Tuesday, November 12, 2013

Let the Monetary Weaning Begin

Cartoon by Jim Gibson
Janet – hey doc when are you going to get me off this pain medicine? You removed that nasty goiter three months ago and while I cannot leap tall buildings in a single bound, I am back at work as a pole dancer in Peoria. 

Doc – I’d hate to take you off the medicine too soon there is always a chance that you might stub your toe and then – there we go again with all that shrieking and gasping.

Janet -- Okay Doc – you are da man. But I gotta say, you are starting to worry me. My Uncle Charlie told me that drugs can be dangerous and that some people even get hooked on them. My Uncle Pete had his large intestine removed last year and he was off the pain meds by the first Friday night poker game.  How come a mere thyroid-ectomy requires so much pain meds? I am starting to think you are holding out on me. Maybe my Adam’s Apple is rotten to the core? Fess up Doc please.

Janet Yellen might take some of this to heart as the Fed Chief nominee prepares to be grilled in her confirmation hearing. She seems quite intent on helping unemployed persons – but so long as the Fed continues to inject pain medicine into the US national economy some four-plus years after the end of the recession she has to understand what the Fed is doing to the psychology of domestic producers and investors. Every time the Fed announces it will not begin tapering its dose of pain killers it will raise two damaging questions. First, is the economy really so horrible that we can’t even reduce the dosage a tiny bit?

Posing this question raises a cloud of uncertainty that is not good for --- guess what – employment.  It seems that every time the Fed announces it will not begin tapering, the stock market soars. That reaction suggests that more medicine is appreciated by someone. But that doesn’t mean it is good for the patient. As you know, someone hooked on drugs is the last person to recognize what is good and what is bad for them. And the logic is perverse anyway. The government and the Fed perpetuate a myth that the patient is weak and needs more support. The patient appreciates more support. But the truth is that despite unprecedented amounts of Fed policy, the patient is not leaping over tall buildings. Maybe the Fed should understand that the more they tell the patient she is too weak to stand without help, the more the patient believes this is true. It becomes a self-fulfilling prophecy. People wonder why firms have been so slow to return to strong hiring. But why would they want to hire more workers if the Fed tells them the economy is not self-sustaining?

Second, won’t another month or more of medicine have damaging side effects to the economy? Drugs keep the patient going but we all know that drugs can have side-effects. The longer you take drugs the more you raise the chance that these nasty side-effects will occur. Many have already pointed out the bubbles that seem to be forming again in real estate and financial markets. It would be awfully strange and perverse if the solution for the past crisis creates another one with similar characteristics. The message from Washington has to be confusing to the financial markets. On the one hand regulators are telling financial companies to hold more reserves and/or reduce financial leverage and risks. On the other hand the Fed is handing out money like Mars Bars on Halloween. With interest rates held so low – banks and other investors do not want to invest in assets that give no yield – so they are very tempted to buy assets that promise higher returns – and of course more risk.

But the risks associated with a permanently low interest rate environment are broader than these bubbles. China is a great example of a country that has highly unbalanced economic growth. Economic development in China has come mainly through international trade and investment. That sounds pretty good. What could be wrong with that? It’s like saying that since protein creates muscle, you should mostly eat big, juicy ribeye steaks and minimize your portions of vegetables and fruits. It makes sense to have a balanced diet. We all know that. It ALSO makes sense to have a balanced economy. A strong economy capable of withstanding global macroeconomic shocks has balanced growth across sectors. In that balanced country consumers buy more goods and services, firms invest in equipment and research, foreigners want to buy everything for i-phones to mining companies, and the government buys airplanes and tablets for students and teachers.

Current Fed policy is troublesome and needs to be reversed. The USA needs to be weaned or we risk a debilitating addiction to money and low interest rates that just makes us less confident about the future and promises us bubbles and a more unstable economy. If Janet Yellen wants to help the unemployed she needs to distance herself quickly from Bernanke’s risky policies.

4 comments:

  1. Dear LSD. I watched your video with John Manzella. Gotta tell though of my disappointment . . . . I expected to see a macro demo using a bunch of X’s and 0’s with Johnny Manziel.

    As usual—after accepting I would not enjoy a futebowl diagram—I found your ‘splaination down to earth and unnerstannable. I also viewed the video Debt Crisis 2013 / US Economy Explained - Understanding Why There Is NO FIX/WAY OUT. It too was clear and unnerstannable. LSD, it looks like we’re screwed—can’t cut spending sufficiently to reduce the debt, can’t print enough $$$ to deflate it, and can’t grow the ‘conomy fast enough to create wealth to pay it down.

    I’m not jell’n for Yellen or anyone else—at this point I don’t think it really matters who quarterbacks the Fed. Taper, print more $$$$, juke to the left . . . to the right . . . head fake . . . quick kick . . . the offense is flaccid—can’t move the unemployment rate “down” the field. The head coach forgot ‘bout the basics, like block’n ‘n tackl’n and keep’n your eyes on the ball. ‘stead, he focused on a hair-brained game plan that called for mis-directing the ‘conomy toward feel-good health plays going east/west ‘stead of north/south . . . and forgot to charge his jobs laser. He blew a lot of $$$$ on misleading advertising telling fans how good the new offense would be but neglected to field a qualified experienced team. The owners need to fire the coach ‘cause he spent all their money and has nothing to show fer it (but, alas . . . it’s too late) . . . ‘cept a lot 0’ debt and a stadium full 0’ fans that don’t have $$$ to buy brats, beer, and p0p korn.

    So, what’s the QB to do? If the coach doesn’t change the game plan, not much . . . . ‘cept continue running east/west.

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    1. Dear Charles, I dare say you have been watching a little too much football. I agree that it is not easy to see any end to future deficits and debt. Some polls arnd articles are starting to discuss how the low opinions of government could translate into a changed politics. But seeing is believing that one. As for the Fed and Yellen I agree with you on that too. So long as government fiscal policy is a mess there is nothing much the Fed can do about employment or anything else. It is possible that a new Fed chief would exert his/her independence and common sense but that would take a repeat of something like the policy of the early 1980s. I don't see Yellen doing anything like that. Once the government understands the Fed will not monetize their debt, the government would have to change. But it is hard to see a tough Fed in the near future.

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  2. Lar, Mars Bars are popular in UK. We prefer Snickers.

    You and Wesbury should co-host a show on FBN:
    http://www.ftportfolios.com/Commentary/EconomicResearch/2013/11/11/taper-talk

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  3. Thanks Fuzz -- I'd love to do a show with Brian but I am afraid we are too much alike. I stand corrected about the Snickers. They are definitely my favorite.

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