Simple Janet Is Lost in the Keynesian Puzzle Palace By David Stockman
Why do our central bankers think negative interest rates (NIRP) can possibly stimulate credit growth and old-fashioned Keynesian GDP expansion in a world of Peak Debt?
Well, the truth is, they don’t think it. They assume it. Since they erroneously believe that capitalist main street is utterly dependent upon their constant assistance, virtually any short-run development—adverse or otherwise—is taken as evidence that more monetary policy intrusion is needed.
Indeed, this faulty frame of mind has gone so far that they now interpret the negative feedback loop from their own bubble inflation as evidence that monetary conditions are too “tight.” So more policy stimulus—such as NIRP—is warranted in order to offset headwinds to growth.
Here is a doozy from Janet’s written testimony.
“Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity…..”
It does not take much expertise to read the code. Simple Janet is saying that it doesn’t matter that the Fed has spent years falsely inflating equity markets via massive liquidity injections and props and puts under risk assets. Any correction in stock prices and any regression of ultra-tight credit spreads to normality which could cause economic and job growth to slow must be countered at all hazards.
In short, the only thing they plan to do about a bursting bubble is to reflate it. It puts you in mind of the boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan!
In fact, the absurdity of Simple Janet’s circular reasoning was on display today in real time during her Senate testimony. Even the Fed’s official court jester, Jon Hilsenrath, couldn’t help from reporting the irony:
“We are… looking very carefully at global financial market and economic developments that create risk to the economy,” she said. “We are evaluating them, recognizing that these factors may well influence the balance of risks or the trajectory of the economy, and thereby might affect the appropriate stance of monetary policy.”
Stock prices sank as Ms. Yellen spoke. In what looks like a perverse feedback loop, she worries that market conditions could pinch the economy, and her lack of confidence sends markets lower still.
All she does is talk about incoming trivia that have been repeated month after month to absolutely no avail. Or she references a simple-minded bathtub model of a closed U.S. economy—one later contradicted by extended jawing about headwinds from China, global oil and commodity prices and shrinking U.S. exports.
Obviously, you can’t have it both ways. Either the Fed has total control of “aggregate demand” and can dial-up its monetary management controls until the U.S. economy is full to the brim and all the “slack” is drained out of the labor market. Or there is massive leakage and interaction with the rest of the world.
If it is the later—and of course it is—then Simple Janet is truly lost in the Keynesian Puzzle Palace.
After all, why does she spend several paragraphs boasting about the Fed’s success in stimulating 13 million jobs and getting the official unemployment rate down to 4.9% when by her own observation the U.S. economy is being bludgeoned by forces originating outside the bathtub of domestic GDP?
Why do these labor market metrics even matter when they are subject to being trumped by forces far outside the Fed’s control? Or has the Eccles Building now appointed itself central banker of the world?
Although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange-rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth.
These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging-market economies, and for commodity-producing firms in many countries.
Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.
The point is, Simple Janet is just emitting jabberwocky. The global date negates the notion that there is a purely domestic business cycle that the Fed can manage and manipulate to the perfection of full employment.
In fact, today’s $80 trillion global economy is endowed with a plethora of stormy seas by Simple Janet’s own account. So why would you measure jobs growth from the very bottom month of the recession or even bother to reference the totally flawed official unemployment rate in a world of gigs, temps and hours, not 40 hour work weeks at the Ford factory?
The fact is, 62% of the job gains cited by Yellen are “born again” jobs; only 5 million net jobs have been created since the pre-crisis peak, representing the weakest growth rate in modern history. Likewise, the employment to population ratio is still at modern lows and has recovered only a small fraction of its post-crisis loss. It renders the official rate essentially meaningless.
So here’s the thing. Simple Janet and her posse are completely lost. And now they are thrashing about randomly pretending to be managing the monetary dials in the Eccles Building based on the incoming data.
No they are not. They are sliding by the seat of their pants. They have declared war on savers and are fixing to make their assault even more vicious. And their phony wealth effects doctrine is blowing-up in their face, reducing the financial markets to the status of a theme park roller coaster ride.
If Simple Janet occupied any office in the elective branches of government she would have been in the impeachment docket long ago.
Maybe The Donald will take notice of her assault on tens of millions of retirees, savers, main street business people and just plain folks. They are all being sacrificed to Simple Janet’s Keynesian lunacy and the last grasp of the Wall Street gamblers.
So after all that has gone before, it will only take one loud voice to trigger an uprising against the crime of NIRP—and then the casino will discovery what real price discovery is all about.
Regards,
David Stockman
for The Daily Reckoning
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