Jim Dandy to the Rescue

 In 1969 a music group named Black Oak Arkansas played the song, Jim Dandy to the Rescue. 

One verse went like this:

One day, I met a girl named Sue.
She was feeling kind of blue.
I'm Dandy, the kind of guy
Who can't stand to see a little girl cry.
Jim Dandy to the rescue!
Go, Jim Dandy! Go, Jim Dandy!

Apparently Jerome Powell and his buddies at the Fed took that song to heart. Powell said recently  in a Wall Street Journal article, more than two million Americans have permanently lost their jobs and 11 million fewer Americans were employed last month than in February. Mr. Powell said it would be important for Congress to spend more money to support these households, along with hard-hit businesses and state and local governments, to limit additional damage to the economy.https://www.wsj.com/articles/fed-signals-interest-rates-to-stay-near-zero-through-2023-11600279214

Powell previously had stated that the Fed would keep interest rates near zero for at least three years. But that’s not enough. He says he wants Congress to do even more.

While I love the song Jim Dandy, it made me realize how far we have come with respect to macroeconomic policy since I was in school.

Let's start with microeconomics. Draw a supply and demand curve for anything – let’s say masks. Note the intersection of the curves tells you the equilibrium value of output and prices of masks. Cool.

Now let's suppose people listen to Donald Trump or their barber and they decide to stop buying masks. The demand curve for masks shifts downward. What does the model say happens next? When I was teaching that sort of thing, I broke it down.

1.     With prices unchanged, supply would now be greater than demand.

2.     We call that situation a glut or an excess supply.

3.     Masks are sitting around gathering dust in storerooms.

4. Firms will cut back on mask production and employment.

5.    Firms would rather sell those masks than have them sit in a warehouse.

6.     Firms, faced with this new situation, lower the price of masks.

6.     Lower prices for masks raises demand for masks and they sell more masks at the new lower price.

Cool, eh. This is what people call market economics because competition in markets means there is a more or less automatic mechanism in a market economy. If demand and output decline, you don’t need Jim Dandy to come to the rescue. If demand and output decline, prices fall and as they do, this restores some of the lost demand. Presto. Problem resolved.

Some of you might be skeptical but this is what we believed for a long time. Somehow now, we never even speak of markets working. If there is a problem in a market – we need to bring Jerome Powell or Nancy Pelosi together to save the day.

You scoff. Larry, you are into the JD again.

So I went to the Bureau of Labor Statistics to look at price data. They have a lot of price data and I won’t bore you with all that. I will tell you that in the very extreme and dire situation in the US after 1929, we had a really big economic contraction called the Great Depression. Guess what happened to prices? Prices, as measured by the annual percentage change in the Consumer Price Index, fell during four straight years

            1930  -2.3%, 1931 -9.0%, 1932 -9.9%, 1933 -5.1%.

Did that solve the problem of the Great Depression? No. Did fiscal policy solve it back then? No.  

But a trip to the Bureau of Economic Analysis  (https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey ) shows real GDP growing at very high rates from 1934 to 1944 (except for 1938 when it declined by 3.3%). In those 11 years the annual increases in real GDP ranged from 18.9% in 1942 to 5.1% in 1937.

So maybe prices did fall to clear the markets?

This is not a sophisticated historical or statistical exercise. But I can tell you that after a major collapse in the economy, prices did fall, and that was followed by a vigorous economic expansion.

A subsequent shift in policy advocacy towards Jim Dandyism means that markets don’t clear anymore. Why would a firm accept a lower price if it knows the government is going to come to the rescue? When Powell tells all of us, powerfully, that he wants inflation to be higher, it seems to me markets will never function properly. 

Look at the data again. Between 1949 and 2019 there were only three years in which the price level fell. Those three years were quite interspersed – 1949, 1955, and 2009. In every other year between 1949 and 2019, prices rose. Since 2017, the price index has increased by about 2% per year. Prices did not generally fall in recessions. 

If Powell would quit singing Jim Dandy and stop cheerleading for higher prices, and instead lecture firms about their social and economic responsibility during a recession, maybe then we might get a recovery -- a recovery that does not involve huge mountains of money sitting in banks and an enormous increase in national debt. Maybe worth trying?

Life in 2020

Last week I messed around with the glass half-full versus half-empty. It’s a decent message. Yes, things are bad but if you look around, things could always get worse. Admittedly, that philosophy can only go so far. When things get bad, you feel pretty crappy.

Today what’s affecting me is the idea of living with change. Life has changed a bunch since January. Most of us are not crazy about change. We like to know that the grocery store will have plenty of our favorite items in stock. How could they possibly be out of raisin bran?

I’m sitting in my apartment in Seattle and looking out the window. Today (I wrote the first draft of this piece on September 16) I can see the sun – at least a little. It is 11 am but the haze from the smoke from all the fires is so thick that the sun is barely visible behind a very grey cloud. Smoke hangs on everything. So what? Apparently gulping down smoke is even worse than gulping down too much Jack. Who ever would have thought of that?

That means that since I am old and frail and my respiratory system looks like a 1920s railroad yard, I am not supposed to go outside. It is okay for young people to suck in soot but us older gentlemen (and ladies) are supposed to stay inside. That makes it kinda hard for me to go on my daily walk with friend Barbara around Green Lake.

Wear a mask. Well maybe. “They” say masks don’t work against smoke. Who the hell are “they”? That’s the other thing. Whether it is smoke or Covid, there are a lot of experts out there who seem to want to shout their opinions everywhere they go. A walk down the street is a national debate.

One can’t smell a rose or down an Old Fashioned without having to listen to someone spout off about any one of dozens of topics. We are in debate mode. And these are not friendly debates. For most people, "its my way or the highway". That’s different and takes some getting used to. 

I go to the gym now. I can’t go on walks, so I am left with indoor activity. I know that sounds risky but my gym seems very safe. Gym used to be partly a social event. I met ladies and gentlemen there. Now we all wear masks and we try to stay 10 feet from each other. We actually have to work out at the gym! It's very tiring to work out for a whole hour without stopping to discuss recipes and restaurants. 

Can you imagine doing exercise with a mask on? Now that’s a change worth wondering about. We all look like we are about to hold up a 7-11. We blow spit into our masks as we try to do a few curls and a push-up or two. Before the smoke storms, we could walk outside without a mask. Now you wear your mask everywhere. Inside. Outside. I wear mine to bed. Just kidding about that one. 

Tell that to someone last January and they would have taken your driving privileges away. And how do you know how pretty a lady is while she does bench presses if she has a mask covering her face?

Working out now involves not only a mask but a cloth and a bottle of some stuff you spray on the machines to kill all those covids. Everyone is watching everyone else. Did Joe wipe down his machine sufficiently?  Did he wipe it down at all? Is he wearing his mask properly? Does it cover his nose and mouth?  Is he a Trump supporter? I am a highly active wiper-downer. I feel a little sorry for the machines. Surely they won’t last very long with all this spraying and wiping. My mask is firmly in place. I check it every seven seconds. 

Changes, yes. But where does all this end? We have smoke and covid and race relations. What’s next? Murder Hornets?

The Fed's New Approach to Monetary Policy

The press went wild and crazy recently when the Fed announced a new and radical policy change. Sometimes I just don’t understand these people. The story has two parts. 

First,  the Fed is now very concerned that inflation is not high enough. They most definitely want it to reach 2%. Second, they say they are going to tolerate inflation going above 2%.

It makes me think of a powerful and omniscient Fed that can wield its many policy tools so as to manage this lazy inflation kid.

So I digitally went to my friend, Fred, the data analysis tool at the St. Louis Fed. There I was able to download enough inflation data to gag a goose at Green Lake. https://fred.stlouisfed.org/series/CPIAUCSL#

I graphed (not here) what is called the Consumer Price Index (CPI) from before the Tuna was born to now.

This was data for every month from February 1947 to July of 2020.

I was able to get a transformation – the annualized percentage change from one month to the next. That’s good for comparison purposes.

I looked at the graph and it made my stomach sick. So many ups and downs!

So I downloaded the data into an Excel file and looked at the numbers.

What did I find? I found a pattern in the inflation rates that resembled Peter Wachtel after his usual two-bottle liquid dinner in Marietta.

Main conclusion? If the Fed was trying to predict or control Peter, then they are going to have their hands full.

For example, in the 12 months between August 2019 and July 2020:

            The CPI rose in 9 months, but declined in 3 months.

            The biggest one-month decline was April 2020 when it fell by 9%.

            The biggest one-month increase was the 7.3% increase in August of 2020.

            The average monthly rate over those 12 months was 1.1%

I’m not sure what the Fed would say about all that monthly variability, but it might say, “See Larry, inflation averaged only 1.1%.” We must mount our hefty steed and push it faster. Clearly if the goal is 2% and it increased by only 1.1%, then Mr Powell would be in a dither. Imagine that you were hoping to make $2 at a craps table and you only got $1.10. What a gigantic humiliation.

But that’s not the whole story. This little table shows you some of the other years.

            2020  1.1%

            2019  1.8%

            2018  2.9%

            2017  1.8%

            2016  0.9%

Are they keeping 2018 a secret? Were they excited and happy in 2018 when they got inflation (2.9%) well above their 2% goal?

What if you averaged the last three years and found that for the last three years inflation averaged about 1.9% per year? 

1.9% seems pretty close to 2% to me. I guess that’s irrelevant. Maybe they think they have such precise controls over the economy that they can spin the money dial and get 2% instead of 1.9%?

Despite inflation of 1.9% over the last three years the Fed had to make a major announcement that inflation is tool low and that they needed to make a major historical change in their targeting.

And the press lapped it up like a huge chocolate milk shake in September.

Please tell me what is wrong with these people?

Okay, I will take a shot at that question.

What is wrong is that they aren’t honest with us. They think we are stupid and they think we will believe the Fed and the press and we will give them kudos and honorary awards for wonderfully controlling our economy. No kid goes away without a medal to pin on his or her chest. 

The truth is that the Fed doesn’t care a wit about inflation. Inflation is a way to take our eye off the ball. The ball is the goal to always be pressing on the accelerator pedal. The Fed’s goal is to always be trying to get demand in the economy to grow faster. Their goal is for that increased demand to reduce the unemployment rate.

Why can’t they just admit that? Why can’t they say they have only one policy target? Since I have been so brilliant today, I will let you reply and tell me why you think the Fed would rather distract us with meaningless inflation data than just tell us what they are really trying to do when they keep interest rates at roughly zero for infinity.  

Glass: Half Empty or Half Full?

 Covid 19 is on our minds continually. We dodge people and we wear masks and we find it hard to be positive about the future. I often have nightmares about the physical process of the medical treatments and of course the prospects of death at my young age. Nothing can change the reality or the facts – though we do argue about the facts.

That’s were philosophy comes in. It’s the old glass half-full or half-empty story. There’s the glass – which way is it? We are challenged to decide how we are going to live with this threat.

So I decided to follow an approach that focuses on what others have dealt with. If they could get through those histories, then I suppose we can deal with our own.

Please don’t fault me for the choices I made below. They are meant to be illustrative. But they are also real and meant to remind us that others have had to find ways to cope with some pretty horrible things. They somehow had to find ways to live despite incredible uncertainty. Maybe our situation isn’t as different a we think?

I encourage you to write me or make comments about things I have left out.  

I cut and pasted this information below mostly from Wikipedia. I am not a historian and cannot vouch for any of the numbers. While not each and every item listed below had the same significance and incidence, each is an example of something that affected many directly and many more indirectly. Living through these events without knowing how they would turn out must have been terifying.

• The Blitz was a German bombing campaign against the United Kingdom in 1940 and 1941,... From 7 September 1940, London was bombed by the Luftwaffe for 56 of the following 57 days and nights.
• From 1933 to 1945, Nazi Germany operated more than a thousand concentration camps on its own territory and in parts of German-occupied Europe. The first camps were established in March 1933 immediately after Adolf Hitler became Chancellor of Germany.
• By 1995, complications from AIDS was the leading cause of death for adults 25 to 44 years old. About 50,000 Americans died of AIDS-related causes. African-Americans made up 49 percent of AIDS-related deaths.
• The Black Death (also known as the Pestilence, the Great Mortality, or the Plague) was the deadliest pandemic recorded in human history. The Black Death resulted in the deaths of up to 75–200 million people in Eurasia and North Africa, peaking in Europe from 1347 to 1351.
• By far the most costly war in terms of human life was World War II (1939–45), in which the total number of fatalities, including battle deaths and civilians of all countries, is estimated to have been 56.4 million, assuming 26.6 million Soviet fatalities and 7.8 million Chinese civilians were killed.
• For 110 years, the numbers stood as gospel: 618,222 men died in the Civil War, 360,222 from the North and 258,000 from the South — by far the greatest toll of any war in American history.
• In 1995 Vietnam released its official estimate of the number of people killed during the Vietnam War: as many as 2,000,000 civilians on both sides and some 1,100,000 North Vietnamese and Viet Cong fighters. The U.S. military has estimated that between 200,000 and 250,000 South Vietnamese soldiers died. The Vietnam Veterans Memorial in Washington, D.C., lists more than 58,300 names of members of the U.S. armed forces who were killed or went missing in action. Among other countries that fought for South Vietnam, South Korea had more than 4,000 dead, Thailand about 350, Australia more than 500, and New Zealand some three dozen.
• There were so many things going on around 1918 that it’s difficult to say which one was the most horrifying. What’s not mentioned in the same tone, however, is the Spanish Flu, even if it was by far the most devastating event among everything happening around the time – at least in terms of death count. At its peak, it infected around one-third of the entire human population, and total casualties are somewhere in the ballpark of 20 million to 50 million.
• I doubt the accuracy of this data I found, but it quotes numbers of slaves in the US. In 1790 there were estimated to be 694,000 slaves in America. In 1860 the number had risen to about 4 million. Slavery was not legally abolished until the 13^th amendment in 1865, December 6^th ratified. Racism remains an obstacle to the lives of millions in America and elsewhere.

I end on that point.

Da Market in 2020

The stock market indices closed at record amounts today, September 2. 

There is a lot of wondering whether or not the markets are overvalued. I am not qualified to answer that question, but I can provide a little data. 

I stick to the S&P 500 for the data. I got the data from the Wall Street Journal today. 

Date                                            S&P

September 2, 2019                      2976

February 20, 2020                       3373

September 2, 2020                      3580

My Casio calculator finds this:

                                                                   

   September 2 to February 20 --   13.3%      31.9%*

   February 20 to September 2 --     6.1%      10.5%*

   September 2 to September 2 --  20.3%       20.3%

* annualized rate of change

Interpretation:

    Measuring the five month change from September 2019 to the peak in February of 2020 -- the S&P rose by 13.3% or an annualized rate of about 32%.

    The market crashed for a while. 

    Measuring from the previous peak in February 2019 to the most recent peak on September 2, 2020 -- the S&P rose by 6.1% or 10.5% on an annualized rate.

    From September 2, 2019 to September 2, 2020, the S&P rose by 20.3%.

Point?

The very high values of the S&P did not come mostly from the recent advances in the market. The market had already risen before the recent crash and that explains most of the increase over the last year.

Yes, the market crashed. And measured against the very low value it attained of 2237 on March 23, 2020  -- the S&P gained 60% as of today, February 2, 2020. 

But that 60% can be misleading. The market gained only about 6.1% (10.5% annualized) from peak (Feb 2020) to peak (Sept 2020). 

Is the S&P overvalued? Not sure. If it is, it is not so much from what happened after the crash -- and much more the result of gains before it.

For comparison sake the S&P has increased by about 7% per year in the 21st century. 

If the factors propelling the S&P 500 from before the crash have dissipated, then it is possible that recent stock market behavior is not particularly strong and might not  warrant any worry over peaking. 

That's a big if but worth considering before you sell it all. 

Policy Stew

Add some chocolate ice cream to a hearty beef stew. How about a slice of Key Lime pie in your lamb stew? Add some fresh watermelon to your spicy chili.

Mix JD with some Scotch.

Sound terrible?

Add a soccer player to your NBA team? A sumo wrestler to your swim team relay?

Enough?

Garlic is very different from a lamb shank. But grill them together in a pan and you have made something delicious.

Some things go together. Some things are best kept separate.

That’s the way I feel about monetary policy and policies to improve income distribution. These are both important and delicious in their own rights. But they are not like ingredients of a stew – you cannot just mix them together and hope for anything good.

As I hear some of our politicians today – they don’t want to keep the watermelon separate from the chili. Monetary policy is held hostage or must support a variety of issues – poverty, race, education, housing, college education, global warming, etc.

What do I mean? I have been arguing that the Fed has poured too much money into banks. I want the Fed to judiciously remove that money. People worry that such a policy is unfair because it disproportionately hurts the poor and minorities. I don’t know if that is true, but so long as we think it is true it means that monetary policy won’t be used for its intended purposes. If we use monetary policy judiciously, we use it to stabilize the economy. That should be good for the poor.

Monetary policy is a simple thing. The Quantity Theory of Money (MV=PT) is the basis for thinking about money. If monetary velocity (V) is constant, an increase in the amount of money in circulation (M) will impact either the price level (P) or the amount of transactions (T) or both. With V unchanged, an increase in M will lead to an increase in P and or T. Why? What's the thinking behind this simple equation?

It has to do with the demand for goods and services. An increase in money causes demand for goods and services to increase. Firms will accommodate that rise in demand with a rise in output and/or a rise in prices.

That’s it. That’s the whole story. If you have a shovel, you can move dirt. Your shovel will not turn on the electricity and it will not pour you an Old Fashioned. If you increase the money supply, it will affect output and prices. It will not solve international trade problems and it will not solve poverty. It will not make our incomes more equal.  MV=PT. That’s it.

If we have unequal incomes in America, don’t fool around with monetary policy. If we have distribution of income problems, then use policy tools that directly address what you think causes unequal and unfair incomes. Stay focused. Don’t throw out the baby with the dirty bath water.

One final point. Some say that monetary policy has driven up the stock market and that has benefited mostly rich people. But clearly the same people who say that also want monetary policy to spur the economy into creating more jobs and incomes. There is no conflict.

If along with a strong stock market, we find distribution of income issues worsen, how does one rectify the imbalance in a useful and effective way? I doubt the solution is very simple, but I’d prefer discussing those approaches rather than folks wanting to hamstring the Fed by asking it to solve things it has no real influence on.