 2007 housing bubble and the financial crisis that followed. Benchmark

“Alan Greenspan will go down in history as the person most responsible for the enormous economic damage caused by the housing bubble and the subsequent collapse of the market,” according to The Guardian.

Noting the plunging housing prices and high unemployment in 2013, when the article was written, The Guardian reported that, “The horror story could have easily been prevented had there been intelligent life at the Federal Reserve Board in the years when the housing bubble was growing to ever more dangerous proportions (2002-2006). But the Fed did nothing to curb the bubble. Arguably, it even acted to foster its growth with Greenspan cheering the development of exotic mortgages and completely ignoring its regulatory responsibilities.”

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Something’s Rotten …

“That it should come to this!”

                                  Hamlet, Act I, Scene II

Any student of Shakespeare will recall that Hamlet’s procrastination did not bode well for Denmark.

Centuries later, the Scandinavian country has Tivoli and perhaps the world’s best ice cream, but it’s not exactly a world power.  It may not be Hamlet’s fault–after all, Denmark is even more socialistic than the U.S. and Canada–but his hesitation was not a good thing for him or his country.YellenHamlet 2

So what does this have to do with Janet Yellen?  She chairs the Federal Reserve Board, which, like Denmark, has wielded its power clumsily, although it doesn’t even produce ice cream.  And, like the tragic prince, she will likely be remembered more for her inaction than for her action.

Even Hamlet didn’t procrastinate for years, although it may seem that way if you watch a poor production of the famous play. Also, like the melancholy Prince of Denmark, Ms. Yellen seems to be collapsing under the weight of the world and fretting over the potential consequences of her actions. And so, like Hamlet, she does nothing.

Her words before the New York Economic Club last week could have come straight out of Hamlet. Princess Yellen may be far less eloquent than the young prince of Denmark, but the parallels between what she said and what he said are significant.

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