Tuesday, June 18, 2019

The Fed, Market Interest Rates, and the Coming Recession

The Fed is in a quandry these days. They were having a perfectly nice day raising interest rates as it seemed the economy was strong enough to tolerate higher rates. In early 2016, the Federal Funds Rate (FFR) was near zero so what harm could it do to move that rate a smidgen? The red line in the graph below shows the FFR and you can see how the Fed raised it through 2018. It reached a little above 2.25%, not particularly high by national standards. So why not keep raising the rate to maybe 3% or 4%?

Note: The FFR is usually considered an instrument of the monetary policy controlled by the Fed. But the FFR is connected through markets to the interest rates on lots of other assets so when the FFR goes up, it usually drags up many of those other rates. In that way, the Fed influences a broad spectrum of interest rates. Among those assets are Treasury bonds with a maturity of 10 years. The interest rate or yield on the 10-year Treasury is often taken as a gauge of all market interest rates. When the FFR is higher than the 10-year Treasury rate, we call this unusual situation an inversion. End of note.

The graph below explains the hesitancy to raise rates further. Consider the far left side of the graph. Notice the FFR hit the range of 6.5%. Notice also that the FFR rose well above a key market interest rate -- the return on a 10-year government bond. Finally, notice that a recession, as indicated by the grey shaded area, following this inversion of rates.

Move ahead to the time period after 2006 and you see another similar rise in the FFR and an inversion of the FFR rate above the 10-year yield. Bam!, another recession. In this case the FFR maxed out at a little over 5%, and that was quite an increase from the 1% rate that prevailed before the policy to raise the FFR.

Just looking back over the last 20 years or so, we come away with the idea that large increases in the FFR that result in the FFR being higher than the 10-year Treasury rate can lead to recessions. Now we see what looks like the same phenomenon happening again. We see the FFR rising after 2016. We also see we haven't had a recession for quite a while. And we see the 10-year rate starting to fall. There is no real inversion yet but if you extrapolate the lines, you might see one soon. If you looked up these rates on Friday June 14, the FFR range was 2.25% to 2.5% and the 10-year yield was 2.0%. That looks like an inversion to me.

So where is the recession? The answer is that the recession is hiding somewhere near my last glass of JD. Where did I put that thing? Or maybe the inversion-thing is not as reliable as the graph indicates?After all, recessions have always been pretty hard to predict. Maybe there is more to it?

Can the graph help? For one thing, at 2.25%, the FFR is not nearly as high as the 5-6% levels that preceded the last two recessions. For another thing, with the market rate at 2.1%, that is much lower than the 10-year Treasury rates prior to the last two recessions. And rates today have shown no real discernible rise. Rates have bobbled around since 2012, and the market rate today is no higher than a lot of dates since 2012 and certainly not much higher than the rest of the months since 2012. If you compare today's market rates to those before 2012, today's rates look modest.

Just looking at the FFR and a key market interest rate, therefore, does not necessarily proclaim the coming of the next recession. Of course, recessions have never been easy to understand or predict. A housing crisis had a lot to do with the last one and in the past, all sorts of things from oil price shocks  to anchovies dying have precipitated recessions. Today has no shortage of risky trends that could set off the next one. Whether Fed policy can or could set off the next one is no sure thing. Maybe they should just stick with their plan to raise rates to normal levels?



Tuesday, June 11, 2019

Saving in the USA

Lassie, the Lone Ranger, and Superman save damsels and others in distress. I have two dear friends who similarly are trying to save me from an inevitable date with JD and the devil. But that kind of saving is not what I am writing about today.

My favorite part of teaching macro is when we discuss trade deficits. A very unobvious point is how the imbalance between national saving and investment causes trade imbalances – deficient saving leading to trade deficits. President Trump is correct to try to stop unfair trade but what he may be missing is that we are our own worst enemy. Our distinct lack of saving in this country is the culprit behind our trade deficits.

Of course a lack of saving disturbs our internal domestic economy too when saving is insufficient to meet the demands of borrowers. We call this crowding out when saving insufficiency leads to constrained business investment and lower spending in the economy. If foreigners decide to save here, that helps, but then we get the problem above as foreign savers have to buy dollars to save here and that causes the value of the dollar to rise and leads to a larger trade deficit. If only Lassie, the Lone Ranger, and Superman could help us learn how to save money! What a wonderful world it would be.

The Bureau of Economic Analysis has lot of macro numbers, so I went there to find saving data. What I found is organized in some tables below.

My point today is that we have a major problem with saving in the USA. The top table is the main table as it presents net saving. Underscore the word net. Net savings are calculated when you subtract the uses of saving from the gross amount saved. (You will find uses of saving in the second table and gross saving in the third one.)

Gross savings is what happens when households, businesses, and governments don’t spend all their income. Think of them putting this excess in the bank. Uses of saving gets at the idea that households, firms, and governments want to borrow some of that money they put into banks. Tuna might have a good year and sock away some dough. Peter needs a new Tesla. Lady Diane won’t let him empty his piggy bank so he goes to the bank to borrow some money.

The top table shows you net saving – gross saving minus uses of saving. A nation likes to have a big positive number for net saving. The first column shows you contributions to net saving from households, firms, and governments in 2000.

When the gross amount of savings just equals the uses of saving, we have a nice balance. What I referred to above is the problems created in countries when the sources are always too low relative to the uses of saving.

Notice that net saving equaled $616 billion in 2000. Net saving as a share of Gross Domestic Product (GDP) was about 5.9% in that year. Most of that amount was contributed by households, but domestic businesses and the Federal Government each made positive contributions in 2000. State and local governments were the only scofflaws that year with net saving equal to -$41 billion.  

Let’s see what happened in the past 18 years. In 2018, net savings was less than in 2000 at $599.2 billion. Net saving shrunk to 2.9% of GDP.  That is, in terms of GDP it was half of its former self. It recovered from being -2.5% in 2009, but that was an unusual and tough year.

Look at the 2018 column of the top table. Notice what changed. Households and business firms were contributing much more to positive net savings compared to 2000. The government is the main reason we changed. The federal government went from plus $156 billion to minus $986 billion. What?! Hand me the JD barrel please. 

Is it really possible that the Federal government could have a $1.1 trillion swing in net saving? If you want to lump in state and local governments, then add another $200 billion to the swing – for a total swing of $1.3 trillion from 2000 to 2018.

Politicians in all your favorite parties are whistling in the wind as they get you riled up about how unfair China is and whether Trump didn’t pet his dog enough last week. Don’t fall for that crap. Your favorite pols are a bunch of spending fools who know we aren’t smart enough to catch them at their nefarious schemes. This is a scheme, and both parties are guilty. Why do we let them get away with all this? Huge government deficits! Huge trade deficits! When will it end?

Table. Source www.bea.gov
2000
2009
2018
Change
Net Saving
Domestic Business
142.9
560.6
789.9
647
Households & Institutions
358.3
666.5
1037
678.7
Federal Govt
155.5
-1248.9
-985.9
-1141.4
S&L Govt
-40.6
-341.3
-241.8
-201.2
Total
616.1
-363.1
599.2
-16.9
Uses of Saving
Domestic Business
1004.6
1531.2
2139.6
1135
Households & Institutions
227
397.5
573
346
Federal Govt
163.1
233.6
283
119.9
S&L Govt
116.6
209.1
278.3
161.7
Total
1511.3
2371.4
3273.9
1762.6
Gross Saving
Domestic Business
1147.5
2091.8
2929.5
1782
Households & Institutions
585.3
1064
1610
1024.7
Federal Govt
318.6
-1015.3
-702.9
-1021.5
S&L Govt
76
-132.2
36.5
-39.5
Total
2127.4
2008.3
3873.1
1745.7

Tuesday, June 4, 2019

Don't Raise Interest Rates?

Everyone seems to agree these days that the Fed should not raise interest rates. Today Chairman Powell said he might lower them. The Fed backed off their plan to raise rates to normal levels and President Trump wholeheartedly agrees. Paul Krugman, the famous macroeconomist and darling of Keynesians everywhere and the media chimed in last week in one of his columns.

I have been pretty consistent in this blog that interest rates ought to be raised. Today's post looks at some data to explain why it makes no sense to keep interest rates low forever. And really, do we think interest rates are the best tool to overcome the negatives of a trade war?

The mantra for low rates comes from those who  simultaneously love low rates and hate high rates. They love the low rates so they can borrow gobs of money and add to their ever-growing collection of cool cars and stunning shoes. Clearly these people do not like to save money. They hate higher rates for I guess the same reason.

Sophisticates like to point out that interest rates ought to have something to do with expected inflation. If inflation is expected to be low then interest rates ought to be low too.  These highly sophisticated individuals seem to discount everything else that is going on in the world. All that matters is expected inflation and interest rates. How nice it would be if the world was always so simple and easy! One could always boil everything down to two things!

To elaborate this world of only two things I asked Fred to draw a graph with two indicators -- the interest rate  on 10 year US government bonds and the inflation rate (one-year  percentage change each month of the consumer price index) from the early 1960s until now. The percentage change in the CPI is an indicator of past inflation but it's impossible to look inside people's heads for their future expectations and I am content to measure expectations with past performance.

What does the below chart say? Notice that the blue line (interest rate) is often well above the red one (Inflationary expectations).There were many months when interest rates were much higher than inflation. This was especially true during the 1960s and then again in the 1980s and 1990s. Somehow we lived through all those years without crisis. It is true that there were recessions scattered during those years.

You might point out that there were recessions in those years but if high interest rates above inflation are so disastrous, why weren't there more recessions! And if you look at the chart closely you will notice that those recessions came after very large increases in inflation. Notice at the end of the chart how low the inflation rates are. Inflation is barely noticeable recently.  Should the Fed really be so worried that a gradual increase in interest rates is going to cause a recession when inflation is so low?

It is true that interest rats have risen since 2015 but notice that the rise came from basically zero interest rates. Compare today's rates to any point you choose before 2015 and you have to conclude they are very low. How can one say they are too high? Do they look especially high relative to inflation? I don't think so.

The upshot is that the Fed has plenty of room to gradually raise interest rates without any real calamity. Of course if a trade war or Brexit or any one of a number of risk factors surface, we might be headed for a recession. But the Fed keeping rates so low today will do virtually nothing to save our economy from those shocks.

The Fed could be a real leader here. Educate people that normal interest rates are important for our country. Explain why keeping rates too low for too long is damaging. It ain't so hard. But I guess when central bankers turn into politicians, simple things sometimes can get hard.




Tuesday, May 28, 2019

Guest Blogger John Manzella Don’t Blame Trade and Immigration for America’s Problems

I often hear people talk about their difficulties in finding a meaningful job or keeping up with increasing healthcare, housing and education costs. These concerns, along with rising income inequality and a shrinking middle class, are provoking anger. For many, trade and immigration have become convenient villains. But that narrative is wrong. Let me tell you why.

Income inequality, which is partly a reflection of the growing gap between lower and higher skilled workers, has risen steadily in the United States since the 1970s. In fact, the economic gap between the rich and poor is higher here than other advanced economies, according to the Pew Research Center. This has resulted in a shrinking middle class that no longer represents the majority of Americans.

What’s gone wrong?

American free-market capitalism has generated the greatest economic growth the world has ever seen, but it has not benefited all of us equally. As I stated in a recent article, in an effort to improve economic outcomes for all Americans, it’s essential to continually improve our system of free-market capitalism — not move toward a more socialist-like model that empowers left-leaning politicians to make decisions that should be made by the market.

It’s just as important not to accept oversimplified solutions to complex problems presented by far right or far left-leaning populist leaders. Unfortunately, support for the far right and left is growing and has contributed to greater polarization in the United States. This is further dividing Americans and making it more difficult for Congress to compromise to pass necessary legislation.

This polarization trend isn’t just an American problem. A recent report published by the Organization for Economic Co-operation and Development (OECD), a global policy forum, indicates that over the past 30 years, middle class households worldwide have experienced dismal or no income growth. This has fueled perceptions that the current socio-economic system is unfair and has led to greater support for extreme left and right ideologies and politicians that embrace them.

But that’s not all. Stated by the Pew Research Center, across 27 countries surveyed, 51% are dissatisfied with the way their democracy is functioning, compared with 45% who are satisfied.

It’s time to take a deep breath and not buy into emotionally appealing solutions from populist leaders who often scapegoat trade and immigration as the causes of America’s problems. In doing so, keep the following points in mind.

First, problems associated with rising income inequality, a shrinking middle class, and the inability to find meaningful work has much to do with lower and middle-skilled jobs being eliminated by automation and the increasing demand for higher skilled workers.

Moving forward, 14% of existing jobs could disappear as a result of automation in the next 15 to 20 years, plus another 32% are likely to change radically as individual tasks are automated, says a recent report by the OECD. Other organizations say nearly half of existing jobs could vanish, mostly affecting lower to middle-skilled workers.

To adapt, a well educated labor force should be a top national priority equal to the effort that put a man on the moon. Importantly, students need the ability to pay for technical or university level educations without incurring unreasonable debt. And employees of all ages need to engage in life-long learning.

History reveals that after fast-emerging technologies destroy jobs, more new ones are created. Although we don’t know what the new jobs will be, we do know they will require highly skilled workers.

Secondly, don’t scapegoat trade.

Automation, not trade, accounted for more than 85% of U.S. job losses in manufacturing from 2000 through 2010, according to the Center for Business and Economic Research at Ball State University. Although trade has contributed to some job losses, it has provided far greater benefits.

Today, nearly half of all U.S. exports are sold to our 20 free trade agreement partners — which only represent 6% of world consumers. To boost job-creating exports to the rest of the world, we need more, not fewer, free trade agreements.

Thirdly, immigrants don’t steal American jobs, they help fill them.

Immigrants help fill vacant American jobs at all skill levels. But the worker shortage is getting worse. According to Korn Ferry, the U.S. skilled worker deficit could result in $1.75 trillion in lost revenue annually for American companies by 2030. In light of this, legal immigration should be expanded, not reduced.

Furthermore, American colleges and universities attract the best and brightest students the world has to offer. However, after graduation we send them home to compete against us. Allowing more foreign graduates to remain here to support our companies or start new ones would benefit our economy.

Immigrants also add to America’s population and consumer base. Germany and Japan, for example, have negative population growth rates. This puts downward pressure on their economic prospects.

The United States has problems. But trade and immigration aren’t to blame for them. Americans, as well as others around the world, need to look past the simplified and often emotionally-charged solutions presented by far right and far left-leaning populists or our problems will only get worse.

This article was nationally syndicated by Tribune News Service/Tribune Content Agency and appeared in the Chicago Tribune and newspapers across the United States.

Tuesday, May 21, 2019

China's Currency

We have been having so much fun lately talking about trade wars and Trump's taxes, I thought we might get back to data graphs and mundane topics like exchange rates. Some of you have been getting less than required sleep lately so I hope this helps.

Below is a graph my friend Fred (at the St. Louis Fed, https://fred.stlouisfed.org/ ) helped me create. It has data on two key exchange rates -- the dollar/yuan and the dollar/euro rates. The data goes from January 2005 to March 2019. The data are monthly so you see 14 years of monthly data points.

Why do we bother with exchange rates in a macro blog? Was it because someone had a little too much JD? Perhaps. But we love to talk about exchange rates for several reasons. First, whenever the dollar appreciates against another currency, that means the currency of the other country gets weaker and foreigners would want to buy fewer US goods (assuming prices didn't change in the meantime). It also means that Americans or people holding dollars will find the goods and services we buy from other countries are less expensive. This improves the inflation rate in the US and tilts spending away from America. Knowing whether the dollar value is going up or down, therefore, helps us know more about changes in the inflation and growth rate in the USA.

I could write a book on exchange rates but I see some of you have already fallen asleep. The good news is that Davidson, Von Hagen, and Hauskrecht (Macro for Business: The Manager's Way of Understanding the Global Economy, Cambridge University Press) will be out in the bookstores in January 2020. So you will have lots of pages you can read soon.

Let's dispense with why exchange rates are important and look at what the graph might be telling us.The first thing to know about the chart is that each data point shows the percentage change in the exchange rate changed over the past year in each month. The second point is that a movement upward on the graph implies an appreciation in the value of the Chinese yuan or the euro (and therefore a depreciation of the dollar.)

We can see some years that showed significant dollar depreciation -- 2007-08, 2011, 2013,  and 2017.

Of course, you also see that the values of these currencies are highly variable. Lots of peaks and valleys. That disputes a widely held notion that the Chinese peg their currency against the dollar -- always keeping it depreciated against the dollar. The common hills and valleys shared by the euro and yuan (against the dollar) dispute any special activity by the Chinese on their currency since 2005. If anything, the yuan has the greater variance of the two.

We can see a distinct period of dollar appreciation from the end of 2013 through early 2017. Since then, the dollar has been highly volatile falling and then rising again.

Of course, you could take a longer view and note that since its trough in 2008, the dollar has been on an upward climb at least through 2017. The hump in 2018 interrupts the trend toward a higher dollar but one wonders if the trend will soon reappear.

Clearly, this little picture helps us to see why inflation has been so tame in the US economy.  And it might show why, if it continues, the US could be in for a period of slower economic growth.

I checked with other exchange rates and the truth is, the dollar has generally risen against most currencies. So much for the China story. The US dollar has been rising for global reasons, and China has had very little to do with that. Perhaps it is a testament to the strength of the US economy relative to other countries after we all escaped the worst economic cycle since the Great Depression.



Tuesday, May 14, 2019

Bernie

I got into a discussion about Bernie Sanders with a dear friend of mine. He thought I should look more closely at Sanders' positions. I went to Bernie's web site, did several other searches, and finally did one on democratic socialism. 

What follows below is what I said in an email back to my friend (I did edit it a bit more here). 

Letter starts here....

Sanders definitely says he does not want Leninism but he also calls capitalism a lot of bad names.

Then he says the following.

“Democratic socialism means that we must create an economy that works for all, not just the very wealthy” 

That sounds nice but it has the following problems when not followed by more specifics…

First, it is plain wrong. It implies that the current system works only for the very wealthy. That is plain silly. The current system has plenty of problems as it relates to income distribution and poverty – but capitalism has been good for a lot of people for a long time. Fix it yes. Say it is all for the wealthy is silly.

Second, note that the statement says nothing about what the new system would look like or its philosophical principles. What guides this democratic socialism a la Sanders?

Third, reading his other materials one can infer that the new system will tackle every social problem we know and offers a government solution. He is very clear about all the ways government will tell companies what to do – and what rich people can do with their wealth and income. He is not very clear about how far the government can or should go with respect to the balance between private markets and government. Is there a rule or principle guiding this balance? 

Fourth, while he lists all those helpful programs he offers nothing that I can see as to how we get from point A to point B. It’s like a religious plea for salvation but never once offering a realistic guide as to the negative externalities that get generated when you try to change all that stuff. Besides transferring income and wealth what can really be done to seriously improve the lives of families? Do we really know how to solve all these problems? Any of these problems?

Fifth there is no reassuring analysis about how one actually creates a more equal society when we know that government can be as corrupt as the private sector. Will we really help all those people when rich people are not exactly going to sit around and thank Bernie for redistributing their incomes?

One more point. Saying all this about Bernie does not mean that there are not any ways to make changes that improve people’s lives. Maybe Bernie is the opening bid? Maybe Bernie will help us find a better middle ground? 

In that case, let him dream all he wants but we would hope the government and the people will see that marginal change is both necessary and possible. We would hope that people can separate the dreams from the realities.

That’s all I've got for the time being. Thanks for telling me more about Bernie. I plan to spend some time in the next year trying to figure out who might be a decent leader for our country.

letter ends here.....

The above is what I sent to my friend. I look forward to more conversations in the future. 


Tuesday, May 7, 2019

Real GDP Q1 2019

The annualized percentage change in real GDP was announced by the US government recently. Real GDP rose by an annualized 3.2% in the first quarter of 2019. Like all the similar announcements, this one will be revised several times before we settle on how much real GDP rose in Q1 2019.

In the meantime we are stuck with interpreting the 3.2%. Mostly we want to know if it represents a change from the past. Many people were quite happy with a number like 3.2%. It sounds good and it tastes nice like a nice JD old fashioned. If the number had been 1.2% we would have scowled and worried that something might be seriously wrong with the US economy.

So I decided to take a look at quarterly real GDP over the past 10 years. The data I present begins in Q1 of 2010 and stretches through Q1 2019. Thus we have 109 data points in those 9 plus years.

The data are presented graphically for you below. At the far right is the 3.2% of Q1 2019. Looking back across all the points you quickly notice that the 3.2% is neither the highest nor the lowest number  on the chart. In 2014 there were clearly some better results. Looking across you can count 13 quarters when real GDP grew by more than 3.2%. So one point to make is that the 3.2% is strong but not any sort of peak.

What else jumps out at you from the chart?

One thing is the volatility. The average one-quarter change was about 2.3%. So the 3.2% was well above the average. But does it mean next quarter or future quarters will be above the mean? Notice all the ups and downs in the chart. There are at least 10 episodes in which the real GDP change increased only to be followed by one or more decreases. Notice the two peaks in 2014. Following those peaks were about two years in which the rate generally declined.

Two points so far. The 3.2% is well above the mean quarterly change but it is not especially strong. Second, a rise in real GDP growth is not necessarily followed by more growth.

Third, since early 2016, the graph does start to look different. There is less volatility and there does seem to be a general upward trend in quarterly growth rates. This might give the expectation that this trend will continue with quarterly increases of at least 3% or more.

Some of you are fidgeting because you know that thinking about the future of the economy ought to bring in real cause and effect. If post 2015 is different, then why is it different? I am sure Trump's people will disagree with Obama's. Is the post 2015 performance the result of Obama's policies finally maturing after a long adjustment from a major economic recession? Or does the post 2015 growth register changes brought in by Trump's administration?

Politics aside, it is not easy to answer these questions. Maybe the dots have nothing to do with Obama or Trump? And of course, it is also possible that the post 2015 apparent upward trend will begin to vanish in July when we get the Q2 2019 numbers.

I stick with my love of persistence. Without one of the risk factors turning the world on its head, I like the idea that employment growth causes spending which causes output which causes more employment, spending, output, and employment.

I can't be sure of exactly why post 2015 real GDP growth is rising but I do think momentum could carry us for a while.



Tuesday, April 30, 2019

Another Oldie Goldie: Out of the Economic Wilderness

A friend suggested that I recycle some of my older gems from the blog. Today I rehash and remind about the needs for much better policies if we are going to keep the US economy growing. We all want that, right? Whether you are Ds or Rs you want to find a way to have our robots and our jobs too.

I published Out of the Economic Wilderness in January 2018. http://larrydavidsonspoutsoff.blogspot.com/2018/01/out-of-economic-wilderness.html

If anything the process of delivering macroeconomic policies in Washington has gotten worse. There seems to be no party strongly advocating fiscal responsibility. And neither party has anything to say about what to do about the replacement of jobs with technology. Why do we put up with all that crap?

Out of the Economic Wilderness offers no specific solutions but surely the remedies for our current problems are not impossible. Rocky came back several times against heavy odds and he did it without magic. He did it by training smart and training hard. There is no bucket of JD Old Fashions out there that will fix our problems. We need to hunker down and do the tough things it takes to be the most globally competitive country in the world. We need to have the most educated, best trained, and highly motivated employees in the world. It's sad that we don't even think that way.

After the Sputnik challenge this country reacted with energy and focus. The global economic threats today are no less threatening. I hope we get off the dime before its too late.

I hope you enjoy re-reading Out of the Economic Wilderness.




Tuesday, April 23, 2019

Da Market Today

I wrote this yesterday, April 22, 2019. The usual financial market experts are lamenting that we might be near another stock market peak and subsequent decline. Apparently the market today does not believe these forecasts as so far the S&P 500 is holding its own.

We all know why these experts are predicting a peak. If they get this prediction right at least once in their lives they will become rich and famous and get to dine with other rich and famous persons. Unfortunately predicting da market is a lot like predicting when Nolan will pull down his trousers and pee on an unsuspecting bush.

This topic wouldn’t be so much fun if it weren’t for the obvious and erroneous misrepresentations made by these prognosticators. For example, they point out that when the S&P hit 2905 on April 19 of this year, that it was nearing a previous high. Simple, right? Da market was approaching a new high. On Saturday night when you have that last glass of Pinot and are approaching a new all-time high – it’s important that you order an Uber to take you home. Just as your evening is about to end, these snake charmers are worrying that the market is about to retire as well. You should sell your stocks so those folks will make a nice commission on the sale.

While it is true that the market went up a lot between Christmas Eve 2018 and April 19, 2019 – it is also true that the market barely edged up an inch between October 1, 2018 and April 19, 2019. Actually, it fell a bit during that almost seven month time period.  So was the market high on April 19? 

Or compare it to January 26, 2018 and you get a wild and crazy 1.1% increase in that 16 month interval between January 2018 and April 2019. No cigar for that performance.

Some of you want to wring my neck because I have not admitted a key point – if you compare the S&P value today to two years ago and before two years ago – yes the market has risen. Yes, it has even risen at a pretty good clip. But come on dudes – has it risen enough to call off the S&P party? Has it risen enough to cause a major and significant downturn? Has it risen enough for you to sell all of Grandmas’ stocks?

I doubt it. Keep in mind what the market does. Unless the world has fallen totally apart – the S&P goes up. That means the previous peaks are historical points. We go from one peak to the next peak. Going from one peak to the next is normal!

Like Nolan and the unfortunate plants he waters, we don’t know when and where the stock market will take a breather. Of course it will. But let’s face it, companies are doing pretty well these days. If the S&P value is at least approximately impacted by the ups and downs of these companies, then it is not easy to see why we would soon have a sustained stock market collapse. The economy is growing. Wages and incomes are growing and jobs are being created every month. Everyone knows a recession is due by looking at the calendar but very few serious people are predicting when and where it will arrive.

Sell your stocks or don’t. But surely don’t put much stock into these stock market forecasts. Okay, sell a few shares and buy some JD. That sounds good to me. 

Tuesday, April 16, 2019

MMT: It's the Rave Now

Modern Monetary Theory (MMT). Really, it isn’t so modern. I can remember learning MMT at Georgia Tech from Bill Schaffer in the 1960s. It was a special case of the Keynesian Model. Without going through all the history of who John M. Keynes was, let’s just say he was the father of macroeconomic theory. He was also married to a ballerina. Pretty cool guy.

Professor John Hicks penetrated Keynes’ impenetrable writings, especially what he wrote in the General Theory. Whew, the hardest reading I have ever done. But Hicks figured it out and created something called the IS-LM model. This had nothing to do with religion. The IS curve modeled the goods and services market (Investment equals Saving). The LM curve was all about money (demand [L] and supply [M]). Putting IS and LM together was almost as cool as Joe Biden touching Madonna’s hair.

The IS-LM model was the way we explained the economy and discussed monetary and fiscal policy. One very special and weird case of the model was when the IS curve was vertical and the LM curve was as flat as the tires on my 1956 Mercury in 1964.

These extreme assumptions led to a policy conclusion that fiscal policy was all powerful and monetary policy had no impact on the real economy. And this is exactly what these modern-day MMTers are saying. They say, forget about monetary policy. 

What we need to do to keep the economy humming, according to MMT, is to have the government create stimulus with its fiscal policy. That is, raise government spending and reduce taxes so spending grows. If there is a role for monetary policy, it is to not get in the way. As the economy expands, the Fed should create as much money as is needed.

So here’s the cool thing. Back when Hicks and Dick Froyen were explaining all this stuff to us young'ns, they explained that the assumptions for that variant of the model were an infinite demand for money and a zero elasticity of aggregate demand with respect to interest rates. Viola – with those assumptions all money gets gobbled up to be held and never gets spent. With those assumptions, even if bigger government deficits caused interest rates to rise, they would not harm interest sensitive spending like autos and capital goods. Sweet. Let government deficits soar and pump as much money as needed.

Why did Hicks invent this special case? What was he smoking? Basically, this was supposed to be the Great Depression Case of the model. Hicks mimicked Keynes by saying that in very extreme times like a Great Depression, people acted really weird. And thus he and Keynes believed that money would not rescue us in the 1940s but they thought fiscal deficits would.

My question: Why are we assuming the same assumptions hold in 2019? If MMT is based on behaviors that are typical in a Great Depression, why would we want to make those assumptions now when the unemployment rate is low and output is growing? Seems kinda weird to me. Who moved my JD?


Tuesday, April 9, 2019

Don’t Underestimate Free-Market Capitalism by Guest Blogger John Manzella

John Manzella, founder of the ManzellaReport.com, is an author, speaker, and nationally syndicated columnist on global business, emerging risks, and economic trends. To contact him, visit www.JohnManzella.com.

This article was nationally syndicated by Tribune News Service/Tribune Content Agency and appeared in newspapers across the United States.


American free-market capitalism has generated the greatest economic growth the world has ever seen. At the core of its brilliance is its ability to create incentives to produce solutions to problems and to distribute those solutions worldwide. In doing so, it has paved the way for tremendous gains in efficiency and productivity while lifting millions of people out of poverty.

When discussing its benefits, the late author and philosopher Michael Novak said: “No other system so rapidly raises up the living standards of the poor, so thoroughly improves the conditions of life, or generates greater social wealth and distributes it more broadly. In the long competition of the last 100 years, neither socialist nor third-world experiments have performed as well in improving the lot of common people.”

For centuries, the American experiment has embraced free-market capitalism along with the rule of law, separation of church and state, entrepreneurialism, balance of power, the welcoming of immigrants, and a brilliant Constitution. This “secret sauce” has created a stable environment encouraging entrepreneurs to take risks and empowering people to unleash their creativity to achieve their dreams.

After dozens of speaking engagements in Mexico in the early 1990s, I found that many in the audience either had an American passport or badly wanted one. When I crossed through Checkpoint Charlie into East Berlin as the Berlin Wall was coming down, I was told by countless East Germans of their wish to move to the United States to seek a better life. And when visiting China, young Chinese often tell me of their desire to study in America or permanently move here.

What draws so many people to the United States? America’s “secret sauce” continues to provide tremendous advantages that few other countries can.

However, due to flaws revealed during the Great Recession that began in 2008 and throughout its slow and uneven recovery, many Americans began to question the credibility of our economic model.

In efforts to help those struggling to get ahead and create greater economic opportunities for all, some elected officials are advocating left-leaning (some would say “socialist”) policies that give the state too much decision-making authority. And herein lies the problem.

Stated by author John Steele Gordon, “Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias.”

Additionally, government service providers lack competition, a primary factor that makes capitalism so successful, and have less incentive to become more efficient, productive, innovative, and accountable. If left unchecked, economic decisions made by the market today could become decisions made by policymakers tomorrow who assume they know better.

Michael Novak also stressed that checks and balances are to the political order what competition is to capitalism. China, for example, does not have a system of checks and balances, nor one that promotes competition. As a result, its brand of one-party capitalism is undergoing difficulties that are likely to become more severe in the years ahead.

Other examples where the state substituted its decision-making ability for that of the market include the former Soviet Union, North Korea, and Venezuela — all failed states.

On the other hand, the American system of capitalism is far from perfect.

Some argue that our system is in a constant struggle to achieve a balance between the wealthiest and the rest, but in recent years has shifted too much power to the top, creating greater inequality. Others assert that crony capitalism, which exists when competition is unfairly limited, is too pervasive. And still others claim that their ability to reach the middle class has become nearly impossible.

In an effort to improve economic outcomes for all Americans, it’s essential to continually improve our system of free-market capitalism — not move toward a more socialist-like model that empowers politicians to make decisions that should be made by the market.

Free-market capitalism is responsible for improving the living standards of millions or even billions of people around the world. It’s also responsible for creating the wealth that, through taxation, supports essential government services, social programs, and safety nets.

Seeking the right balance between the market and the state is critical. But in the process let’s be sure to improve America’s “secret sauce,” not poison it.