Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.
Posts Tagged ‘Economy’
In the latest season of “House of Cards,” President Frank Underwood stakes his political future on a $500 billion program called America Works, which will allegedly create 10 million jobs and bring the U.S. to full employment.
Well, “House of Cards” is fiction. Ten million jobs creating full employment? It would help, but it would still be 82,898,000 short, since there are a record 92,898,000 Americans not participating in the workforce.
Speaking of fiction, the U.S. Bureau of Labor Statistics reported that the unemployment rate has fallen from 5.7% to 5.5%. That’s because, according to Zerohedge, “while the number of unemployed Americans dropped by 274K (and) those employed rose by 96K, the underlying math is that the civilian labor force dropped (by) 157,180 to 157,002 (following the major revisions posted last month), while the people not in the labor force rose by 354,000 in February.”
So once again, a worsening economy brings us closer to full employment in the mythical land of Keynesian America.
How Not to Create Jobs
The bigger fiction, though, is that government spending can fix unemployment. When it comes to spending, President Underwood is an amateur compared with President Obama, whose first-term stimulus legislation was 66% larger than President Underwood’s. And it didn’t produce anywhere near 10 million jobs – although President Obama claimed in 2008 that it would put 7 million people to work, including 5 million in “green jobs.”
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.
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.
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.
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.”) (more…)
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.
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. (more…)
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.
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.
The new word is “patient.” And it’s a humdinger.
The Dow Jones Industrial Average soared more than 700 points over two days last week after Federal Reserve Board Chair Janet Yellen announced that the Fed will be “patient” about ending its easy money stance.
It took three months of hard work for the Fed to come up with the new word, but apparently it was time well spent.
In September, as we’ve reported, the Fed announced that it would wait a “considerable time” before raising interest rates. That caused much fretting. Media such as The New York Times devoted entire articles to what the Fed meant by “considerable.” Pundits, who apparently have the power to read minds, determined that “considerable” meant that the Fed would begin raising rates in the summer of 2015.
We missed the economics classes where the definition of “considerable” was determined to mean “10 months from now,” but apparently such classes exist, as practically every pundit agreed on the timeline.
“The whole idea that the stock market reflects fundamentals is, I think, wrong. It really reflects psychology. The aggregate stock market reflects psychology more than fundamentals.”
Robert Shiller, Nobel Prize-winning economist
Tired of low returns? You may be a bond investor.
Bond investors have been “growing tired of low returns, the endless warnings that rates are about to rise, and constant reminders of the dangers of riskier bonds,” according to Jeffrey Matthias, CFA, CIPM of Madison Investment Advisors.
At the same time, they’ve watched the stock market continue to break new records every time there’s another sign that a central bank somewhere may buy a few bonds or lower interest rates into negative territory.
“None of us have ever lived through this kind of extreme, long-lasting suppressed rate environment,” Matthias wrote, and, as a result, those bond investors who are mad-as-hell-and-are-not-going-to-take-it-anymore have been frustrated enough to take on a lot more risk for a little more yield.
When you chase yield, you catch risk. It’s a dangerous reaction to the yin and yang of investing – fear and greed.
“Typically, when markets are moving higher,” Matthias wrote, “most investors turn greedy and want more. Should an investor’s more conservatively positioned portfolio produce lower returns when the market surges, the investor may regret not having taken more risk. In contrast, should a riskier portfolio drop significantly in market value, the opposite may happen and an investor may begin to regret (his or her) decision to have invested in risker assets. This can be accompanied by a fearful overreaction.”
We’ve explained in the past how the federal government puts a yellow smiley face on its unemployment figures by excluding Americans who have given up looking for work and including part-time workers as if they are fully employed.
Similarly, the Congressional Budget Office estimates the cost of a tax increase or tax reduction under the assumption that the increase will have no impact on taxpayer behavior – so tax cuts have no economic benefit and tax increases produce revenue without harming the economy.
So we shouldn’t be surprised that the Consumer Price Index (CPI), which measures inflation, rigs the numbers by excluding increases in the cost of food and energy.
The Federal Reserve Board’s $3.5 trillion in bond buying failed to boost inflation to the target rate of 2%, but the Fed could have accomplished its goal without buying a single bond. All it had to do was change the method used for calculating CPI.