The Fed, Fitbit and Fearthquakes

Can you weigh yourself too often? Most of us are concerned about our weight. Being too heavy or fat is not what we strive for and in many cases we ought to be concerned for health reasons. As such, measuring one’s weight or girth is not a bad idea. The question then is how best to measure.

The measure I prefer is how my clothes feel. I cannot fool my Levis. When I gain weight they scream at me. Another approach is to buy a nice scale and stand on it now and then. I approximate that once a year when my blankety-blank doctor insists on knowing how much I weigh at my annual physical. To add insult to injury he makes me wear my shoes on the scale. Others think it sensible to detect trends and to weigh oneself at least once a month. My Fitbit friends are at the extreme. They measure every second.

And that’s where I part company. And that’s where I also get to today’s topic, the Fed. The Fed thinks it needs to read the pulse of the nation every minute. As if these frequent measurements will help them manage the US economy better. Think of your weight again. Body weight is partly mystery. You and I have both gone on radical diets that lasted at least 12 hours. And guess what? The stupid scale said we gained weight. And even if weight was a little more understandable and we did lose 0.5 pounds in 12 hours or 12 days – what then would that tell us? Way to go dude. Go eat a big buffalo burger.

Good monetary policy ought to be like a good diet. It works because you apply a new sensible regime over a long period of time. Or maybe it is more like a steamroller. If the road gets bumpy then flatten it out. Don’t take a hammer and flatten each and every bump as it arrives.  Ms. Yellen’s Fitbit contains an intermittent flow of hundreds of pieces of relevant but often conflicting information on a daily basis. It has her mesmerized. As recently as last week she was still not convinced that the US economy was growing fast enough. Let’s take in a little more data today. Maybe tomorrow she will be convinced. Or maybe not.

Meanwhile what is the problem? Why can’t we just lumber along? We aren’t growing very fast but we are growing faster than most other countries. Shouldn’t we be happy and proud about that? And inflation is not a problem. Give Ms Yellen a break. This line of argument shows how successful she, her buddies at the Fed, folks in government, and the press have been about hiding the elephant in the shop. It amazes me that except for an article here and there in some business tabloids, everyone is silent about something called imbalances.

Imbalances is not a great word. It doesn’t shout “save me” in the same way that recession or rich persons or automatic rifle does. Maybe I should make up a new word. Let’s call it a Fearthquake. F has nothing to do with methane this week. F means financial. Earthquake means well earthquake. They had an earthquake in Italy recently. We know earthquakes are terrifying events. A Fearthquake is just as bad. We had a Fearthquake in 2007. We are still suffering from the aftershocks.

That Fearthquake and the looming next one come from imbalances. In the case of 2007, the imbalances were in the housing and equity markets. Maybe that is why we are so reluctant to name this evil. Many of us were enjoying price appreciate in our homes and stocks. No one wanted to rain on that parade. But the Fed learned nothing from that episode. It is totally obvious that keeping interest rates low to negative for almost a decade is causing the economy to walk slowly and with a limp. Saving makes no sense in this economy. 

One wonders why productivity is so slow. Has there ever been an economy in the world that had strong perpetual growth in productivity and output with such little saving? And risk tolerance. I am not a finance expert but corner one if you get a chance. Because of low interest rates households are moving into bonds instead of money; into risky bonds instead of low risk bonds; into equities instead of bonds, and so on. And firms are doing the same things. Government believes they can borrow more and more – and a rising national debt will have no negative consequences. They back student loans as if these loans will ever be paid back. Please tell me Ms Yellen why you don't talk about any of these imbalances and the coming Fearthquake?

Call it imbalances or a Fearthquake. Ms Yellen needs to trash her economic Fitbit and put on her jeans. Maybe they will convince her that something bad is coming. It might not be too late for a return to sane monetary policy.