Economy | timiacono.com - Part 5

Can You Spot the Trend?

From The Increasingly Unequal States of America(.pdf) at the Economic Policy Institute (via this item at The Nation) comes the graphic below that helps explain why so many Americans feel so strongly that the economic recovery hasn’t yet reached them, despite news that U.S. job creation in 2014 reached a 15-year high and that the unemployment rate has tumbled.

The report notes this is “not just a story of those in the financial sector in the greater New York City metropolitan area reaping outsized rewards from speculation in financial markets”. These are broad-based trends that have occurred nationwide since the 1970s following many decades when, for example, there “was a cultural and political environment in which it was unthinkable for executives to receive outsized bonuses while laying off workers”.

That’s progress, I suppose.

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Amid all the hubbub about the implications of the Greek election and snowpmageddon on the East Coast we are reminded that there is a Federal Reserve meeting this week, during which central bank policy makers are sure to talk about the location of the dots and the shape of the curves in the graphic below from this story at the Financial Times.

Notwithstanding the fact that Fed funds futures are notoriously unreliable for saying much of anything relevant about the future of the Fed funds rate (though they’re  not nearly as bad as the Fed’s own projections in recent years), the point of this story is a good one, namely, that the brain trust at the central bank will be giving due consideration to a major re-think of the whole idea of a June “lift off” for short-term interest rates, though they’re not likely to share much about that discussion with the rest of us.

Given the global economic headwinds (everywhere but in the U.S., or so it seems), the bond market certainly isn’t expecting a rate hike anytime soon as yields have plunged anew and the Fed is surely not anxious for a repeat of Greenspan’s mid-2000’s “conundrum” that led to the events of 2008-2009. Things are getting interesting for Ms. Yellen.

In Davos, former Treasury Secretary and would-be Federal Reserve Chairman Larry Summers warns the U.S. central bank to put off any increases to short term interest rates, citing deflation and secular stagnation as the two major threats of the current era of central bank omnipotence (that, lately, is evolving into something of a currency war).

Summers also doesn’t think the European Central Bank’s money printing extravaganza, announced to much fanfare yesterday (and sharply higher stock prices around the world) is going to do the eurozone much good, that is, save for another round of asset inflation.

The IMF’s latest report on slowing growth in the global economy makes it easy for a skeptical reader to connect a few dots regarding the latest round of central bank sponsored malinvestment in general (a word that clearly doesn’t exist in the modern economists’ lexicon) and the shale oil boom/bust cycle in particular.

From this Reuters story we get the following summary about what’s ailing the world::

“New factors supporting growth, lower oil prices, but also depreciation of euro and yen, are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries,” Olivier Blanchard, the IMF’s chief economist, said in a statement.

The IMF advised advanced economies to maintain accommodative monetary policies to avoid increasing real interest rates as cheaper oil heightens the risk of deflation.

If policy rates could not be reduced further, the IMF recommended pursuing an accommodative policy “through other means”.

Left unsaid was that cheap money gushing from the Federal Reserve in Washington and big banks on Wall Street was a major factor driving the shale oil boom that played a key role in recently plunging energy prices that, now, are raising the specter of world wide deflation that – you guessed it – should be countered by even more cheap money.

Vicious cycle anyone?

It seems former Bank of England governor Mervyn King is on to something in this report at the Telegraph when he notes the following:

We have had the biggest monetary stimulus that the world has ever seen … The idea that monetary stimulus after six years is the answer doesn’t seem (right) to me.

Why is it that central bankers suddenly seem to make much more sense when they are no longer central bankers? King joins suddenly lucid former Fed Chief Alan Greenspan who has recently been famously fond of a barbarous relic and makes you wonder where the heck central bankers still employed by central banks are steering the ship.

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