Posts Tagged ‘Economy’

Nothing Lasts Forever

Monday, December 14th, 2015

If the Federal Reserve Board has used all of its policy tools during the current expansion, what happens when there’s a recession?

That’s a question worth asking, even as the Fed appears ready to raise interest rates, albeit by just a smidgen, based on the pretext that ZIRP (zero interest rate policy) is no longer needed, given today’s allegedly booming economy.

On course, the economy’s not booming and we may even be heading into a recession, assuming we aren’t already in one (it’s hard to tell in today’s slow growth-no growth economy). Average Recovery

Just one sign that the boom is an illusion is the length of the current expansion.  The average recovery since the end of World War II has been 58 to 61 months, depending on whose numbers you use.  The current “recovery” hit the 58-month milestone in April 2014 – 20 months ago. As David Stockman pointed out this week in his “Contra Corner” blog, “the only expansion that was appreciably longer than the present tepid affair was the 119 month stretch of the 1990s.”

Nothing lasts forever and even Larry Summers, the former Treasury secretary and current Harvard professor, recognizes that the current expansion may be nearing an end. As he wrote last week in a Washington Post op-ed, “U.S. and international experience suggests that once a recovery is mature, the odds that it will end within two years are about half and that it will end in less than three years are over two-thirds.  Because normal growth is now below 2 percent rather than near 3 percent, as has been the case historically, the risk may even be greater now.”

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The Big Disconnect

Monday, December 7th, 2015

Imagine being stuck in a blizzard.  You look out your window and can see the snow piling up outside, yet the meteorologist on your TV is forecasting continuing sunshine and near tropical weather.

That level of disconnect is similar to that shown by some members of the Federal Reserve Board, who are preparing for liftoff, even as the economy implodes like a SpaceX rocket. The difference, though, is that the SpaceX failure was an unmanned flight; when the Fed acts, we’re all on board, like it or not.Fed Meteorologist

We recently reported that a couple of members of the Federal Open Market Committee had spoken publicly in favor of a rate hike. But this past week, they were no longer the outliers, as even Fed Chair Janet Yellen joined in during a speech before the Economic Club of Washington.

USA Today reported, “Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.”

If you read on, though, that’s not quite what she said.  Given that inflation is nowhere near the Fed’s 2% goal, she couldn’t say that the central bank’s goals have been met. (more…)

Fed Policy Brings Record Stock Buybacks

Monday, November 9th, 2015

Just once, we’d like to post that the economy is growing like pumpkins in September, that personal income is soaring (or at least not falling), that jobs are being created, businesses are being started and capital is being invested.

Would that it were true.

Readers of this blog may thing we’re pessimistic by nature. We’re not. It’s just that the economy has been a disaster for as long as we’ve written this blog.Non-Farm Payrolls

Now, finally, the unemployment rate has fallen to 5% – just under 10% if you’re counting people who have given up looking for work or who are working part-time because they can’t find full-time work.  In addition, the U.S. Bureau of Labor Statistics reported that personal income grew 2.5% between October 2014 and October 2015.

The economy is cyclical and it could signal that the job market is finally improving.  However, the labor force participation rate remains at its lowest level in 38 years, so we’ll leave the cheery propaganda to mainstream media. We feel an obligation to tell the truth and the truth is that the economy is still in dismal shape. We’re not in a recession – at least not according to the traditional definition of one – but defining the current period of economic non-growth as a “recovery” is a stretch.

Consider what the current recovery hath wrought: (more…)

A Way Out for the Fed

Monday, November 2nd, 2015

The economy grew at a tepid rate of 1.5% during the third quarter.  More than 100 million Americans aren’t working.  And the inflation rate is near zero.

That’s after seven years of the most radical monetary policy in history, which was supposed to lower unemployment while boosting the inflation rate to 2%.  If you’re the Federal Reserve Board, do you:

  • Conclude that keeping interest rates near zero isn’t helping the economy and abandon that policy.
  • Keep doing what you’re doing, hoping things will change next year, so you can take credit for it.
  • Conclude that the economy is still a mess even after you bought a few trillion dollars’ worth of bonds, so maybe you need to buy more bonds.

    When economists think rates will rise.

    When economists think rates will rise.

The correct answer, at least last week, was b., as the Fed voted to continue its zero interest rate policy (ZIRP), “surprising no one,” as The Wall Street Journal noted.

That means the Fed will keep on zirping, at least until December, but more likely into 2016.

Subject to Interpretation

The Fed’s policy statement, which has changed about as much as Fed policy over the past seven years, was interpreted by many to imply that the Fed “might” increase interest rates by a whole 0.25% when it meets in December.

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Show Us the Money

Thursday, October 15th, 2015

The bright spot in this limp recovery has been the unemployment rate, which has fallen to 5.1%.  But don’t look too closely, or you’ll notice that the spot is not so bright.  In fact, the job market is no better than the rate of productivity, growth in gross domestic product (GDP) or numerous other depressingly underwhelming economic factors.

We’ve frequently pointed out that the oft-cited U-3 unemployment rate is meaningless, as the more people give up looking for work, the lower the rate goes.  Can anyone but a government economist think it’s a good thing when the unemployment rate goes down because millions of Americans have stopped looking for work?

A growing number of people – including, we hope, some presidential candidates – seem to be noticing that the labor force participation rate hasn’t been this low since Jimmy Carter was president.  It’s now dropped to 62.7%, a level not seen since February 1978.

But there’s another factor that demonstrates the weakness of the unemployment stats – personal income.Money

A Wall Street Journal commentary by Bob Funk, CEO of Express Employment Professionals, notes that, “There is something that the numbers are missing.  Economics — and logic — tells us that if unemployment was truly that low … wages would be rising.  Instead, wages grew at 0.2% during the second quarter, the slowest rate in 33 years.  The median family income in America is approximately $53,000, below where it was before the 2008 economic meltdown.” (more…)

How Ben Bernanke Saved the World

Monday, October 12th, 2015

“It became necessary to destroy the town to save it.”

                    U.S. major talking about Bến Tre, Vietnam

The Wall Street Journal doesn’t have a humor section, so “How the Fed Saved the Economy” appeared on the op-ed pages under the byline of Ben Bernanke, former chair of the Federal Reserve Board.

In his commentary, Bernanke takes credit for saving the economy – rather than responsibility for the most dismal recovery in history.Bernanke

Anyone who has read even one of our blog posts knows that we would disagree with any claim about the Fed saving the world, especially given that the economy continues its slow-motion deterioration after nearly eight years and several trillion dollars’ worth of “saving” by the Fed.

However, Mr. Bernanke has a book to sell.  And while it will likely appear in the non-fiction section, we’re guessing by its title that it is even more self-congratulatory and less fact-filled (if that’s possible) than his op-ed piece. (more…)

Place Your Bets

Monday, September 14th, 2015

“What mighty Contests rise from trivial Things … ”

                            Alexander Pope, The Rape of the Lock 

Let’s put this in perspective. If the Federal Reserve Board raises interest rates at its meeting this week, it will likely raise them by 0.25%.

That’s 25 basis points … a quarter of a percentage point … a hair’s breadth. In the 1980s, U.S. long-term interest rates approached 20%, which is 80 times higher than the post-increase Fed rate would be.Interest-Rates-US-Fed-Funds2

So what’s the big deal?

The big deal is that any rate increase, even one as slight as a quarter of a point, would signal a change in direction for the Fed. It would mean that the easy money days are over. The stock market would no longer be artificially inflated by Fed policy. Yields would rise. The Keynesian bubble would burst. (more…)

Five Reasons Why Wenning Advice Is Worth More Than Buzzfeed

Monday, August 24th, 2015

You may have heard that Americans are now getting their news online, instead of reading it in newspapers.  They’re not.

Most of what appears online and is called “news” fits that classification only in the broadest sense of the word.  Instead of going online to read about the Iranian nuclear deal, the economic turmoil in China or continuing slow growth in the U.S., Americans are reading about the Kardasians, Caitlyn Jenner and ex-Subway pitchman Jared Fogle.FTSE

If you doubt the above, consider that NBCUniversal just announced it is investing $200 million in Buzzfeed, which now has a value of $1.5 billion.

Buzzfeed, as you’re probably aware, is a site that is notorious for its lists.  Today, for example, you can find “16 Sexts Every Twentysomething Actually Wants,” “40 Random Thoughts We’ve All Had The Night Before School” and “99 Names For B**bs” (Note: our standards are higher than Buzzfeed’s, but you can probably figure it out).

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China’s Fix Could Break Things

Monday, August 17th, 2015

Imagine if free markets were allowed to be free.

Of course, in today’s world, they’re not.  Central bankers and government agencies have taken control.  Not knowing what to do with it hasn’t stopped them. 

China is the latest case in point.  We recently suggested that investors worry about China, not about Greece, although for a tiny country Greece gives everyone plenty to worry about.  But China should be the center of everyone’s attention, given its attempt to fix its falling stock market and boost imports by devaluing the yuan.China

While it’s impossible to guess the intentions of China’s rulers – and they’re not about to share them – the 1.9% devaluation announced last week smacks of desperation.  China’s stock market has been swooning this summer and its exports are down by 8.3% (much larger than the expected 1.5% decrease), which is not good for future growth.

In addition, The Wall Street Journal noted, “Pockets of manufacturing have been especially hard hit, as reflected in sluggish electricity use and falling rail cargo. Especially scary is the prospect of deflation; producer prices were down 5.4% from a year ago.”

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Maybe the Fed Is Just Lazy

Monday, August 3rd, 2015

Just last month we reported that the Federal Reserve Board’s policy statement was almost identical to its previous policy statement.  Now the Fed has issued another policy statement – and it’s almost identical to the last one.

Granted, there’s not much to say.  The economy has flatlined, the Fed has run out of policy tools and it’s mid-summer … a time when many people spend more time avoiding work than actually working.  But this is the Federal Reserve Board we’re talking about – the people who are in charge of our economy, since neither President Obama nor Congress want to do much about it.

So, for those of you who remember what a “carbon copy” is, the latest policy statement is a carbon copy of the last one.  Maybe we should just re-run our previous blog post. Yellen, Janet

“The most notable change,” as Goldman Sachs’ Chief Economist Jan Hatzius wrote, “was the addition of the word ‘some’ in the committee’s description of desired progress in the labor market.  Specifically, the June FOMC statement said that it will be appropriate to raise interest rates ‘when it has seen further improvement in the labor market’ (and is reasonably confident that inflation will move back to two percent).  Today’s statement said that rate hikes would be appropriate after ‘some further improvement in the labor market.’ ”

So “further” became “some further.”  (more…)