En (La)Garde Against Deflation

Said Lagarde, of a threat that dismayed 'er:
"There's a danger that prices may crater. 
We're conditioned to fear
That things become dear
But deflation's the risk that is greater."

"With deflation, the instinct is human
To save and cut back on consumin',
But though disciplined ways
Are worthy of praise,
They prevent the economy's boomin'."

"To all of those countries who plan
To avoid the malaise of Japan:
Forget all the rules
Of conventional tools,
And stimulate now, while you can!"

Advance Draft of Next FOMC Statement

"If employment & prices are strong,

We can give up QE before long,

So we're tapering it,

But just by a bit,
In case we turn out to be wrong."

The drumbeat of tapering talk continues, with various members of the Fed Open Market Committee making public comments that suggest the question isn't "if", or even "when", but "how".  Expectations have begun to coalesce around the next FOMC meeting on September 17-18, in part because it is seen as advisable to remove the uncertainty surrounding the unwinding of QE before the White House announces the President's nominee to succeed Chairman Ben Bernanke. The current Chairman's term ends on January 31. 

Comments yesterday by James Bullard, president of the Federal Reserve Bank of St. Louis, put the spotlight on the tactics the Fed might employ when starting down the long, unwinding road: "A larger move would be interpreted as a faster pace of reduction," he said, while "a smaller move would be considered a more hedged bet, a slower rate of reduction in purchases." In other words, the FOMC could test the waters before making a big commitment to unwinding its extraordinary monetary stimulus. 

Please, Sir: Ease, Sir!

The market's resounding with pleas
From New York to the Brits and Chinese
For a positive trend,

By which they depend

On the Fed to continue to ease. 

For the Index to keep hitting highs,

It's important to all of those guys

In the trading salons,

As they're dealing in bonds, 

That the Fed Open Market Desk buys. 

Investors have reason to sob less

And fear for their balance at Schwab less

If the Fed will agree

To stick with QE

'Til there's 6 1/2% jobless. 

Around the world, stocks have surged to new highs following Federal Reserve Chairman Ben Bernanke's assurances of further monetary stimulus. On Wednesday, speaking at a conference organized by the National Bureau of Economic Research, Bernanke observed that "you can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the US economy." These words gave a shot of comfort to global markets that, for the last two months, had been obsessed with the timing of eventual "tapering". 

The resulting Wednesday afternoon rally in US equities carried through to Thursday morning in Frankfurt, Paris and London, before caroming back to New York for a second day. The S&P 500 has now reached a new record, and the Dow Jones Industrial Average may soon follow suit. 

* * *

On a side note, I am happy to resume this little hobby of economic verses, following a two-month hiatus in which I found and adjusted to a demanding new job. Thanks to all those who enquired after my welfare during that time, and who expressed their desire for the return of Limericks Économiques. I hope they don't disappoint. 

A Misbegotten View

Some conservatives want to find meaning

In professed homosexual leaning,

Which some think explains

The penchant of Keynes
For cyclical, state intervening.

We know the economist said

In the long run, that we are all dead, 

But the meaning was not

That he hadn't begot,

Or who he preferred in his bed. 

Help the Long-Term Unemployed

The news has been better concerning
A rise in the ranks of the earning,
But many confirm
They've been out longer-term
Without showing signs of returning.

In order to bring employees in,
We need programs to put more trainees in,
To conquer more ills
By developing skills
Than the Fed's quantitatively easin'.

Economics and Ideology

As opposed to the world's great religions,
Economics is free from divisions
(Except for the few
Applicable to
The really important decisions).

Economists from around the country and the world converged on San Diego this past weekend for the American Economics Association annual meeting.  Among them was Paul Krugman, who would take part in a panel discussion of "What Do Economists Think About Major Public Policy Issues?"  The discussion centered on a paper by UC San Diego economists Roger Gordon and Gordon Dahl, which subjected the question of "Professional Consensus or Point-Counterpoint" among their peers to statistical analysis.  Gordon and Dahl concluded that professional consensus does indeed exist, and that much of the disagreement is not ideologically driven. As preparation for his part in the discussion, Prof. Krugman published a New York Times blog post in which he concluded that, while consensus may generally reign in the Dismal Science, a statistical approach may overlook the at-times virulently ideological disputes that arise in the biggest and most consequential matters.  These include questions such as whether "the benefits of the American Recovery & Reinvestment Act exceeded its costs."  (I.e., was the stimulus worth it?)

The panel also included the University of Michigan's Justin Wolfers, who offered a milder interpretation.  Although Prof. Wolfers' analysis also showed an ideological basis for economists' opinions on the stimulus bill, he nevertheless could not conclude that, on the whole, responses to a broad range of policy questions are statistically correlated to ideology.  May there yet be hope for rationally based policy?

The Bonds That Divide Us

At the Fed, there are three schools of thought
On the bonds that Bernanke has bought:
A) keep on going,
B) begin slowing,
Or C) we would rather have not.

Minutes of the Federal Open Market Committee's December meeting were released on Thursday, and they reveal the divisions among the members on the Fed's policy of buying mortgage and Treasury bonds to stimulate the economy. Following that meeting, on December 12, the Fed announced that it would continue with the bond purchases until the pace of job creation improved. Yet, the minutes show that the "hawks" on the committee fundamentally disagreed with the entire program and, even among those who supported it, there was disagreement over its timeline. Those who wanted an open-ended monthly commitment to add $85 billion to the Fed's balance sheet were most concerned with allowing the stimulus to have its intended effect, while those who worried about the risk of adding so much to the Fed's own investment portfolio wanted to bring the program to a mid-2013 close.

However, Diane Swonk of Mesirow Financial tells the New York Times that "there’s still a huge bias toward buying." Any appearance of dissension, according to Ms. Swonk, reflects merely "modest misgivings in the middle of the most aggressive effort the Fed has ever undertaken to stimulate the economy."

The Futility of Liquidity

Though the Fed may be funding us cheaply,
Recovery's not rising steeply,
Until and unless
We consumers express
More demand again, broadly and deeply.

This was the message conveyed by Federal Reserve Bank of Dallas President Richard Fisher in a speech in Gainsville, Texas on Tuesday. While "quantitative easing is a necessary but insufficient tool to spark job creation," said Mr. Fisher, "employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell." This is actually a mild statement for the Dallas Fed president, who, while not a member of the Fed Open Market Committee, has consistently opposed its stimulative measures, arguing that quantitative easing and Operation Twist would have little impact against the resistance of regulatory burdens and tax uncertainty. In his latest remarks, he sounds almost Krugmanesque.

More QE, Please

Said Bernanke: "More QE is planned
To give job creation a hand"
(Though it's tricky to know
How banks full of dough
In the aggregate, pump up demand).

Ben Bernanke's announcement of a shift in Fed policy has baffled many in the markets, as Heidi Moore writes in the Guardian. Having moved from a regimen in which rate-setting was linked to both unemployment and inflation, to one in which low inflation is simply assumed while a jobless rate cap of 6.5% is targeted, has raised a number of questions as to implementation and projected timing of eventual interest rate hikes.

More broadly though is the question of how, when US banks already have over $1 trillion in reserves, flooding the system with even more cash will make a difference in the pace of hiring. Most economists agree that the proximate cause of our unemployment level is the lack of aggregate demand. The Fed's purchasing of more billions of Treasury and mortgage bonds may lower yields and therefore move investors into riskier assets such as equities. However, with regard to job creation, quantitative easing is more of a desperation play by a central bank that wishes that the Federal government would hire people to fix the damn infrastructure, already, but expects that they won't.

Monetary Policy Shift

The Fed made a policy shift
To render employment a lift
By buying more bonds,
As liberals and cons
In Congress are "fiscally cliffed."

Said Bernanke: "This monetization,
Which we do without sparking inflation,
Will terminate when
I'm happy again
With the pace of employment creation."

He continued, dispensing liquidity
To the bankers within his vicinity:
"Let the buying commence
Without the pretense
Of an end-date to QE Infinity."

The Federal Reserve Open Market Committee ended its latest two-day meeting with a blockbuster announcement: Chairman Ben Bernanke and colleagues will keep interest rates super-low until the unemployment rate falls below 6.5%. It's the first time that an explicitly quantitative criterion has been publicly articulated for the setting of interest rates. According to the Fed's own labor market projections, we can therefore expect near-zero short-term rates until 2015. Mr. Bernanke expressed frustration with the slow pace of the recovery, as well as the additional roadblock created by the fiscal cliff. "If we could wave a magic wand and get unemployment down to 5% tomorrow, obviously we would do that," he said.

Infrastructure Inspiration

While walking, a gal named Maria
Soon stumbled upon an idea:
"To patch up, quite simply,
The pothole that tripped me
Is pro-growth, if no panacea."

The preceding verse is brought to you by the latest round of economic statistics, from which I deduce that a greater level of public spending would produce much-needed counter-cyclical effects (or stimulus, if you like). As the Wall Street Journal notes, consumer prices remain flat, unchanged in July for the fourth consecutive month. This is in line with wages, which also remained flat. As noted elsewhere in this blog, housing activity is still mixed, with recent rises noted in commencement of foreclosure activity. Manufacturing, meanwhile, is up strongly, rising 0.5% in July and 5.0% year over year, but this has not ameliorated the unemployment rate, which remains stuck at 8.3%. The missing link in all this data is the shrinkage in the public sector, which works both directly and indirectly against a struggling recovery. Not only are public sector workers laid off, but construction companies are less engaged than they could be... and those potholes won't fix themselves.

At the End of his String

Said Bernanke: "I wish we could bask
In the glow of achieving our task
That the jobless plateau
And inflation stay low,
But at this point, it's too much to ask."

"It's likely no difference at all if I
Induce mortgage interest to fall, if I
Have no guarantees on
The prospects who seize on
Cheap funding, but can't really qualify."

The Federal Open Market Committee wraps up its latest two-day meeting this afternoon and, as always, releases a statement at 2:15. Reuters' Pedro da Costa writes that economists expect the Fed to indicate a "readiness to act" in support of flagging US economic growth. Eric Green of TD Securities, for example, says: "We do not expect any new initiative from the Fed. A dovish statement signaling willingness to do more will manage frustrated expectations for more (monetary easing)." One such heretofore unrequited expectation is that of a third round of quantitative easing ("QE3"), in which the Fed would likely buy long-term mortgage bonds. This would help to lower long-term interest rates, making it cheaper to borrow, and also "breathe fresh life into a housing sector that is finally showing some signs of healing," as Mr. da Costa writes. One problem with such a move is that, as previously noted in this space, US households have been trying to reduce their excessive debt levels, while many who might like to exploit cheaper mortgages cannot qualify to get one.

A Boon to the Local Economy

A political party's convention
Brings money, acclaim and attention
To the local milieu,
Including a few
That the chamber of commerce won't mention.

The GOP's next convocation
In Tampa should bring stimulation
To the owners of clubs
Whose customers love
The artistry of denudation.

Though club owners rather not choose
Which party should win or should lose,
According to strippers
The more lib'ral tippers
Are those of conservative views.

In a revealing look at the economic impact of the upcoming Republican national convention, the New York Times lifts the veil on the notorious Tampa strip club industry. When the nation's GOP delegates descend on the city, club owners expect that their employees will be sitting in the lap of luxury, and with good reason: evidence from the 2008 convention cities suggests that, while the average Democrat spends $50 in a "gentleman's club," the average Republican drops $150 (much of it in singles). On a serious note, dancers assert the need for additional stimulus as, in this economy, it's not easy to grind out a living.

A Call to Fed Action

An economy mired in stagnation
From a crisis of hypothecation
Then turned to the Fed
And fitfully said:
"Only you can provide our salvation!"

With a glance in its slim bag of tricks,
Said the Fed: "We can certainly fix
Your moribund state
By dropping the rate
From zero-point-two-five to nix."

In a story that inspired much scorn from the financial blogosphere, The Wall Street Journal's Jon Hilsenrath writes that "Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring." The only problem is that, even by the admission of a journalist well connected with the aforementioned Fed officials, the potential steps are not likely to have much effect. For example:

Determined to keep trying to get the economy going without causing inflation, the Fed is exploring other novel measures. One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment.

I'm afraid that the time for pushing on a string is past, and the hour for fiscal and structural changes is here, if only the Congress would grasp it.

Sales Slump

The heart of the market is rending
When retail is downwardly trending,
But is it a shock
When a nation in hock
Will at times prefer saving to spending?

The US government reported retail sales down 0.5% in June, making the first negative sales quarter since April 2008. These light sales figures will weigh on the reelection hopes of Pres. Barack Obama, confirming as they do the picture of a weak domestic economy. But: is it wise or realistic to expect an overly indebted, underemployed US consumer to reach out of his or her meager savings to jumpstart the economy? Better for Uncle Sam to use his still-first-class credit rating to fund the renewal of our national infrastructure, thereby picking up the economy and providing something useful at the same time.

Unqualified Interest

As a primary task of the Fed, it
Should cheapen the cost of our credit,
Which would help a lot more
If the mean credit score
Would qualify many to get it.

The Wall Street Journal's Jon Hilsenrath reports that the Fed's efforts to spread the stimulant of low interest rates throughout the US economy is stymied by the many borrowers who are over-leveraged, underwater and therefore unqualified to refinance at lower rates. Moreover, the fortunate few who can refi at will tend to reinvest rather than spend the proceeds, as they were already able to buy whatever they wanted. In a response that is short on verbiage but long on sarcasm and contempt, the Zero Hedge blog suggests that our national economic model - borrowing to fund consumer-driven growth - may not be sustainable.

Less Than Zero

The economy's got so abominable
That constraints on the Fed are phenomenal,
But the will to inflate
Makes a negative rate
Seem potentially real, if not nominal.

Thanks to Marketplace radio, it has come to my attention that members of the general public are still concerned about the Fed's inability to drop interest rates below zero. Because of the so-called "zero lower bound" problem, it may seem that the Fed has run out of monetary tools to stimulate the economy. In terms of nominal interest rates, this is correct. That's why, according to Marketplace Money economics editor Chris Farrell, it may be time for the Fed to "get real":

The Fed can create a negative "real rate" under certain conditions. Two quick definitions: "Real" means adjusted for inflation and "nominal" means the stated rate. So if the fed funds rate is at zero (nominal) and inflation is running at 2.5 percent, the real rate (inflation-adjusted) is below zero. In other words, if the Fed's nominal rate is at 0 percent and the inflation rate is 2.5 percent, then the real rate of interest is -2.5 percent. The Fed could lower the real rate of interest by pushing for a higher rate of inflation -- say, 3 percent (for a -3 percent real rate). Among others, it's an approach that New York Times columnist and Nobel laureate Paul Krugman has written about favorably.

Stimulus at the Pump

A fall in the fuel price enhances
The state of the nation's finances,
And the drag it removes
Most likely improves
The incumbent's electoral chances.

Most Americans have likely noticed a fall in the price of gasoline over the last month. The US Energy Information Administration reports that the price at the pump now averages $3.79 a gallon, down 3.8% from the 2012 peak of $3.94 on April 2. Some of the causes of this happy development include: softer demand due to the weaker economy, a drop-off in perceived tensions with Iran, additional refinery capacity and improvement in crude oil distribution logistics. As the incumbent's political fortunes seem to rise and fall inversely with the price of oil, one may now expect joy and consternation respectively in the Obama and Romney camps. Though, aside from the conduct of Iranian relations, the White House has little impact on short-term petroleum price movements, they may nevertheless reap some political benefit as the price of gasoline backs away from the feared $4-a-gallon threshold.

Constructive Solutions

What should we have done if we craved
That America's middle be saved?
Researched and retooled,
Retrained and reschooled,
Reinvested, rebuilt and repaved.

Financial Times' Washington correspondent Edward Luce has written a book that nobody wants to hear, but everyone needs to read: Time to Start Thinking: America in the Age of Descent. In it, Mr. Luce discusses the causes, and some solutions, to the declining state of American affairs. One of the difficulties in winning public investment in the renewal of American competitiveness, as in the verse above, is that neither party is willing to admit the state of decline. Thus, where the government has addressed our problems, it has generally made them worse. The solutions, however, are fairly clear, once we acknowledge the issue.

No More Fed Action?

"The economy's growing respectably,"
Said economists surveyed collectively,
"So a Fed funds regime
At a low-rate extreme
Is an outlook we look upon skeptic'ly."

The Wall Street Journal has reported the results of its latest survey of US economists, and, while not especially pretty, they do not paint an ugly picture either. Writes the Journal's Phil Izzo, "More economists are convinced the Federal Reserve won't take further action to spur growth this year, as the economy appears to be on firmer footing." The "respectable" 2.2% first quarter growth rate is forecast to bump up to an annual 2.7% GDP increase by year end. As a result, 36 of the 51 economists surveyed expect the Fed to refrain from any additional large-scale bond-buying. Interest rates? The consensus is that they've gone about as low as they can go, and the mean forecast for the June 2014 Fed funds rate is 1%. Come to think of it, that is a rather mean forecast, but it's better than nothing.