July 2018

If Milton Friedman looked down at his country today on his birthday, what would he see?

Mostly, that since he died on November 16, 2006, the American economy has become a very “dry dessert”. And why´s that? Most likely because Ben Bernanke broke the promise he made to Friedman in 2002: Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again. PS. The oil shocks in 2004-08 were significant, so there were some “spillovers” to the core measure.

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The International Monetary Fund just issued a tome written in the indecipherable international-ese favored by global economic organizations, but warning darkly about “imbalances.” Here is the latest view from the IMF: “Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.” Over the medium term, sustained [current account trade] deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.” In English, for American readers, this translates as: “Dudes, the US is running huge and… Read More

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The GDP report misleads

The latest GDP estimates included a sharp rise in previous numbers that seemed to have made the economy richer. The “shape” of the economy and so its growth rate, however, provide the same economic picture as before. As most people expected, quarterly growth in Q2 was boosted by a single item (the so called ‘soybean effect’). Coming in at 4.1%, this was the best number since Q3 2014 (4.9%). Being boosted by an uncharacteristic contribution from the export sector. After hearing about trade wars and restrictions for most of the year, exporters “jumped the gun” to get ahead. There is… Read More

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The unending search for what´s behind the paltry, but long, expansion.

At this time, we are plodding along what has become the second longest expansion in available history. By this time next year, the length of this expansion will beat the record held by the 120-month expansion of 1991-01. Several attempts at an explanation have been made. Two years ago, for example, Greg Mankiw wrote “One Economic Sickness, Five Diagnoses” that have been further elaborated since: It may be tempting to blame the Great Recession of 2008-9 for the paltry 10- year growth rate. Indeed, this recession was a deep one. Yet the explanation for the poor long-run performance is not… Read More

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When President Reagan Trumped Trump

Long forgotten, and un-remembered especially by hagiographers, are the proposals of the Reagan Administration, advanced by President Ronald Reagan himself, that the Federal Reserve be placed into the Treasury Department. When the central bank was established, Reagan told reporters in 1982, the Secretary of Treasury was its head, and he asked whether we should reconsider whether such a system might work better than the current one. Nor was Reagan’s covetous eyeballing of the Fed a one-off musing. Rather it was a constant refrain. In 1984 Reagan’s Treasury Secretary Don Regan reiterated the Reagan proposal, as reports circulated there was a… Read More

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When the mind plays tricks!

Edward Leamer, famous for his 1983 article in the American Economic Review, “Let´s take the con out of econometrics”, in January 2007, published an essay “Is a Recession Ahead? The Models Say Yes, but the Mind Says No”.  To him, “Housing is the business cycle”, so he syas: Any model built on housing starts is sure to say a recession is coming soon. But, the curmudgeon jokes: “Economists are like artists. They tend to fall in love with their models.” With considerably less pleasure, I would add. Further on, he writes: Thus, when your mind tells you that your model… Read More

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The Incredible Falling Copper Price         

Copper futures have been tanking of late, sinking from of $3.32 per pound on June 8th, to $2.7 per pound on July 19th, a 19% drop. This drop has largely undone the prices gains the commodity had accrued following the general rise in asset prices in November 2016. Predictably, the financial press have raised the alarm about “Dr.Copper” foretelling a slowing US economy. Unlike, say, oil, where new capacity is readily pulled online, copper supply is largely fixed, with mines slow to open or even change production volume, which helps narrow down the range of causes in price changes. In… Read More

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What´s up with industrial production?

Is this a good description? “Industrial production jumped 0.6 percent in June, rebounding from a 0.5 percent drop in May. Over the past year, industrial production is up 3.8 percent, continuing a modest upward trend in growth.” That appears to be just a rebound from a significant previous drop. We´ll have to wait for more prints to see if an upward trend takes hold (unlikely). In “olden times”, a slightly smaller drop in industrial production was associated with a recession (2001). Why not recently?

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The US Federal Reserve this week released its latest Beige Book, a series of increasingly repetitious and unintentionally lugubrious reviews of the national economy. If you read the Fed’s Beige Book from January 2016, about two-and-half-years ago, then don’t read the July 2018 version.  Nothing has changed. The economy was and is and perchance always will be defined by “labor shortages.” A sampler from earlier Fed Beige Books: From the Fed’s Oct. 18 2017 rendition: “Labor markets were widely described as tight. These shortages were also restraining business growth.” January 2017: “District reports cited widespread difficulties in finding workers for… Read More

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In his intro to the Congressional Hearing today, Powell said: “Monetary policy affects everyone and should be a mystery to no one.” Which brought to my mind Greenspan´s tirade shortly after taking the Fed´s helm: “Since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” -Alan Greenspan, 1987 The undeniable fact is that to the great majority of people, monetary policy will always be a mystery. It´s therefore an impossible dream to think it “should be a mystery to no one”. Greenspan recognized… Read More

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