Opining gravely, medieval theologian Thomas Aquinas asked, “Can several angels be in the same place?”
In only
slightly modified terms, the Fed is now pre-occupied with a similarly
unanswerable and fanciful question, according to Jon Hilsenrath’s
pre-meeting missive on the Fed’s current monetary policy
“debate”. Figuratively estimating the number of angels which can dance
on the head of a pin, Fed officials and economists suppose they can
specify the the appropriate money market rate down to the decimal
place for virtually all time to come:
When Federal Reserve
officials gather for their policy meeting Tuesday and Wednesday, the
most challenging question won’t be where to push interest rates in the
next few days, weeks or even months. It will be where rates belong years into the future.
So if
you want to know why there are exceedingly dark clouds gathering on the
economic horizon just consider some of their answers and the reasoning
behind them. Until recently, a majority of our monetary plumbers in the
Eccles Building believed that the ideal long-term Federal funds rate was
around 4% in a “well balanced” macro economy where inflation is
about 2% and unemployment is about “low” around 5.5%.
Of course, every one of these three magic numbers are perfectly arbitrary, academic and silly.
Due to the structural failures of the US economy owing to decades
of destructive Washington policies, the “unemployment rate” today is not
remotely comparable to what was being measured in the 1950s and 1960s
when today’s Keynesian theology with respect to the Phillips Curve,
Okun’s Law and full-employment policy was being formulated.
Today
there are 102 million adults not holding jobs, for example, but only 43
million of these are retired on OASI (social security) and just 11
million are counted as officially unemployed. At the same time, there
are upwards of 40 million part-time job holders, which self-evidently
represent additional unutilized potential labor hours. So there are
upwards of 100 million adults in America who represent a massive but
latent labor supply that makes a mockery of the silly “U-3? unemployment
ratio that the Eccles Building theologians insist on counting down to
the decimal points.
Stated
differently, the BLS recently revealed that the private business sector
of the US economy generated 194 billion labor hours in 2013—the exact
same number as way back in 1998 and notwithstanding the massive growth
of the adult population in the interim. Indeed, as recently as 2000,
there were only 75 million adults (16-years and over) not holding jobs.
Yet of the 27 million gain since then, only 7 million entered the OASI
rolls. This means that during a 14 years period in which there was no
growth of aggregate labor hours in the business economy, 20 million more
adults ended up in the safety net, in mom and dad’s basement or on the
streets.
These
realities are not a mystery, and they do reflect a dangerous fiscal and
social policy breakdown. But they are also thumbing proof that monetary
policy has exactly nothing to do with employment conditions and job
creation. During the last 15 years, the Fed engaged in massive and
nearly continuous Keynesian stimulus maneuvers, expanding it balance
sheet 8X from $500 billion to $4.3 trillion. Yet million of employable
adults and billions of available labor hours have been flushed out of
the private economy, while measured hours worked have been absolutely
frozen.
The
excuse that counting decimal points on the head of the U-3 unemployment
rate may sound medieval but that Humphrey-Hawkins makes them do it is
just palaver. The so-called dual mandate and minimum unemployment
target is just a vague statutory aspiration; there is no quantitative
target in the law and the current U-3 version of the endless
alternative ways to measure the “unemployment rate” did not even exist
when the statute was passed in the late 1970s.
Accordingly,
when Bernanke previously, and Yellen now, appear before the Congress or
press and piously intone about their full employment “mandate” being a
license for perpetual money printing they are simply indulging in a
self-serving lie.
The
same foibles pertain to the 2% inflation target. Its not in the law; and
until the last two decades, price stability was thought to mean an
average of zero inflation over time. Certainly William McChesney Martin
and most of the first generation of modern Fed policy-makers believed
that. Even today, Paul Volcker properly asks why is 2% inflation forever
so virtuous when it means that the purchasing power of the dollar will
be cut in half every 30 years.
And
that doesn’t even consider the total manipulation of the BLS inflation
measures that happened beginning a decade after Humphrey-Hawkins was
enacted. These manipulations include arbitrary hedonic adjustments for
“quality”; continuous reweighting of the price basket based on
substituting cheaper chicken for more expensive beef; the use of
geometric means to eliminate items with extreme increases; and of
course, the foolishness of excluding food and energy from the price
index used to make Fed policy—-the so-called PCE deflator. Rational
policy in a $17 trillion economy caught in vast global
cross-currents cannot be made based on trends shorter than one year. So
on a running one-year basis there is no distortion due to food and
energy price spasm, and these items are the foundation of every
household budget.
Thus, the
2% inflation target is just more monetary Thomas Aquinas. And this
is especially the case with respect to the lame proposition that the
inflation target is being missed from below. As shown in the graph,
there has never been a sustained period since the 1990s in which there
was a shortfall of inflation from below. The entire notion of inflation
targeting, in fact, is just self-serving Keynesian nonsense that
provides yet another excuse to keep the printing presses going at full
tilt.
But the
most egregious of the three magic numbers is the target for Federal
funds. The entire discussion as reflected in the Hilsenrath notes is
that it is the “control variable” which has no other purpose than to be
manipulated by the twelve allegedly wise men and women who comprise the
FOMC. Yet that is the heart of the anti-capitalist folly that
constitutes current monetary policy.
In
fact, the money market rate is the most important single price that
exists—its the price of leveraged financial speculation and the carry
trades. It needs to be set by honest price discovery in independent
markets for genuine private savings and business driven short-term
borrowings. Rather than being a pure creature of Fed manipulation—–its
determination should never happen within a country mile of the Eccles
Building.
Once
upon a time the founders of the Fed understood this, and provided that
the nation’s new central bank would operate as a “bankers bank”,
passively providing liquidity against real bank loans and discounts at a
penalty rate above a floating or mobile discount rate set by the
market. The virtue of that pre-Keynesian model is that is guaranteed
honest two way markets and thereby built-in checks and balances on
speculators on Wall Street. And it did not pretend that this mobilized
discount rate was a tool to manipulate the entire GDP, the unemployment
rate, the CPI, housing starts or consumer spending. Instead, these were
to be outcomes on the free market, not orchestrations from Washington.
In
short, the pre-Keynesian Fed would not be counting decimal places on the
head of the Federal funds rate, nor would it be listening to the likes
of William Dudley gumming about immeasurable things like “headwinds” or
Larry Summers arriving at a 3% Federal funds target on the preposterous
grounds that the world is suffering from a flood of excess “savings”!
This
simply illustrative the massive intellectual confusion of the Keynesian
model. The world’s central banks have created a tsunami of credit, but
there is no balance sheet in the Keynesian model, only
quarter-by-quarter flows. So Professor Summers makes the lunatic
argument that since the Federal deficits has declined for several
quarters, that means there is too much savings.
Thomas Aquinas would be proud.
Mr. Summers, in an email
exchange, said a broader set of factors will hold down rates in the
years ahead. Around the world, households (especially wealthy ones and
older ones), businesses and governments are saving more, piling
resources into bonds and driving down interest rates in the process.
“I suspect unless
circumstances change fed funds rates may well average less than 3[%]
over the next decade,” Mr. Summers said…..
They suggested that once
these headwinds recede, rates can go back toward their long-run
averages. But more recently, some Fed officials have acknowledged the
possibility of a lingering weight on rates.
A 4% fed funds rate would
be “much too high in the current economic environment in which headwinds
persist, and somewhat too high even when these headwinds fully
dissipate,” New York Fed President William Dudley said in a speech last month.
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