Economy | - Part 30

The Illusory Recovery

This Guardian story by Larry Elliot details five reasons why the current economic recovery may prove to be an illusion and, in the process, mentions former Federal Reserve Chairman Alan Greenspan four times when comparing today’s “recovery” to the one ten years ago that didn’t work out quite like policy makers had planned.

The global economy seemed to be on the mend when the International Monetary Fund met for its spring meeting in Washington 10 years ago. Alan Greenspan had cut official interest rates in the US to 1% after the collapse of the dotcom boom and the world’s biggest economy had responded to the treatment. Gordon Brown was chancellor of the exchequer and the UK was in its 12th year of uninterrupted growth.

Companies in the west were flocking to China now that it was part of the World Trade Organisation. The talk was of offshoring, just-in-time global supply chains and integrated capital markets. The expectation was that the good times would last for ever. No serious thought was given to the notion that total system failure was just around the corner. Faith in the self-correcting properties of open markets was absolute.

When the crash duly came, a self-flagellating IMF confessed that it had been guilty of groupthink. It had either ignored the signs of trouble or played down their significance when it did spot them. The fund has learned some hard lessons from this experience. Downside risks to the forecasts in its half-yearly World Economic Outlook (WEO) are now exhaustively catalogued.

The world of 2014 is not dissimilar to that of 2004…

According to Elliot, here are five signs that history might, if not repeat, rhyme:

  1. Dependence on exceptionally low interest rates
  2. A crashing bond market
  3. The fracking boom comes to a swift end
  4. Resource conflicts around the world
  5. Rising inequality

It would seem that the first item is virtually guaranteed to cause a good bit of trouble and, unfortunately, that may be more than enough to derail things in the year or so ahead. The Fed has a pretty terrible track record of withdrawing stimulus and we’ve been in uncharted territory for years now. The others? Well, they won’t help.

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Richard Koo, Nomura Research chief economist also known as “Mr. Balance Sheet Recession” for popularizing the term a few years back, explains why it won’t be so easy for central banks to unwind their massive money printing efforts that began after the financial crisis.

He notes excess reserves in the U.S. banking system are sufficient to increase the money supply by 19 times and that this could lead to a 1900 percent inflation rate.

He makes a good point that central banks that have implemented QE will want to appear to be out in front of potential inflation threats, hence the reason why the Federal Reserve appears to have become a bit more hawkish lately despite little  evidence of higher inflation.

For some reason, there are lots of stories in the financial news this morning about inflation, for example these selections from this morning’s links post a short time ago:

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The Labor Department reported that nonfarm payrolls increased by 192,000 in March and data from prior months was revised upward by a combined total of 37,000.

The jobless rate held steady at 6.7 percent, little changed over the last four months, as more workers entered the labor force last month and were able to find jobs.

January payroll gains were revised up from 129,000 to 144,000 while the February total jumped from 175,000 to 197,00 and, if not for the latter, the March gain would have been the best month for job creation since last November.

The number of unemployed persons was little changed at 10.5 million, however, the civilian labor force rose a sharp 503,000 last month, pushing the participation rate up from 63.0 percent to 63.2 percent, the highest level since last summer.


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Gallup Job Creation Index at 6-Year High

In advance of tomorrow’s big monthly labor report, this Gallup survey showed that the job market is in the best shape since 2008, a year that will forever be remembered for the events that unfolded, leading to job losses in the millions.

The pre-2008 data is not shown, however, it’s a pretty safe bet that we’re a still a long way from whatever might be considered “normal”, that is, if “normal” could ever exist again.

The other charts in the report about government vs. private sector hiring/firing and within the three levels of government (i.e., federal, state, and local) is kind of interesting too.

Expectations for an unusually large spring rebound in the Labor Department jobs data tomorrow (even after seasonal adjustments push the final number down) are running high. It will be interesting to see, first, what the number is, and, second, how markets respond.

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On Deep Dysfunction and the U.S. Economy

The more I hear about “secular stagnation”, the more it sounds like the U.S. and global economy are like some massive software project that had fundamental design flaws that prevented it from ever functioning properly, yet all the managers want to do is get it fixed (and they’ll try just about anything short of a complete redesign).

Of course, fundamental design flaws in big software projects almost always end up leading to redesigning the thing from the ground up after everything else has failed, but, aside from a few Austrian economists who continue to preach to the choir, you never hear a peep about rethinking the overall design of the U.S. or global economy.

In another example of “real life meets Onion satire” to produce some terrifying implications (i.e., this 2008 classic Recession-Plagued Nation Demands New Bubble To Invest In), we read in this New York Times story that former Treasury Department Chief Larry Summers is still thinking about our “secular stagnation” predicament.

Want a thriving labor market? Blow a bubble.

That’s one implication of a theory about the contemporary American economy developed by Lawrence H. Summers, the former Treasury secretary and prominent public intellectual.

The theory is a frightening one, implying deep dysfunction in the way the American government treats the economy. It is a trendy one, all the talk among policy makers and those at think tanks. And Mr. Summers expanded on it at a forum on full employment hosted on Wednesday by the Center on Budget and Policy Priorities.

The big idea is that — absent extraordinary intervention in the economy through fiscal policy, monetary policy or both — growth and employment will prove lackluster.

What’s a government to do? Well, the Fed could keep its easy monetary policy indefinitely and watch the bubbles form, like the dot-com bubble of the late 1990s or the housing bubble of the mid-2000s. But, Mr. Summers pointed out, bubbles burst, with hugely destructive consequences.

“A strategy that relies on interest rates significantly below growth rates for long periods of time virtually guarantees the emergence of substantial bubbles and dangerous build-ups in leverage,” Mr. Summers wrote recently. “The idea that regulation can allow the growth benefits of easy credit to come without the costs is a chimera.”.

Despite Summers urging, that’s about all we’ve got – Fed sponsored bubbles – and that situation doesn’t look as though it will improve after this fall’s mid-term elections.

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