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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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Euro Area Woes

David Beckworth wrote an enlightening essay on the Eurozone in the National Review “The Euro Zone Should Integrate or Separate”. According to Beckworth: The Proximate Cause of Economic Pain As the above figures show, some euro-zone economies have fared much worse than others since the crisis. A major reason for that divergent performance is that one monetary policy cannot work equally well for very different economies. This challenge can be illustrated using Taylor Rules, which seek to establish what interest-rate targets the European Central Bank (ECB) should set based on changes in inflation and slack in the economy. Studies that estimate Taylor Rules… Read More

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The Federal Reserve’s preferred metric of inflation, the PCE-core, hit 2.0% year-over-year in May, reports the Bureau of Economic Analysis. Fed Chair Jerome Powell has stated the Fed’s 2% target is symmetric, which may be code words for “inflation a little above 2% is tolerable.” One might become cynical at the ease at which the pundits and analysts who before thundered about the threats of hyperinflation so suddenly going mute.  And, no less, with yawning federal budget deficits forecast into perpetuity. But with the GOP-Trump in precarious control of Washington, perhaps discretion is the better part of valor.  This may… Read More

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We delude ourselves

From the WSJ: A U.S. economic expansion that just became the second longest in the nation’s history seems to be accelerating, rather than slowing down. Atlanta Fed Bostic: Let’s begin with how the U.S. economy is performing at midyear. It appears to be in a pretty good place. Unemployment is at its lowest rate since the early 2000s, and inflation is running close to 2 percent. As I’ve said recently, the economy is about as close to target as we’ve seen over this expansion. That does not mean that the FOMC can go on recess until conditions change. I think… Read More

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The Negative Yield Curve Haunts Global Economies

Market Monetarist and Mercatus Center scholar David Beckworth recently blogged that the “negative yield curve”—when short-term rates rise above long-term—is here already in some economies, and heading to the US. For the uninitiated, a negative yield curve has been a reliable precursor to recessions. Beckworth charts 2-year Treasuries vs.10-year: Ouch. David Glasner, proprietor of the always-thoughtful Easy Money blog, also treated the inverted yield curve, and his concluding money quote is this: Nominal GDP has been increasing at a very lackluster annual rate of about 4-4.5% for the past two years. Certainly, further increases in the Fed Funds target would… Read More

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The viewpoints of the world’s macroeconomists are becoming anachronisms, not updated for a global economy and housing costs. For starters, there are some storm signals out there in monetary-land; notably Far East investors are fearful of capital flight. “U.S. rate hikes have sorted emerging markets into winners and losers as investors pull capital from particularly unstable countries, though steep dollar debts may soon drag even Southeast Asia—fairly healthy so far—into the losers’ circle,” reported the Nikkei Asian Review. “The gap between key South Korean and US interest rates will widen further if the US Federal Reserve raises its key rate… Read More

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The Fed´s ‘model’ is screwed up

In Powell’s Fed Could Clear Up a Few Mysteries Puzzling Investors, we read: The Fed says unemployment is already running below the level that can be sustained in the longer run, but wages are crawling higher rather than taking off. What’s more, job growth hasn’t slowed down as much as you might expect in an economy with a big worker shortage. Fortunately, inflation is not a wage phenomenon. On the contrary, it is inflation that drives up wages. The late 1960s makes that clear. Note that wage growth only picks up after inflation has almost tripled! Comparing the late 1990s… Read More

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When ‘good’ is ‘terrible’

The headline: The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem? Snipets: No question looms larger for Federal Reserve Chairman Jerome Powell than this: How low can the U.S. unemployment rate safely go? Only twice in the past half-century has unemployment fallen to its current rate of 3.8%—for a few years in the late 1960s and for one month in 2000. The ’60s episode spurred years of soaring inflation that would take a decade for policy makers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. It seems low unemployment… Read More

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“Construction in the residential market remained solid, though the shortage of labor and intense price pressures for building materials continued to act as headwinds.” The above paragraph is from the May 30 Beige Book, the Fed’s periodic wrap up of economic conditions in its 12 districts. Can you guess which of the 12 districts the Fed is describing?  Dallas, perhaps? No, the above is the Fed’s most-recent synopsis of housing markets in the Fed’s San Francisco 12th District, which is the West Coast. What is odd about the Fed’s resolute myopia is that there is a broad, bright-red common thread… Read More

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Keynes; “The difficulty lies, not in the new ideas, but in escaping from the old ones”

An old idea never relinquished is the one that sees inflation as a cost phenomenon, or the result of “cost-push.” A recent op-ed by Peter Hooper, managing director and chief-economist of Deutsche Bank Securities, and more significantly a 26-year veteran of the Federal Reserve Board in Washington, DC, provides a good illustration. According to him, “the Trump administration doesn’t seem concerned about this. It has taken at least six actions that have either actually or potentially boosted inflationary pressures. As a result, it has risked making our next economic downturn more severe.” The first is the “classic” Phillips-Curve reasoning: Historical… Read More

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