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

Tuesday, July 31, 2012

Transcript: A New Recession with Laksman Achutan

Now for today's audio, we have Laksman Achuthan of the Economic Cycle Research Institute.

We're on the road and we left our sound effects at home, so we'll let this go through without interruption. But be clear, we have our issue with Achuthan.

Listen to this episode

And just to set the scene, in the months after the 2007 recession began, ECRI and Achuthan insisted it had not begun and was not likely. We picked apart the analysis then to figure out why they were so divergent from our view. Turns out the elements of the leading indicators were heavy with financial markets and monetary indicators such as interest rates. These are exactly the targets of the Fed and Treasury. So these indicators were in the green zone. Turns out that manipulating the dial does not fix the engine. Fixing the engine will give you the readings on the dial you want, but jimmying the readings does nto fix the engine.

So the self-congratulation you may hear from Achutan for this call might have been qualified with a memory of 2008, but they were not.

Similarly, when we go over the indicators of employment, sales, output, and so on.  These are indicators of the business cycle. They are not the business cycle, which if it means anything must mean the cycle of business investment. When investment is moribund, as we've said, it's hard to see a business cycle. In fact, the business cycle is broken. All the effort to jinn up investment with cheap money and tax breaks has been more expensive than effective.

Consequently we have said that the last recession never ended.

As to the impossibility of predicting the onset of recession, Steve Keen did it, we did it, Nouriel Roubini did it. It's not a matter of shocks hitting you in the back of the head, it's a matter of demand being systematically undermined. We've done it twice, having predicted the downturn of 2000. What we haven't done, I guess, that excludes us from the ranks of legitimate forecasters, is predict recovery. Or in the current case, even accept a recovery.

After 2001, with the so-called jobless recovery, we called foul, saying a jobless recovery is not a recovery. Now, as we repeat, we say we are not in recovery, but bouncing along the bottom. Financial markets recovered, but what else? Corporate profits. Granted. Bank balance sheets. But wither investment.?  Okay, Okay. Here is Achuthan.

That was December. Achuthan is right. Economists DO focus on short-term data. You saw that again this month. Economists vied for decimal points in forecasting the second quarter. Second quarter. That is over. Forecasting the past. Important, it seems, for some purposes, but helpful ... not so much.

Let's stop and let the guy talk.


Laksman Achuthan courtesy of Bloomberg Surveillance.

But please. Yo-yo years?  This is stagnation. It's becoming a new normal, an accepted dissolution of a society. Lost jobs, low incomes. Yes it's globalized and abetted by trade imbalances, but it's not inevitable.

From Econ Intersect we excerpt these notes:

The advance estimate of first quarter 2012 Real Gross Domestic Product (GDP) is 1.5%
  • 3Q2011 GDP was revised down from 1.8% to 1.3%, 4Q2011 GDP was revised up from 3.0% to 4.1%, and 1Q2012 GDP was revised up from 1.9% to 2.0%
  • The market expected the advance estimate 2Q2012 GDP from 0.3% to 1.2%.
Even though the GDP came in better than expected – it should have been worse because 0.32% of GDP was attributed to inventory buildup (which usually is a sign of a slowing economy).


Real GDP is inflation adjusted and annualized – the economy only grew moderately per capita, and per capita GDP is roughly slightly more than half recovered from the trough of the great recession.

Real GDP per Capita

BEA says:
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a deceleration in PCE, an acceleration in imports, and decelerations in residential fixed investment and in nonresidential fixed investment that were partly offset by an upturn in private inventory investment, a smaller decrease in federal government spending, and an acceleration in exports.
Inflation continues to moderate as the “deflator” which adjusts the current value GDP to a “real” comparable value continues to moderate.  The following compares the GDP deflator to the Consumer Price Index:

This release included significant backward revision caused by the regular annual revision.
The estimates released today reflect the regular annual revision of the national income and product accounts (NIPAs), beginning with the estimates for the first quarter of 2009. Annual revisions, which are usually released in July, incorporate source data that are more complete, more detailed, and otherwise more reliable than those previously available. This release includes the revised quarterly estimates of GDP, corporate profits, and personal income and provides an overview of the effects of the revision.

The backward revision was so large, one wonders why we even react to GDP releases in real time.

The chart below is a way to visualize real GDP change since 2007. The chart uses a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. As the analysis clear shows, personal consumption is key factor in GDP mathematics.
Click to View

Caveats on the Use of Gross Domestic Product (GDP)

GDP is market value of all final goods and services produced within the USA where money is used in the transaction – and it is expressed as an annualized number. GDP = private consumption + gross investment + government spending + (exports − imports), or GDP = C + I + G + (X – M). GDP counts monetary expenditures. It is designed to count value added so that goods are not counted over and over as they move through the manufacture – wholesale – retail chain.
The vernacular relating to the different GDP releases:
“Advance” estimates, based on source data that are incomplete or subject to further revision by the source agency, are released near the end of the first month after the end of the quarter; as more detailed and more comprehensive data become available, “second” and “third” estimates are released near the end of the second and third months, respectively. The “latest” estimates reflect the results of both annual and comprehensive revisions.
Consider that GDP includes the costs of suing your neighbor or McDonald’s for hot coffee spilled in your crotch, plastic surgery or cancer treatment, buying a new aircraft carrier for the military, or even the replacement of your house if it burns down – yet little of these activities is real economic growth.

GDP does not include include home costs (other than the new home purchase price even though mortgaged up the kazoo), interest rates, bank charges, or the money spent buying anything used.

It does not measure wealth, disposable income, or employment.

In short, GDP does not measure the change of the economic environment for Joe Sixpack in 1970, and Joe Sixpack’s kid in 2011, yet pundits continuously compare GDP across time periods.

Although there always will be some correlation between all economic pulse points, GDP does not measure the economic elements that directly impact the quality of life of its citizens.

Saturday, July 28, 2012

Transcript: Forecast Redux

Today on the podcast, I told you so Part 6, bouncing along the bottom with downside risks.

About this time last year, or maybe slightly earlier, we raised Part 5 above the parapets, and had to duck down again as the recovery archers pelted our position.
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Over the past 18 to 24 months we have dropped one element from the forecast -- the potential for downside crisis stemming from commercial real estate, its similar securitization problems and the exposure of the smaller and regional banks.  The crisis was resolved by traditional banking methods, actual write-downs and reworking of terms, but also because financial insecurity drew foreign capital to dollar-deonominated real assets and because people fleeing homeownership kept multi-family rents from collapsing. There was no crash in commercial real estate. Well, there was a crash, but it didn't bring down the smaller banks. Well, a couple thousand failed and the FDIC is still going from town to town, but the system of smaller banks did not fail. That is, well, they are not making loans and producing credit, .... Let's just say it's not like the crisis we suggested might come. And it is certainly not the crisis of the Eurozone which we also pointed to early last year.

In the euro area a radioactive seventeen-atom molecule is reaching critical mass.

This situation has been engineered by policy makers insisting on austerity, public and private. Early on we heard the explicit promise by economists and others that cutting budgets, pensions, social safety nets and wages to free up funding for bond payments would lead to increased investor activity and lower interest rates. Now we don't hear that so much. And of course, the austerity measures were not explicitly contingent on this rosy scenario playing out on the ground. So what we got was recession, the inability to make good on the draconian structural adjustment measures, rising debt to GDP, rising and now lethal interest rates, and no return of capital. The confidence fairy was a no-show.

This all cycles through the fundamental imbalances in Europe, the export surpluses of Germany and Finland, and the mirror of debt in the southern so-called periperhy. The next step for some is a mutualization of debt to bring down the interest rates that were not supposed to go up because the confidence fairy would come through.

The success of the chosen solution that was insisted upon by the ECB depends on debts being repaid that cannot be repaid and on imbalances evaporating that are entrenched.

We are still far short of this realization.

A series of comments by Mario Draghi of the ECB sent stocks soaring. Draghi is the man who insisted on austerity in exchange for ECB aid.

Tim Duy has a mainline view. Quoting

Tim Duy


It looks like Draghi finally found that panic button. This is crucial, as the ECB is the only institution that can bring sufficient firepower to the table in a timely fashion. His specific reference to the disruption in policy transmission appears to be a clear signal that the ECB will resume purchases of periphery debt, presumably that of Spain and possibly Italy. The ECB will - rightly, in my opinion - justify the purchases as easing financial conditions not monetizing deficit spending.

So far, so good. But there is enough in these statements to leave me very unsettled. First, the claim that the Euro is "irreversible" should send a shiver down everyone's backs. Sounds just a little too much like "the crisis is contained to subprime" and "Spain will not need a bailout." Second, the bluster that "believe me, it will be enough" is suspect. The ECB always thinks they have done enough, but so far this has not been the case. Moreover, he is setting some pretty high expectations, and had better be prepared to meet them with something more than half-hearted bond purchases.

Also, note that despite Draghi's bluster, the rally in Spanish debt send yields just barely below the 7% mark.
More distressing to me was Draghi's clearly defiant tone, reminiscent of comments earlier this week from German Finance Minister Wolfgang Schäuble. The message is that Europe has done all the right things, it is financial market participants that are doing the wrong things."
 In the real world the correction of the underlying imbalances will never take place while the export nations are calling the shots, as now, and the debts that cannot be repaid will not be repaid. The chosen path ends either in break-up or in the current perhaps worse path of long-term stagnation as the core,  including the ECB bribes the periphery to accept permanent recession.

What does austerity look like in the US?

The fiscal cliff.

The U.S. is attracting capital because it is the cleanest dirty shirt, some have said.  Why is the shirt even partly clean? Because growth continues and the banking system, as weak as it is, is not as weak as in Europe. Why is the shirt dirty? Because the government deficit continues at plus one trillion dollars. This is the standard line. Not Demand Side's view.

A big government deficit according to the standard line, means the government is subtracting from economic vitality. the end of this government profligacy is the fiscal cliff. Economists of all stripes predict a huge subtraction when sequestration kicks in and various tax cuts expire. Austerity.

To Demand Side, the U.S. is the cleanest dirty shirt also. Clean becauseit has not instituted austerity. Dirty because it remains exposed to unresolved unaddressed financial sector decadance and corruption, because its deficits are simply supports to consumers and pass-throughs to  corporations, and because it has no plan to put people to work.

In the current political drama, the two sides have marshaled their forces on the battlefield over tax cuts for the rich. A side show. The reenactment of a tired conflict, chosen only because the story  is familiar to the  onlookers, the audience of fevered partisans. The battle lines can be clearly drawn. The heroes' faces can be clearly exposed to their fans. Unfortunately both armies will be wiped out by the same bombs, as well as the onlookers and the media vendors in their midst.

No matter the devastation, the story is likely to survive and be replayed.

Why not employ people doing things that need to be done?  Infrastructure needs to be built, people need to be educated, whole generations of transportation and energy systems need to be built. Most of this could be financed off budget, in infrastructure bonds guaranteed by the government with revenues tied to taxes connected to that infrastructure. Similar bonds could be issued for other tangible utilities. Short term  bank financing for energy efficiency and retrofitting should be easy. Other probably tax-based or deficit-financed schemes for education are well within reason. Savers tired of zero returns under current Fed strictures would flock to offers of very low rates.

Footnote: The student loan bubble cannot be ignored. Trillions in student loans that cannot be repaid,especially by people entering a stagnant job market, could be converted to a simple 5 percent of income and collected through the IRS. We cannot destroy completely the prospects and incomes of our young people. At a minimum they will rebel and take it out on us.

So.  Forecast remains, bouncing along the bottom with downside risks. Coming off the bottom not now in prospect.

Check out the whole supporting material with Demand Side the Book at Demand Side Books dot com. Out at Amazon. Buy as many as you want at $8.95. Going up September 1 to $12.95. Kindle is operational, we were quite happy with the response to the review and comment edition. This is improved.

Friday, July 20, 2012

Transcript: 510 Impeach Jamie Dimon

The Final First Edition of Demand Side the Book is now out and ready. Improved but not new from the Review and Comment Edition. Demand Side Economics (subtitle) Demand Side Minds can now be got via the Demand Side Books dot com website.

The book will list at $12.95, but in appreciation primarily for podcast listeners, you can get it for the next month and a half -- until August 31, at $8.95, The Kindle version is much better than the last, and if they do what we ask will be -- until August 31 -- only $2.99. Buy as many as you want, no limit.
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We do appreciate the feedback and support from the faithful 39 at Demand Side Economics the podcast. The eagerness of reception and range of response has been, as they say, truly gratifying. Thank you.

Here is the link to the Creat Space Store, the only outlet now available. Amazon up soon. Kindle very soon. Other e-book outlets, we hope, soon. Enjoy.

Today on the podcast Impeach Jamie Dimon. No, not remove him from his post as chairman and CEO of JP Morgan Chase. He is doing quite well for his company, ah, as in himself and his fellow executives. Impeach Jamie Dimon from his post as, if you can believe it, vice chair of the New York Federal Reserve.

There were calls from the usual suspects in May:

Simon Johnson, former IMF chief economist
Elizabeth Warren, Senate candidate and person with integrity
Elliot Spitzer
Peter Goodman
and in kind of a very backhand way, actually Tim Geithner, former head of the NY Fed and now Treasury Secretary, and person with ... ah, a job in the Obama administration.

Warren said, for example,

"We need to stop the cycle of bankers taking on risky activities, getting bailed out by the taxpayers, then using their army of lobbyists to water down regulations," Warren said in a statement following the disclosure. "We need a tough cop on the beat so that no one steals your purse on Main Street or your pension on Wall Street."

She added that Dimon's resignation will "send a signal to the American people that Wall Street bankers get it and to show that they understand the need for responsibility and accountability.",

While Dimon has defended his position, arguing that he serves primarily in an advisory capacity, critics argue that there is an obvious conflict of interest in his continuing to be on the board, even as his bank is under investigation for the losses.

Yes, the so-called hedge that turned out to be a speculative bet, which morphed from a tempest in a teapot to $2 billion when Dimon first addressed analysts on the subject, then four or seven billion in the face-to-face last week.

But first let's listen to Professor Anat Admati of Stanford University excerpted, edited, but never distorted, from Bloomberg on the economy, talking about Fortress Dimon and the risks to banking.


Of course, Prof. Admati underappreciates the whiz-kiddedness of Jamie Dimon, his fiduciary integrity, and the risk management superstar that by all accounts he is.

Mr. Dimon can ask for and be granted a waiver of the swearing in at a Congressional hearing before his testimony because, of course, he would never lie, and besides he saw what kind of trouble Lloyd Blankfein of Goldman Sachs got into after he testified under oath. Congressman Spencer Bachus of Alabama's 6th District, a Republican , was only too happy to grant the waiver, as a courtesy between gentlemen. Never mind that Congressman’s Bachus' district has suffered mightily from the financial engineering of JP Morgan. But you must understand, Jamie Dimon is the guy who writes the checks.

Now you might think we have a captured regulator problem in banking. After all, the regulators under former Chairman Alan Greenspan actively deregulated. Greenspan was the deregulator in chief, being fully qualified as an Ayn Rand Libertarian. He was appointed by “government is the problem” president Ronald Reagan. Then came the bankers' best friend, neo-Monetarist Ben Bernanke. But if you think we have a captured regulator at the Fed, you would be wrong.

Because Mr. Dimon is the regulator. Vice chair of the New York Fed, Yes, that would be the facility that financed Dimon's acquisition of Bear Stearns to the tune of $29 billion and which funneled billions to Dimon's bank and others in 17 different programs. And this is not an advisory board, this is the board of directors.

A couple of months ago, when JP Morgan came under investigation for the trading activity of the whale in London, as we said, Tim Geithner NY Fed President during much of the bank bailout, actually suggested in a roundabout decoratively mild way that Mr. Dimon might want to step down, under investigation and all.

Nope. Not happening. Such suggestions have retreated into the … well at least away from the campaign coffers.

A GAO, Government Accountability Office report last year identified problems.

The affiliations of the Federal Reserve's board of directors with financial firms continue to pose reputational risks to the Fed.
The policy of the Fed to give members of the banking industry the power to both elect and serve on the Fed's boards creates “an appearance of conflict of interest.”
The GAO identified 18 former and current members of the Fed's board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis, including General Electric, JP Morgan Chase, and Lehman Brothers.
There are no restrictions on directors of the Fed from communicating concerns about their respective banks to the staff of the Federal Reserve..

In particular, as Bernie Sanders pointed out in his introduction of the GAO report


Jamie Dimon, the CEO of JP Morgan Chase served on the board of the Federal Reeves Bank of New York at the same time that his bank received emergency loans from the Fed and while his bank was used by the Fed as a clearinghouse for the Fed's emergency lending programs.

And if you get into the weeds, there are some pretty odd transactions, including the famous bridge loans that were routed through JP Morgan because of some legalities that were found out to be non-issues, but which went ahead anyway for convenience sake and netted JP Morgan millions in interest for a weekend's activity.

Fed directors should be prohibited from working for or having a material financial interest in private financial companies located in the country. Conflicts of interest ought to be taken seriously. Now there is not even a public acknowledgment of a problem, in fact, when conflict waivers are granted, there is no public disclosure. Not only does Dimon have a perceived conflict of interest, he has a real conflict of interest. He holds a position on the NY Fed's board of directors not for any advisory reason, but so he can be in the middle of the action.

He needs to go before the next scandal.

Impeach Jamie Dimon

Moody's downgraded the big banks last month, primarily those with investment banking operations. On one hand, these are the high margin activities that are making them profitable. On the other, they are the route to destruction if some of the derivatives they write go south.

We saw, amid rumors that Jamie Dimon himself liked the LTROS of last year, predicting it would float the banks and the sovereigns in Europe off the reefs.

Didn't happen. The hedge that went sour on the London office was apparently in one of these credit derivatives, maybe, rumor has it.

Whatever that case, Moody's is patently averse to the trading and derivative operations. Maybe we should have them tell those who are confused what speculation is, since that seems to be a sticking point.

Hit the headlines

We're getting tired of the bond vigilantes and their apologists piling on the politicians.

When they say, the politicians have a problem and we ought to …. fill in the blank.

The problem they have is that austerity has not worked. They followed the bankers' advice, and it is still the bankers' advice, and the sovereigns have worse debt woes now than before they began. Which means the banks are still in trouble.

So you do have a problem. You have those still willing to carry water for the corporations and big banks and bond vigilantes, demanding countries live up to their austerity commitments, and even add austerity in the form of so-called labor market reforms. And you have the evidence that austerity is not going to work, no matter what agreements are made, in the real economy.

Big problem.

Angela Merkel of Germany has a problem because the debt is going bad. Germany built an export machine selling to the Southern periphery. Based on debt. Not incomes. Had Germany bought the same or a similar amount of goods from the South, there would obviously be the incomes to pay back that debt.

So is the answer a fiscal union? Unless there are going to be huge transfers from the Germanies to the Spains, further unification is not an answer, it is just a change of venue for the problem.

More about that another time.

At the peak of financial booms there is corruption, as the means for profit are extended through chicanery. It is part of the reaching for risk. It always happens. But that does not mean it is something different than fraud and corruption and ought not to be prosecuted.

Impeach Jamie Dimon.

Sunday, July 8, 2012

Transcript: 509 Monetary Policy Hits the Wrong Target - WSJ

Today on the podcast, the ill-conceived monetary policy of the Fed is doing no good for a great deal of bad.

A couple of notes before we begin.

First, to be clear on the clearinghouse concept we introduced last time on the podcast. This is from long-time Post-Keynesian thinker Paul Davidson, of the University of Tennessee. What it does is set up a clearing mechanism for international capital flows.
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Capital flows are the problem. We think of Germany and China as great virtuous nations, with their export surpluses and healthy economies. But it is because they are importing the jobs and exporting the goods. As Keynes said at Bretton Woods, it is the strength of these export nations and the weakness of the importers that is the root of the dysfunction of global trade. Capital has to flow to the deficit country. The capital is rarely a good thing. Witness the Asian currency debacle, or the troubles of the southern periphery of Europe today. The U.S., of course, sees the capital flows as huge debt owed to China and others.

If trade were balanced (what a concept), jobs in both nations would be stimulated. Borrowing to consume from another country does not stimulate your domestic economy, either now or later. One way to balance trade is to have flexible exchange rates that adjust the prices of goods. That method is frustrated by the Chinese pegging of rates and the single currency euro, within the Eurozone.

Another way to balance trade is to monitor capital flows and require the surplus nation to purchase goods, directly invest, or just donate to the deficit nation. Since nations would likely not choose option three – donate – there would be direct foreign investment spurring jobs and development in the deficit nation or there would be simple purchases of goods, spurring job growth. Of course, they could donate. That would likely create a few jobs, too.

This is done not in the hurly-burly of exchange of individual commodities, but after the fact, when the balances are toted up. It is do-able. If the Europeans were serious about stability, it is what they would do rather than require a super-national authority to dominate the domestic policy of its 17 nations. AKA a fiscal union.

Plus the clearing union has its ancillary benefits of facilitating control of drug money, terrorist finance and simple tax evasion. AND, my favorite, it is the perfect facility to collect the Tobin Tax, the financial transactions tax, on the trillions of hot money rushing around the globe looking for microscopic arbitrage opportunities.

So, a clearing union. Put it in the category of something that would work, that is easy to understand, and that will not happen until and unless the current corporate controllers of finance and public policy wake up or lose control.

A second note. We just sent out to the printer the final first edition of Demand Side the Book. Much better. Thanks to those who commented. We will be sending an e-mail with the appropriate code for you to get your free copy of the final. We look forward to offering some sort of discount to the rest of the patient podcast listeners, and we should mention our gratitude for the kind comments and postings greeting the Review and Comment Edition. We really do appreciate that stuff. It is useful just to know we're speaking the same language.

We look forward to that being available by sometime mid-month. E-books about the same time. Probably an enhanced Kindle. And we have the audio book in the can in raw form.

Now, on to the Fed.

Unlocking the dysfunctional policy via an article in the Wall Street Journal.

Tuesday, June 19
Jon Hilsenrath

Fed Wrestles with How Best to Bridge U.S. Credit Divide

We had to come back with a look at Jon Hilsenrath's piece last month in the WSJ.

Quoted near the end is Paul Willen, a Boston Fed Researcher,  
“You want money to go to people for whom credit is an issue. Monetary policy is having no effect on the vast majority of people.”


And we're going to give away the punch line right now. You want money to go in the form of income, not additional debt.

But let's start from where the Fed starts, and I don't mean with a misunderstanding of money and credit or an ineptness of policy. Though that is where they do start.

If those who are in the credit squeeze could refinance their mortgages at the low Fed-sponsored rates, the extra two or three hundred dollars per month (or more) would make a difference in their lives. Those who can refinance, as displayed by a wonderful visual on page A-10, are those who don't need the money.

“If you don't need the money, you can get it all day long. Thank you Ben Bernanke, said human interest element Chris Hordan, who also provided the clues to what IS happening with the Fed's easy money. Hordan took his savings from refinancing and put it in gold, European bank bonds, and U.S. stocks.

And clearly, from the charts in Hilsenrath's piece, it is this group who is being benefited, the group who doesn't use the money for real economy stuff. The plus 760 FICO folks have greeted each new multi-hundred billion dollar Fed scheme with a wave of refis. The rich get richer, as have the corporations, by trading high cost debt for low cost debt. Thank you, Ben Bernanke.

So this is the Fed's effort to address unemployment? How does it work? Well, it doesn't work. Gold stocks or ETFs don't stimulate demand. Even if the middle class could get the new mortgages, they likely wouldn't go on a spending spree. Even if they went on a spending spree, there would likely be more cheer in China than in Chicago.

It's the same reason tax cuts haven't worked. First, those which go to corporations or the wealthy don't affect hiring because spending and demand is not affected. Second, those which DO go to the middle class or lower go to pay down debt, mitigate straitened times, or buy the occasional Chinese import.

At the end of the day, the question is one of incomes, and the Fed is making it a question of debt. The Fed has actually gouged interest incomes with its low rates, squeezing pensioners and their prospects, causing them to rein in spending. And it has put – the Fed has put – their money – OUR money – behind payoffs to the banks and the top end.

“Even though we have the greatest monetary policy stimulus in the history of the Fed, we really have not managed to lower the funding costs for a large swath of people, said David Zervos, a bond strategist with Jefferies Inc., a Wall Street investment bank. He called the Fed efforts “monetary policy for rich people.”

Fed officials said they have a long-standing congressional mandate to minimize unemployment and inflation, not to micro-manage the distribution of wealth, income or credit. “That is expecting the Fed to do way more than it can possibly do,” said Ms. Duke.

The Fed's interest rate lever, Mr. Evans said, "Is a blunt instrument.”

Phooey, says Demand Side, the micro-management is proceeding apace, targeted directly at the big banks and the wealth effect, which is the wealthy effect. The problem is that this doesn't do anything for unemployment or growth.

So when Hilsenrath correctly says,
The U.S. recovery is hobbled by an economic divide that separates Americans not by income or wealth but by their access to credit.
The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom.
Millions with good credit, meanwhile, are taking advantage of the easy money, a windfall in many cases for people who don't especially need it.

he is right.

This is Fed theory. They just haven't noticed that there's a limit to debt. It's absurd to think that loading up on more debt is a way to long-term steady growth. Households don't want it. Banks don't see the profit in it. It only burdens future incomes with more dead weight.

But it is the single-minded purpose of monetary policy. Pushing lenders and investors into more risk by cutting off the returns to low risk. It's not happening, or when it is, that risk is financial bets like the $2, $4, or $10 billion “hedges” that go bad.

What would happen if the government loaded up on debt to finance infrastructure, education, climate mitigation? That would be incomes to people who worked in those areas, and spending that would go down through the economy. It would be sturdy, higher-interest bonds for the pension funds and other investors. And it would create the value that is needed to pay back the debt.

Hire people to do things that need to be done? The Fed could guarantee infrastructure bonds as easily as it does mortgage bonds. In fact, why mortgage securities are favored to the tune of $1.25 trillion and counting is a question to me. I suspect it is because MBS holders sat on the Fed's board.

Impeach Jamie Dimon.

Oh, that's later.

The $600 billion of QE II would have paid 5 million people $30,000 for four years, eliminating the unemployment problem overnight, with the multiplier. This would take the strain off unemployment payouts and the social safety net on one end and return a little positive flow to the revenue side, particularly important for states and localities.

Monetary policy as now practiced does not work, will not work, cannot work. More risk does not mean more productive uses of capital.

We have the impression that although this might not be a surprise to you, it is a surprise to the monetary authorities. Their massive – and it can only be termed "massive" – support to banks was supposed to prevent the breakdown of banking, and as Hilsenrath says here, "by reducing interest rates – the cost of credit – the Fed encourages household spending, business investment and hiring, in addition to reducing the burden of past debts."

"The central bank has said it planned to keep short-term interest rates near zero through 2014. It also has purchased more than $2.7 trillion worth of government and mortgage bonds to reduce long-term interest rates in less conventional fashion..."

and still later.
"Some officials worry about the effect of the credit divide. 'I've taken a position of some skepticism, at least under the current conditions, that more policy would make that much of a difference," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a May interview."

So hiring comes in here at the end, household spending, business investment and hiring. Only it never comes in, because businesses are rational, too, and faced with uncertainty will not and are not investing or hiring. They are instead cutting costs, by refinancing or cutting workforces.

The Fed's policy is basically to make it cheaper to be irrational, or alternatively, expensive to be rational. Instead the government should become rational, increase incomes, reduce uncertainty, sponsor organized writedowns of debt, make profit in real economic activity possible, invest in high return public goods, be ruthless with those who themselves are ruthless and who demanded ruthlessness in the name of market discipline until it came to their turn.


On our way by, we should note another casualty of the current historical experiment, RIP Anna Schwartz. That is the idea that investment is facilitated or even driven by savings. If people saved more, there would be more for investment. Not the case. Is it? Savings rate goes up. Investment stagnates.

Investment is – as John Maynard Keynes said so long ago (see even his Treatise on Money Volume II) "It is not thrift that occasions investment, but the prospect of profit." We can subsidize investment through the nose, or through the tax code, but we only end up bringing forward in time investment that would already have been made or getting too much of the wrong kind. See excess capacity.

We could invest in ... What's that? ... Yes, High return public goods ... rail, renewables, conservation, education, climate change mitigation, an enormous need ... There is your return on investments, your profit, your investment validating thrift.

And as long as we're in digression mode, the inflation Chicken Littles, er, hawks, should review Keynes Treatise and its survey of the depression and price deflation of the 1890s, when they had real money – gold – increasing in quantity in the UK at the same time prices were going down. Keynes calls it the "old fashioned quantity theory of money" RIP.

One more element of Hilsenrath's piece deserves attention. This is a second chart, separated from the medley of those displaying how credit is easy if you don't need it and the trend for that being in a direction the Fed apparently did not anticipate. This second chart is a display of the Federal Reserve's interest rate target from 1980 to present. Let's call it the OOOOPs chart. Maybe four or five O's in that OOOOPs.

the rate in 1980 to '85 was high. Target Rate. Above 8%.

Well, let's set the context. From the beginning of the postwar period to the end of the 1970s, the interest rate was relatively low, particularly in real terms, and relatively stable, becoming less so over time as the Fed became increasingly captured and decreasingly responsive. In the late 1970s, under the influence of Milton Friedman's Monetarism (RIP Anna Schwartz) and faced with oil price inflation, Paul Volcker started playing around with the money supply. The high rates from that period, the early Volcker period – 20% in 1981 – are really reflecting this money supply target, not an interest rate target. Prior to Volcker, not on the chart, relatively tame interest rates. So now Volcker, inflation, 20% rates, presto, the 80-81 recession. Ooops. Killed the economy. Forget this money supply stuff. Cut them all the way down to 8%.

1985. High deficits. 1986, Tax reform – Reagan raises taxes. Fed cuts rates all the way down to, whoa – 6%. Think of the prime rate as three percent higher. Only briefly, though. Enter Greenspan in 1987. Begin the Mayan pyramid steps. Here comes inflation from oil prices. Hike interest rates, but a step at a time. Back to near 10% in 1989. OOOOPs, recession. Down, down, down, down, down. Now below 6% in '91, below 4% in '92, not hurt by the Clinton Budget Act, and boom goes the economy. The first re-fi boom. All those lucky folks paying through the nose for 12% mortgages refinance and see cash flow positive results, lower unemployment, low oil prices, and well – rising interest rates. Not quite 6%, but near in '94-2000. EXCEPT, as inflation is coming down in this high growth period and real rates are going up, oil prices begin to rise. Inflation fears follow. Greenspan walks up the steps to the sacrificial altar, setting rates to what are now historically high real levels, rivaling those of even the Volcker Period, yes the 18% nominal rates were about the same level as the rates at the start of the 2000s. OOOOPs. Recession. Greenspan scuttles down some very steep steps, over 6% at the start of 2001, below 2% by the end. Not a symmetric pyramid.

Flattening out to 1% even long after the jobless recovery begins and ending only with Ben Bernanke and a Greenspanian trek back up. Yes, oil prices alongside. Only this is a climb Alan Greenspan can only envy. Even, sequential steps. 2% at the start of 2005, 4% at the end, up to 5-1/2 or so by mid 2006. Flatten out at this level. BIG OOOOPs. Big recession. Jump off the side of the pyramid. This one has a side. Just before the start of 2008 we're at the 5-1/2% highs. By the end of 2008, we're at zero to .25. That's zero point two five. Now flat for three years. These are the subterranean vaults of the pyramids. Plus the QE's. Buying up bad mortgage-backed securities, loading up on mortgages and bonds to try to drive down long rates and elicit some private investment.

Please. Leave the rates alone. Let them be low and stable, say two or three percent. Give people some certainty. Give pension plans some return. If you want to limit credit, do it by limiting credit, not by fooling around with the price of credit – the interest rate. If you want to stimulate credit. Don't. Let the fiscal side expand credit opportunities in public goods or increase credit-bearing ability by hiring directly. What you've done is load the world up on debt that seems cheap at the time, but cannot now be rolled over or serviced.

So there you have it, the Demand Side podcast brought to you by the Demand Side Forecast, bouncing along the bottom with downside risks of crises. Particularly now in Europe. Hopefully we've gotten the book out before the banks bring down the monetary union. Look for the full extended forecast there.