2018

The myth of “synchronized global growth”

For some months now, that has been the narrative. The Fed has embraced the idea, with new chair Powell introducing “avoidance of overheating” in his first speech (testimony), while resident dove Brainard, as her “wind analogies”, which swirled from “head” to “tail”, has changed from dove to hawk. As this parsing of Brainard´s speech put it: Brainard: Cutting to the chase, I am now a hawk At the very start of her speech, Brainard says: Many of the forces that acted as headwinds to U.S. growth and weighed on policy in previous years are generating tailwinds currently. Today many economies… Read More

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The Week Ending Friday March 9th 2018 A lot of noise was generated about Trump’s steel tariffs and a potential meeting with the North Korean dictator but moved markets very little. The big event turned out to be the February payrolls data. Supposedly weaker than expected wage growth was accompanied by strong job creation than expected. A goldilocks scenario of higher real growth with little inflation risk. Equities surged yet the USD and bonds remained steady. Neel Kashkari’s simple, common sense, viewpoint seemed to be the one the markets followed despite some foolishly hawkish rhetoric from Powell and Brainard: “We… Read More

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In February, more Americans entered the US labor than gained employment—and by a wide margin. The good news is that a net 313,000 people found jobs in February, becoming productive, earning money and adding to GDP. There are 115.2 million employed in the US. That was the headline news. The largely unreported news is that a net 806,000 people entered the U.S. labor force in February, causing a rise in the labor force participation rate. This is also good news—the more people who want to work the better. Thus, the also largely unreported news is that in February labor markets… Read More

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What a difference 0.1% makes

Five weeks ago, when the January employment report was released, the stock market took a dive, supposedly triggered by a wage increase 50% above expectations (0.3% versus 0.2% expected). Today´s release, which showed a robust employment gain of 313 thousand, more than 50% above the 200 thousand expected, but with wage growth coming in 50% below expectations (0.1% versus 0.2% expected) was accompanied by a strong rise in the stock market. Meanwhile Fed BoG members Powell and Brainard mouthed strong words for more than three rate hikes this year. Powell mentioned, “avoid overheating” while Brainard said “winds” had changed from “Head” to… Read More

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Milton Friedman remains a touchstone in macroeconomics, even for those who disagree with his policy prescriptions. So it is unfortunate that one of Friedman’s serious stimulus proposals, that of money-financed fiscal programs, is generally recalled in connection with his bantering about “helicopter drops.” But let’s go back, way back, to the Friedman’s 1948 paper “A Monetary and Fiscal Framework for Economic Stability,” published in the American Economic Review. In his article Friedman argued for a balanced national budget at full employment, but for deficits during recessions, and perhaps surpluses in boom times.  Friedman contended issuing debt to finance government outlays,… Read More

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The Fed makes-up reasons to justify their preferred actions

In her recent speech, Lael Brainard ends with the punchline: In many respects, the macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true. The charts indicate that there have been several instances of “mirror images” over the last 8 years. The latest  “cycle” is characterized by the strongest headwind and the weakest tailwind. That becomes more evident when you see that real… Read More

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Shifting winds

Lael Brainard gave a speech, Navigating Monetary Policy as Headwinds Shift to Tailwinds Since the speech is mostly boilerplate with a catchy title, I´ll jump straight to the conclusion, In many respects, the macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true. She doesn´t mention that the “winds have shifted” several times in the past eight years. In fact, the latest shift… Read More

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The “impossibility” of inflation

For the past 25 years, inflation (PCE-Core) has remained low and stable. Nevertheless, many are worried that inflation is about to “take-off”. In a recent piece, Greg Ip writes, “Why an unpleasant inflation surprise could be coming”: Inflation is going to head up this year — on that there isn’t much debate. … If inflation turns up, economists have long assumed it would do so slowly, giving the Fed plenty of time to respond. But Michael Feroli of J.P. Morgan notes this assumption is built on models in which the world behaves in a predictable, linear way. In fact, he… Read More

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Week Ending Friday March 2 This was a relatively rough week for markets. The S&P 500 fell 1.8%, Friday-to-Friday, most of this seemingly linked to statements by new Fed Chairman Jerome Powell, as well as a tariff announced by the Trump administration on steel and aluminum. Powell’s statements were less polished than Bernanke´s or Yellen’s, though equally platitude-laden and low-information. Powell says inflation will return to 2% in some unspecified but near timeframe, with no indication that a period of offsetting 2%+ inflation would be allowed for symmetry. In other words, the 2% PCE inflation ceiling remains in place. Powell… Read More

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Is the Truism, “Money Is Neutral in the Long Run,” Really True?

Surely, merely running a printing press disgorging fiat money cannot truly increase economic output.  It is a truism. But what about historic examples of central banks policies and real economic output? Milton Friedman blamed the Great Depression on tight money. More recently, the 2008 Great Recession, which by some measures still results in crimped output, was caused by tight money.  Japan’s 20-year deflationary slog has been caused by tight money. So, by historical example, many macroeconomists seem to agree bad monetary policy can crimp real output for decades at a time and can persist indefinitely, unless corrected, as may be… Read More

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