Economy | - Part 30

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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The “Nice Phase of Minsky’s Cycle”

It’s kind of ironic to think of all the time and money that went into all those high frequency trading computers (i.e., the hardware design and the software development that must have both been cutting edge) that have been the subject of much debate at 60 Minutes and CNBC over the last few days, that is, when you think of them in relation to the U.S. economy.

Yes, that computer hardware and software added to the nation’s economic output as did all the talk on TV, but it’s all part of the recent epidemic of unhealthy growth that constitutes the current “recovery” as NYSE margin debt seems to make new all-time highs with every passing week and analysts hail the return of higher levels of borrowing by consumers.

In this Business Spectator report, Steve Keen reminds us why we “can’t escape Minsky” and why reality is different than perception.

It might be felt that Minsky is irrelevant, now that the economy has begun its recovery from this crisis. But in fact this period — in the immediate aftermath to a crisis, when the economy is growing once more, and debt levels are only just starting to rise — is precisely the point from which Minsky developed his explanation of economic cycles.

Minsky’s message is for the whole financial cycle, not just the moment when it turns nasty. At the moment, we’re in the nice phase of Minsky’s cycle, when it pays to lever. Leverage is clearly on the rise, as Figure 1 indicates.

The acronym “DCED” stands for debt contribution to effective demand and measures the annual change in private debt divided by GDP.

There are a couple more charts that are both pretty interesting and some commentary about why the last “Minsky cycle” started in the early 1990s rather than a decade ago.

You can see this in the chart above where overall debt-to-GDP really didn’t dip much in the early-2000s because the American consumer quickly picked up where corporate American left off reckless-borrowing-and-spending-wise.

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