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

Sunday, September 9, 2012

Transcript: 517 Stagnant economy, ineffective monetary policy, "stay the course"

Today on the podcast, a data point, or disappoint with August employment numbers, some thoughts on the insight of central bankers, and James K. Galbraith with some direct, emphatic historical context for the banking crisis.
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Friday's employment report did little to support recovery bulls. The employment recession continues. Private sector job gains were 103,000 minus government sector job losses, at 9,000, leaving a total gain of 96,000. July's robust 163,000 was revised down to 141,000. June was revised down from 64,000 to 45,000.

The unemployment rate decreased to 8.1% because the participation rate declined to 63.5%. The U-6 measure was down to 14.7%.

Average hourly earnings actually declined. One cent.

On the blog we reproduce Calculated Risk's famous percent of job loss during recovery. Look at it closely and you will remember our suggestion that the current Great Recession will see more months of job loss than all other post-war recessions combined.

Long-term 26 weeks or more is dancing around at Depression levels

The political business cycle is no doubt in action. This is the phenomenon where the president in power jinns up as much spending in election year as possible. It has been done by every president since Richard Nixon, except Jimmy Carter. Which means the weak numbers are weaker than they look.

2012 is looking weaker than 2011 in terms of jobs.

The first eight months have added 800,000 and change in terms of jobs. Roughly the same number was lost in the single month of November 2008, and January 2009, and March 2009, and April 2009. So we're not getting back anywhere close to full employment

The level of doofus-ness in monetary policy is remarkable. They may have three piece suits and speak in fervent voices or measured tones, with brows knitted in thought, but they might as well be wearing overalls. Here in the U.S. we have Ben Bernanke throwing trillions of dollars into financial assets and being sugar daddy to the banking system. When it doesn't work, saying, as we heard last week, "Well, it kinda worked."

His competition among the monetary policy muck-a-mucks are hysterical about inflation. Never mind we haven't had any significant inflation in twenty years, they have their degrees and they learned what they learned, and damned the evidence. Not unlike somebody who thinks it might get cold, so we better light a fire. Never mind it's eighty degrees out, the window is open, and we learned what happens when the window is open. So a fire it is. Sure, it's on the living room floor, but at least there are sticks of furniture around to stoke it with.

Higher interest rates work on inflation because they slow down the economy. The success of the Volcker experiment was the massive unemployment of the early part of the Reagan years. There is no real example of lower interest rates leading to a self-sustaining recovery, but there are plenty of examples of higher interest rates leading to a slowdown.

Now the economy is already slow, so the interest rate fire may burn the house down, but its hard to see how it could have a negative effect on inflation.

And in Europe, monetary policy is led by Mario Draghi, Super Mario, head of the ECB. Draghi promised to do whatever it takes to save the euro experiment. His idea of what it takes is to extend more credit, buy more sovereign bonds, in exchange for more promises of austerity, to lure the confidence fairy out of hiding.

How much more evidence do we need that neither more debt nor more austerity is what those countries need?

They need less debt and more employment. That means a write-down of current debt now owed plus a reorganization of economies that looks either like a euro break-up with exchange rates that allow full employment in the deficit countries, or it looks like a transfer of capital to the debtor countries, either by a transfer of capital and investment in those countries, or a stimulation of consumption in the surplus countries like Germany.

This slavish devotion to a euro that is the servant of the surplus countries is a one-way journey to perpetual recession and inevitable failure

The ECB spent most of the first decade of the euro's existence telling banks to load up on sovereign debt. It was counted as tier one capital, I believe, basically without risk. Now they're stuck.

And who is stuck? It is these banks. And the ECB is stuck with the legacy of bad advice and the implicit responsibility to the banks.

The doofus-ness is not any less because these guys wear nice suits. But it changes the conversation. If they were in overalls and straw hats, people would understand. As it is, after years of pronouncements and predictions and policies and only deterioration of economies to show for it, they still get respect.

Here in our local paper, actually from the AP and an article by Bernard Condon and Paul Wiseman: Under the headline "ECB boss outweighs Bernanke right now"
"Move over, Ben Bernanke. this is Mario Draghi's moment.

"The European Central Bank president is overtaking the Federal Reserve chairman – at least for now – as the central banker with the most influence on the global economy and markets. Faced with a growing recession and a possible breakup of the 17-country euro alliance, Draghi has bigger problems than Bernanke, who's overseeing an economy in recovery.

"As head of the ECB .. Draghi also has more ammunition left than Bernanke does."

Thus, after engineering a collapse of the European economy and a crisis of the member states with its austerity demands, Draghi's and the ECB's power is not diminished, but expanded, according to at least this account.

And it is repeated in truly disheartening terms by the Peterson Institute's Jacob Kirkegaard, who greeted Draghi's announcement of unlimited (subject to limitations) purchases of bonds.


The IMF, you will remember, has engineered the collapse of many economies with it's structural adjustment policies. The prospect of its being in charge of Europe is terrifying to some of us.

Turning quickly to a more coherent voice, here is James K. Galbraith, putting the current banking mess in the U.S. in historical context.


James K. Galbraith. One of those who was right. Now marginalized. Only those who were wrong, such as Ben Bernanke and Mario Draghi, seem to have influence these days.


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