A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Wednesday, April 6, 2011

Transcript: 433 The Census Forecast is fading

Listen to this episode

The best lagging indicator of the economy is the consensus forecast of professional economists. Whatever the previous quarter or two, it is amplified into the indefinite future by professional forecasters. This gives contrarians like Demand Side private satisfaction, but public problems.

As you know, according to Demand Side, we are bouncing along the bottom in a weak economy with downside risks from commercial real estate slash regional banks and from sovereign debt mismanagement. We have called for negative growth by the end of the year, a new downturn triggered by oil and commodity bubbles and by tight credit to the real economy

According to the current consensus view, we have had a consensus substantial recovery that is in danger for now from the consensus black swan even of the week. We can look into a recent piece by David Leonhardt of the New York times and get some clarity on the confusion, if that is not too mixed a notion. After we do that, we’ll go over some of the data on this first full week of Q2 2011.

But here in the March 29 NYT Economic Scene, David Leonhardt begins

Actually, before he begins we have the header “As Economy Sputters, a Timid Fed.”


Timid? We don’t think so. Wrong? Well, You may have heard us say that once or twice.
But continuing, Leonhardt writes:

Whenever officials at the Federal Reserve confront a big decision, they have to weigh two competing risks. Are they doing too much to speed up economic growth and touching off inflation? Or are they doing too little and allowing unemployment to stay high?
It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year.

Given this recent history, you might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little.


Is the Fed doing too much to speed up economic growth and touching off inflation, or are they doing too little and allowing employment to stay high?

We would say they’re doing too much of the wrong thing and they don’t really have the capacity in a liquidity trap to do anything anyway. What they ARE doing is dangerous and destabilizing.

If low long-term rates are the target, target achieved. If actual investment and growth in the real economy is the target, it is missed completely. Low rates make financial markets happy. It used to be the story that happy financial markets led directly to happy real economy markets. Now, it’s just happy financial markets are good for our confidence. In point of fact, the connection exists between a healthy real economy and a sturdy financial sector, but in the reverse direction. A happy real economy leads to happy financial markets, as productive, stable investments are widely available.

The Fed has noticed that the cart and the horse are in similar positions, and is trying ever more inventive mechanisms of steerage and control to get that cart going with the horse in the rear.

As to inflation. There is no inflation. Hysteria over “setting off inflation,” as if it were a dry forest and the Fed were playing with matches is just wrong. Not as wrong as, say, allowing our economy and political apparatus to be run by Big Oil even as climate change looms over the survival of the civilization. But wrong. The wild runaway economy overheated spiraling desperate inflation that the hysterics fear is not even on the horizon in a society with a decaying labor market and outlandishly low capacity utilization.

Inflation is occuring, of course, in the prices of financial instruments. Stocks, bonds, exchange rates, commodity futures and so on, not from any demand pressure, but from the leveraging of financial players. This money is sure to be destroyed in the bust, just as money was destroyed in the Great Financial Crisis. There will be losers, but it won’t be because inflation ate their lunch. The kind of cost-push price rises, which Leonhardt and others identify as inflation, is not demand pull, it is cost push, even though it is generated by the Fed’s easy money.

Why we should be so intolerant, I’m not sure. After all, as we said, Demand Side would not mind seeing interest rates rise, even though it would shake the unstable pyramids of the financial casino. If it rises because Chicken Little is putting up a roof, Why should we care?

Our primary issue is, I guess, that we should welcome inflation. Inflation is how in previous such debt situations, the real value of that debt was reduced. Inflation is a tax on the holders of wealth. What a good idea. But mostly, with any kind of real investment activity, there will be inflation. We’ve gone over Minsky’s algebra, or Kalecki and Minsky’s algebra, before. Prices rising is a way of embedding the profits that private actors want if they are going to invest.

But what about the public side? Prices could rise from taxation. Again, we like the idea of taxes on carbon, financial transactions and rich people. But public spending on things that need to be done would be inflationary from the right end of the cart and horse. Thirty billion dollars, no more, buys you a million jobs. They come with healthy multipliers and feature new taxpayers.

But we were supposed to be letting David Leonhardt talk. He was laying out the consensus of the week. Here, quote
Higher oil prices, government layoffs, Japan’s devastation and Europe’s debt woes are all working against the recovery. Already, a prominent research firm founded by a former Fed governor, Macroeconomic Advisers, has downgraded its estimate of economic growth in the current quarter to a paltry 2.3 percent, from 4 percent. The Fed’s own forecasts, notes that former governor, Laurence Meyer, “have been incredibly optimistic.”


As much as we agree with that last point, we need to mention that Laurence Meyer’s own forecasts have been incredibly optimistic. Coming down from 4 to 2.3 in the space of three months, the three months of the actual quarter, indicates to us that Macroeconomic Advisers is busy forecasting the past. As little as we like GDP, and wish people would concentrate on employment, we don’t see first quarter GDP coming in above 2.0. I think I saw, yes, here, Econ Intersect points out that GDP in the first two months of the quarter was 1.38 percent.

Parenthesis, Econ Intersect also points out that were the GDP deflator used by the BEA to estimate real growth swapped out for an annualized CPI-U, the entirety of the Q4 2010 3.1 percent growth would disappear. They say that 0.4 percent as a deflator is suspect. Exclamation point.

Sorry, David, you were saying, [quoting Leonhardt]

Why is this happening? Above all, blame our unbalanced approach to monetary policy.
One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group — at least not one as influential — that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment. “
Demand Side’s question is How long will zero be an acceptable result? How firmly embedded in the policy-maker’s psyche is the notion that monetary policy is useful? When will accountability return to the debate? Can the financial sector really run the economy for its own account without constraint?

And there’s more from Leonhardt, link online.


So, let’s give the data some different spin than you get elsewhere
  • March ISM manufacturing. Same old, same old.
  • February Construction spending. Continues in depression.
  • March employment. Tepid growth is better than we’re used to. But it is not very good.
  • March home prices, up seasonally, but January Case-Shiller is still declining, call it down and stagnant.
  • March Conferece Board Consumer Sentiment, big drop.
  • Feburary Personal Income, not good.
  • February Personal consumption expenditures, improving slightly, maybe, maybe not. PCE grew at 1.38 percent, after a January of 1.38 percent growth, annualized. Q4 2010 was 4.0. GDP for Q4 2010 has settled in at around 3.1. Weak PCE is a foreboding sign.

GDP is composed of PCE, investment, net exports, government spending and inventory changes. Unless we expect strength in any of those other components, GDP is going to be lower than expected.

Econ Intersect offered the following look forward:
 The real economy is not presented in the world of Gross Domestic Product (GDP) which is a dinosaur left over from the days of the gold standard and the industrial revolution. Economic forecasting requires a broad brush integration of many economic related elements.

Regardless, GDP is a rear view mirror of economic activity. Knowing that GDP was 3.1% in 4Q2011 tells you little about where the economy is headed.

The economy will continue to expand in April 2011, but there is every indication that the rate of growth will be nearly flat. We are living in a tortoise economy where the rate of growth has seldom been been strong since the 2001 recession.

The price indexes used for this revision were only modestly changed from the previous report. Again the overall price “deflater” reflected an annualized 0.4% inflation rate. The importance of this low deflater cannot be over emphasized: if the average monthly CPI-U for the fourth quarter is annualized and used as an alternate deflater, the growth reported for the fourth quarter simply vanishes. Could real GDP growth simply be an accounting artifact?
The world’s best bear David Rosenberg has taken his daily reports behind the paywall, including all those old reports we didn’t read, but saved the e-mail connection for. We appreciate David’s generousity to this point. We read him less often than we would have if our notions had not been so similar. We think, however, David exists in the financial market space, and peers out at the real economy. Demand Side’s perspective is firmly in the real economy, peering back at the financial sector. That may be where the money is being made, but ultimately everyone – including investors – depends on the health of the real economy. And ultimately that health depends on the demand side.

There is no stability inherent in capitalism. There is no return to equilibrium, return to normal, as a natural phenomenon. There is not even a jump-start to normal, putting things back on track with a few years of stimulus.

Capitalism has to be managed.

It doesn’t produce the public goods on which in depends, the education, infrastructure, institutional framework.

It tends to maximize externalities for private gain. Externalities are damage to the commons which are external only to the moment of purchase and sale, not to any prior or subsequent use of the product of service. Consequently, the entire human experiment is sacrificed for the short-term profit of the capitalists. Think Big Oil.

Capitalism does not even manage markets efficiently. The big players tend to set the rules. The products are as opaque as is allowed. Activities flow to the parts of the world where they are least regulated. The fact that one person’s cost is another person’s income is completely ignored in favor of cutting costs at every point and ultimately incomes.

So the sturdy revenue sources, simple and transparent rules, strong institutions, substantial infrastructure, forward-looking planning for environment and social welfare are absent in a capitalist-dominated economy, which is the corporate republic in which we live. Unfortunately for the capitalists, they live in the same world as the rest of us. Investments are as dependent as anything else on the health of our economy.

The great weakness of the orthodox Neoliberalism that sits in the center of this mess is that it is intellectual junk that is consistently contradicted by events, the people who defend it don’t really believe it themselves, and the corporate oligopoly for whom it is the official religeon completely ignore it their daily operations. It will collapse by its own hand, eventually. The question is whether it will collapse in a chaotic mess, or will it be defeated in a way that demostrates the necessary orgnization and priorities for the future.

1 comment:

  1. I suspect that Neolibralism will go on for longer than we expect much like Keynes said bubbles can last longer than anyone expect. When it does collapse and it will be chaotic, expect serious social unrest. I wonder what the U6 will be? Unemployment will be much lower but no one will beleive it. People will simply have given up looking. The real issue will be how far up the income scale it will affect people.