Saturday, August 26, 2017

The Great Central Bank Disconnect

Central bank policy, both in the US and in Europe, makes no sense and hasn't made sense since the crisis of 2007-2008 unfolded.  This week, the world's two most important central bank chieftans -- the Fed's Chairperson Janet Yellen and the head of the European Central Bank, Mario Draghi issued statements that seem little more than political utterings, unmoored to the underlying economic reality.

The truth is: the economic recovery from the 2008 Financial crisis is the slowest and most pitiful economic recovery in world history.  The question is why?

That question is never posed by Yellen and Draghi, because their main interest is to defend the central bank policies that have been in place since 2008.

Yellen and Draghi and their political supporters have no interest in strong economic growth.  It doesn't affect them personally or any of their friends or supporters.  They are protected from the dangers and vicissitudes posed by weak economic growth.  They will continue to have power and wealth, even if the economy doesn't grow at all.  Their wealthy friends, Warren Buffett for example, will also do fine in a no-growth economy.  Academics and bureacrats do fine in a no-growth economy.  So, what's the problem with slow economic growth?

The problem is for folks that are in the private sector -- those running small businesses, those looking for jobs or better jobs, those hoping for wage increase, those looking to fight their way out of poverty -- these folks have no real hope in a no-growth economy.  These are the folks whose lives are blighted by slow economic growth.

But, Yellen and Draghi don't care about these folks because they don't really know any folks like this.  They know wealthy folks like themselves, bureaucrats, politicians and academics -- all folks who live in a protected bubble and will not see their own lives impacted in a serious way by slow economic growth.

So, what have Yellen and Draghi been saying that is so unmoored to economic reality?  They have argued that strangling economic regulations have not hurt the economy.  The absurdity of this view can be observed in the pitiful level of commercial lending and the enormous level of commercial bank excess reserves.  These data provide a daily reminder of the stultifying effects of the over-regulated commercial banking and financial system.

Yellen says "research" shows that the regulations have improved economic performance. That must be the same kind of research that argues that much higher minimum wages will also improve economic performance (why not a $ 100 per hour minimum wage...that should do wonders for economic performance, if you believe some of the "research" that economists are producing these days in support of their political agenda).

Both Yellen and Draghi played a major role in constructing the prison that the US economy and European economy find themselves in.  Neither Yellen or Draghi have much respect for free markets, as their preferred policies regularly remind us.

Yesterday, both Yellen and Draghi beat the drum for continuing the oppressive regulatory environment that is largely responsible for the absence of economic growth in Europe and in the US.  Draghi added the absurdity that ECB "stimulus" should be continued to help promote growth.  Draghi means by stimulus the damaging policy of central bank money printing that has failed to produce any tangible results, other than threatening the long-run viability of the Eurozone.  At least, Yellen didn't push that button.

Central banking policy has no rationale.  The Fed's efforts to raise rates are based upon what?  The fear of inflation?  Really?  Measured and reported inflation is on the decline, so what is the Fed trying to tamp down?  Why, now, the effort to reduce the size of the Fed portfolio?  Is there anything in the available economic data in the US that suggests that now is the time to raise rates or lower the Fed's balance sheet assets?  What economic facts on the ground support Yellen's or Draghi's policies?  The answer in both cases is zero.

Fed and ECB policy have no apparent goals, have no apparent justification.  There is no inflation to speak of, so there is no particular reason to embark upon rate increases to combat inflation.  There is no run-away economic growth (in fact, there is hardly any economic growth at all) to be tamed.  So why these policy shifts?

Is all of this just more evidence that the Fed and the ECB have no idea what they are doing and why they are doing it?

Monday, August 21, 2017

ECB Policy, At Least, Has a Rationale

Mario Draghi, the head of the European Central Bank, is expected to announced the wind down of its own version of quantitative easing.  Ostensibly, the purpose of QE in Europe was to raise inflationary expectations and to, somehow, spur economic growth.

Inflation has picked up in the Eurozone and economic growth is higher now than earlier.  But both are mighty low.

GDP growth in the last twelve months in the Eurozone is now 2.2 percent.  That's the best the Europe has seen in quite a while, but not enough to do anyone but protected bureacrats much good.  European youth still have to look abroad to find employment.  European pundits are bragging about the reduction in unemployment that has now fallen to slightly under double digits.  That is the record that Europe appears to be proud of.

But, these kinds of growth numbers, acceptable to the wealthy and to the protected elites, leave the remaining unemployed with little or no hope.  Particularly hard hit are youth and minorities.  They will remain in despair for generations with these kinds of growth numbers.

But, the pundits celebrate.  Slow growth doesn't hurt them, so they are happy folks.

Draghi is now pushing for an end to the quantitative easing program based upon the higher inflation and GDP growth numbers.

At least Draghi has a rationale.

No such luck with the Fed.  The US data provides no real reason for reversing QE. Of course, there was never a reason for embarking on QE in the first place -- either in the US or in the Eurozone.

The only policy that will do any good for those at the economic bottom is a return to free markets -- something that will probably never happen in Europe.  Sadly the US is following the Eurozone in reducing the role of free markets, which will spell endless hardship for the less economically fortunate Americans.

Warren Buffett and his TV commentator admirers need have no fear.  Slow economic growth doesn't hurt rich people.  The rich and the protected elite will thrive in slow economic growth, but everyone else will suffer.

Thursday, August 17, 2017

Fed Policy Makes No Sense

So, why is the Fed doing what it is doing?  That question, rarely asked by the financial press, has been asked recently by other Fed board members. 

The Fed is supposed to move rates higher when inflation poses a serious threat.  So, why has the Fed, since December of 2015, been artificially raising overnight lending rates?  Inflation is not a serious threat and has not been during this period.  So, what is behind this policy?  The answer: who knows?

Other rates have generally not risen in sympathy with the Fed's boost of overnight lending rates.  The ten year is about where it was when the December 2015 exercise began.  The markets have been unimpressed and largely unaffected by Fed action.

Now Yellen says its time for another rate increase, though "measured" inflation is trending down.  If inflation is trending down and is below Fed targets, why the hurry to raise rates?  This is a question that Yellen cannot answer.  There is no answer to this question.

Why the sudden interest in reducing the Fed balance sheet?  There was never a reason to balloon the Fed balance sheet in the first place.  Why reduce it now?  What data supports this?  The answer: no data shows any change sufficient to warrant a change in policy.

What this all means is that Fed policy is completely adrift and unrelated to any actual economic data.  The economy is picking up and inflation is declining.  Hardly a call for Fed action.

The only conceivable explanation is politics. There is no economic explanation for Fed policy.  There is nothing in the data or in forecasts that calls for any particular Fed action.  But, politics provides an answer.

It is embarrassing to Janet Yellen and other left wing academics that the economy is picking up just as the new Administration is celebrating its first six months in office.  Maybe by jacking up rates and selling off the Fed balance sheet, the economy can be ground to a halt.  Maybe, that is what is behind Yellen's thought process. 

There is certainly no data and no argument to support further rate increases or the timing for reducing the Fed balance sheet.  This is just politics.

Monday, August 14, 2017

Take Note of Japan

The most recent quarter showed 4 percent economic growth in Japan.  Economists, as a group, had predicted 2.5 percent growth as recently as last week -- about a 60 percent miss.  Not unusual.

What is important here is that no one thinks Japan can grow any more.  Japan, as is well known, has a shrinking and dramatically aging population.  So, economists have dismissed Japan and argued that an aging shrinking population means no growth.  Wrong.

Capitalism can produce economic growth regardless of demographics.  Free markets can do most anything if given a chance.

Japan is now growing faster than Europe, faster than Britain, faster than the US.  The pundits need to go back to the drawing boards.  Much faster growth is possible in Japan, Europe and, yes, in the United States.

Thursday, August 10, 2017

Even WAPO Sees Lies in NYTimes

Today's Washington Post headline: "New York Times guilty of large screw-up on climate-change story."

In earlier blog, I commented on the completely political nature of this NY Times article.  As it turns out the facts are even worse than I thought.  The article is a complete and total fabrication, as noted by this morning's Washington Post.

Here is the main lie in the NY Times article:

“The draft report by scientists from 13 federal agencies, which has not yet been made public, concludes that Americans are feeling the effects of climate change right now," said the NY Times article.

This is completely and utterly false.  The report had been available since January of this year, as was well known at the time this false article was written.  The report had been uploaded by the nonprofit Internet Archive in January and publicized by the NY Times itself in August.

These reporters probably knew that the report had long been public when they wrote the article and that NY Times' editors knew that it was a pack of lies as well.  If they did not know this they are simply incompetent.  But, far more likely is that the reporters and editors knew that they were lying and that the story was false at the time they wrote the article and at the time it was published.

Here is more of what the article said: “Scientists say they fear that the Trump administration could change or suppress the report.”  Really?  How could the Trump Administration suppress or change a report that had been public for eight months?  The Times did not address that, of course.

Here's another doozy lie in the NYTimes article: “Another scientist involved in the process, who spoke to The New York Times on the condition of anonymity, said he and others were concerned that it would be suppressed.”  Really?  So this unnamed, anonymous scientist  believed that a report that had been public for eight months was going to be "suppressed."   How stupid is that?

This article by the NY Times was a complete and total fabrication -- the epitome of fake news.  Nothing in this article was true, accurate or researched....nothing.  The writers and the editors knew that it was completely false.   And, it ran on the front page.

This is pretty typical of the NYTimes, as I have noted, over and over again in this blog.  The NYTimes is a hack, political rag with no regard for the truth.  Even the Washington Post has pointed this out now in today's edition.

In their rush to discredit the Trump Administration, the NY Times simply invents facts or publishes false facts knowingly.  The NY Times has no regard for the truth and the majority of their articles on the front page related to politics or economics are simply outright and deliberate fabrications designed to advance a political agenda.

Wednesday, August 9, 2017

You Can't Make This Stuff Up

The NYTimes has two more ridiculous articles in their business section this morning that have no purpose other than to attack the Trump Administration because the Trump folks have the effrontery to do things the right way, not the NYTimes way.

One article entitled "Secrecy and Suspicion Surround Trump's Deregulation Teams," written by Danielle Ivory and Robert Faturechi.  This absurd article makes the point that people who are working to help deregulate industry are people who once worked in the industry.  Wow!  Isn't that a remarkable fact.  Is this article intended as joke.  Should people who know nothing about the industry be in charge -- as was typically the case in the Obama Administration.

The other, equally ridiculous, article is really a graphic entitled "The Business Links of Those Leading Trump's Rollbacks."  This nonsense was brought to us by Danielle Ivory, Robert Faturechi and Karl Russell.  The point here was the same as the article in the previous paragraph -- knowledgeable folks are leading the effort to deregulate.  That, apparently, is not the right way to go, according to the NY Times.  Again, I suppose the Times prefers folks who know absolutelly nothing about the industry they are supposed to be regulating, a pattern so ably followed by the Obama Administration.

The NYTimes is either a jokebook or a Democratic Party daily handbook.  It is getting increasingly harder to figure out which.

Tuesday, August 8, 2017

Is Climate Science a Branch of Political Science?

Today's NYTimes has another incendiary headline: "Scientists Fear Trump Will Dismiss Climate Change Report."  What scientist is quoted in the article?  A political scientists.

"One government scientist who worked on the report, Katharine Hayhoe, a professor of political science at Texas Tech University, called the conclusions among “the most comprehensive climate science reports” to be published."

No other "scientist" was quoted.

I wonder how a political science professor becomes a "scientist" with expertise on climate change?  Three guesses and the first two don't count.

One more example of NYTimes politicalization of the news.

Who frankly cares what a political scientist thinks about climate change?

Thursday, August 3, 2017

The Good News

Capitalism is still alive and kicking in the United States, though it occupies a shrinking part of the American economy.  It is mostly in the technology sector that capitalism thrives in the US.  The left has put state control in most of the rest of the American economy, which is why you see economic stagnation in large parts of the economy.  But, Uber, Airbnb, Tesla, Amazon all represent the ways in which technology is making Americans lives better.  No doubt the left will try to snuff these out as well in their drive toward socialism.

You would think that the example of Venezuela -- the latest in a long string of socialist experiments -- would cool the ardor of the left for state control of the economy.  But, it hasn't.

Capitalism will always find a way unless brute military compulsion takes over, such as we observed in the old Soviet Union and modern Venezuela.  As long as the government doesn't develop a policy of outright dictatorship and terror on its population, capitalism will find a way.

While the American economy has been severely hamstrung by the left, nevertheless capitalism is overcoming barriers by going where they aren't.  Our schools have been destroyed by the left and our health care system is now headed that way. 

But, there is hope, so long as the government leaves any space of breathing room for innovation and freedom.  We shall see if that happens.  But, for now, innovation continues at a breathtaking pace in the few areas of the economy that the left hasn't strangled.

Wednesday, August 2, 2017

Inflation in the Modern Age

Life used to be pretty simple.  Folks paid rent or mortgage payments, consumed food and energy, and paid their taxes.  Measuring inflation was relatively simple.  One simply checked on average rents (or mortgage interest rates, food prices and energy prices.  Tracking these simple numbers gave a straight-forward estimate of the cost of living.  That was then, but no longer.

Today, 95 percent of Americans have cell phones and almost 80 percent have a desktop computer or a laptop.  The government's calculation of the cost of living ignores these items, yet they have become an increasing portion of every household's budget.  Are these new technology-based products exhibiting price increases?

What about the cost of transportation?  Do taxi fares tell the story?  What about Uber?  Sometimes, only an Uber driver can be found -- no taxis anywhere in sight?  The cost of a taxi at such times is infinite.  Uber might be expensive in such situations, but less expensive than the non-existent taxi.  How about lodging?  How does Airbnb factor into lodging expenses.  Is their price inflation here?

Remember that the quality of the product is supposed to be held constant when estimating inflation.  Is today's cellphone or laptop of the same quality as what was available ten years ago?  What does using Uber and Airbnb cost?  How do such costs compare to ten years ago?  (No way to know).

What about Amazon's Alexa and Echo?  How does the CPI account for these new products and services?

It is not at all clear that current measures of inflation have anything much to do with the theoretical notion of inflation.  The concept of inflation is based upon the idea that the currency changes its value.  Inflation is the falling value of a currency.  The rate at which a currency loses value is the definition of inflation.  "Loses value" against what?  Aye, that is the rub.

What households consume has changed dramatically in the last several decades and households are much, much more diverse in their spending patterns -- drug use (that something is illegal to consume is irrelevant), technology products, new entertainment devices (think Netflix) were not part of the mix just three decades ago.  But, now they are.

So far, economists have ignored these complications.  But macroeconomic policy crucially depends upon the measurement of inflation and expectations of inflation.  It is no longer clear that we have any idea how to do that.  That is part of the reason that monetary policy is more "witchcraft" today than anything based upon scientific considerations.