PHILLY FED: A TOTAL DISASTER
Well, there’s no two ways around this one. My muddle through thesis is looking excessively optimistic by some measures. If the Philly Fed is any measure, this economy is headed full speed for the cliff’s edge. The August survey showed the lowest level of manufacturing activity since March 2009! The data was weak across the board. Prices were down sharply while new orders, inventories and employment all posted sharp declines.
“The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 (see Chart). The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month.”
Enter, stage right, the Federal Reserve…
To do what? More QE, which does nothing as they’ve implemented it?
They won’t act until deflation is baked in the numbers. CPI and PPI indicate they will be on hold for a while yet.
Yeah, a market hoping for Fed intervention got the exact wrong CPI # today. Too bad the July data is totally meaningless. And the Fed has no idea that QE as they’re implementing it, can’t work.
I think these comments reflect a fundamental misunderstanding of the key metrics the Fed looks at. True, they consider inflation numbers but clearly they realize that these figures are transitory.
No, the charts the Fed looks at dictate that the Fed rate should be a NEGATIVE half-point to a point.
It is also incorrect to say that QE does nothing. It has shored up our banks tremendously over the years as it was intended.
I see BB pulling out both bazookas here, implementing another QE just for the banks to head off any potential crisis caused by Euroland and a VERY SPECIAL treat that is actually focused on juicing the economy, unlike prior plans.
I could be completely wrong, but that’s my read.
I swear you don’t even read my work sometimes….Where is the proof that QE helps? You keep saying this, but you never provide any evidence….
Pshaw, I read your work intently TPC and refer many friends and colleagues to your website.
On this matter, however, you tend to be inconsistent.
You state: “More QE, which does nothing as they’ve implemented it?”
QE does exactly what it was supposed to do, shore up the banks. Once we have agreed on that fundamental point, then we can move forward.
You have acknowledged this in the past. You also state that QE1 and 2 is clearly not money printing as so many have continued to argue.
Yet, at the same time, you have blamed QE for inflation and stated that the economy would be hard pressed to move forward without this support.
Well, which is it? Either QE is money printing or it is not. Either QE contributes significantly to inflation or it does not. Either QE supports the economy or it does not.
Let’s have this out once and for all, shall we.
I’ve been very clear. If the Fed actually materially alters bank assets QE can be effective in helping the banks. That’s what QE1 did. When you take a potentially worthless RE asset and switch it with a tsy you’re materially altering the bank balance sheet. They did not do that in QE2. When I said QE2 was potentially a bank bailout, I assumed they might buy more bad loans. But they only bought tsys. There has been no inconsistency in my position at all.
Well then, exactly what did QE2 accomplish or what was its goal? They let the banks game the system and make great $$ on the spread. Perhaps not as supportive as QE1, but it was supportive to the financial system overall.
And QE2.5 continues as the Fed reinvests maturing securities proceeds.
The Fed has already announced every 2 months they are doing reverse repos to ensure liquidity is provided.
They see issues coming in the future.
i expect the goal of qe2 and last week’s “twist” are to cut any and all funding costs to zero in order to facilitate balance sheet funding and maximize net interest differential. (banks are taking huge spreads on the loans they do make.) and that has been a positive for risk markets — at least until now. trouble is it’s a one-timer; no one can cut funding/repo rates any lower now, can they? and if cash flow troubles start — say, as a result of even mild austerity — the lights can start going out.
gaius, agreed. The Fed has made sure I think that US banks will have no cash flow issues, problem is if Euro banks drag them down and apparently the Fed has tried to make sure that subsidiary US banks of the Euros have enough of a firewall.
BB and co. know it’s all connected and we could handle massive Euro defaults except for Italy, which would cause us major problems.
Plus everyone forgets the interest points banks get on reserves. That’s a nice plus. and again, the reverse repos. I do not think that BB is late to the party this time.
“The Fed has made sure I think that US banks will have no cash flow issues”
i wouldn’t go that far. they’ve done some things to help, but consider that permanent zero will do little to lower funding costs while likely compressing what they can charge at the longer end. add fees, etc., i understand, but not helping.
and the mortgage banks, it must be remembered, are facing skyrocketing non-interest expenses in the form of REO inventory.
i think this amounts to a squeeze on profitability that, it should be noted, japanese banks with bad corporate loans largely did not face as they never had to foreclose on corporate debtors (in fact they avoided it at all costs, preferring to ride cash flows through insolvency). this may be a Very Big Deal if we get another down leg in housing, again resulting from even mild austerity, bringing more collateral seizures. it’s might yet be a major question as to what happens when big banks are both insolvent and cash-flow negative.
The program was misguided and misunderstood. As I’ve explain before….
Let’s assume you are correct. What was it meant to do? What were the intended results?
Prescient, I’ve covered this in so much detail in the last year….I’ve spent countless hours debunking each supposed goal of QE2….
Prescient,
Here you go: http://pragcap.com/evidence-qes-failures
TPC’s other QE debunking articles are linked within that story.
Sorry for the short coments. Cullen has longer and fully documented postes from months ago supportings QE as a method of shoreing up bank balance sheets.
My comments are based on comments Fed officials have made regarding the purpose of past and prerequisites for future QE actions.
Obviously I don’t have access to the range to real time data the Fed has and I didn’t say th Fed was on hold forever Also, I didn’t say that QE3 will work. I just said they are on hold for a while.
The Taylor Rule doesn’t agree
Fed Funds Rate = (inflation rate*1.5) + (output gap *.5) +1
That yields a current funds rate of about 3.8%, which leads me to believe they are catering to their financial overlords rather than practicing sound economic policy.
If I understand Model B correctly that would force us into recession by inverting the yield curve.
John Taylors’s output gap (per his blog) of 4.8% of GDP ($720 billion) is out of sync with output gap implied by 9.1% U3 unemployment rate. The latter is what the Fed is (in theory) focused on, its dual mandate is stable price level and maximum employment; not price level and maximum GDP.
We are either 3.9 % points above 5.2% U3 (CBO faith-based NAIRU definition) or 5.1 % points above 4.0% U3 (Full Employment Act statutory definition) full employment targets. Okun’s law asserts each point of unemployment equals 2 points of GDP change, though some now say 1.8 points is more accurate. This puts the output gap somewhere between 7.02% ($1.05 trillion) and 10.2% ($1.53 trillion) of GDP. In other words, too damn big a hole to paper over with interest rate adjustments. The deficit caps Congress and the White House just agreed to only made things worse.
There’s only one way to provide the fiscal shock necessary without increasing the deficit by, well, a penny. Take Austan Goolsbee’s suggestion (from prior to his WH gig) that we rebase the 140 billion pennies in circulation from 1 cent to 5 cents and supersize it.
http://www.nytimes.com/2007/02/01/business/01scenes.html
Congress could vote to rebase (or give Tsy authority to do so) the 1 cent penny to $10 and instantly deposit $1.4 trillion into piggy banks, change jars and sofa cushions all across the country at no cost to anyone. Call it the “making it rain” stimulus plan.
)
http://www.nytimes.com/2011/02/06/fashion/06noticed.html
Some times I hate how smart you are beowulf…please don’t tell me your goodlooking, rich, and philanthropic also.
Well if he is I have a charity he can donate to (me)! (all in jest)
Sorry Adam, my philanthropic work is focused on the problem of troubled coeds with low self-esteem. However I will keep your application on file.
Beowulf: I agree with your basic premise, and have argued for some time that Timmy should mail and clear 10-20k checks to the roughly 100m taxpayers who filed tax returns and aren’t high income (what determines high income is a topic for another day.) Using unemployment figures to calculate interest rates is another matter.
There have been huge productivity gains the last couple of years due to layoffs and the inability of labor to bid up wages, and I’m struggling to understand how keeping fund rates at or close to zero satiates any of these structural problems. Output gap should reflect slack in the economy, but from a business perspective, if one employee can do the tasks formerly performed by two, there’s no decrease in production.
$1 to $2 trillion in tax refund to workers is the right order of magnitude, so your plan makes sense (though the “making it rain” plan is geared more towards two chronically underemployed groups– children and homeless people).
The trouble is when Tsy writes a check, the money comes out of deficit spending. Obama couldn’t get $1 trillion out Congress even if it was needed to stop a Chinese amphibious assault of Orange County.
Output gap should reflect slack in the economy, but from a business perspective, if one employee can do the tasks formerly performed by two, there’s no decrease in production.
Like Protagoras said, man is the measure of all things. We’ve freed up a worker to do something more productive and the slack time until his next job– there’s your output gap.
I fully disagree. Bernanke knows that it is nearly impossible to stop the momentum of deflation once it gets started. He will do everything in his power to do something before “deflation is baked in.” whether it is successful or not is another story. It will be very interesting to see how it plays out politically, however.
Absolutely agree. Anyone who knows Bernanke knows his biggest fear as chairman would be presiding over a second GD like deflation. Of course that doesn’t make me sleep any better at night because the made read the wrong text book!
When I look at the charts today then the FED is out in full force to prevent more damage in the stockmarkets.
To get the stock market up!!! It’s all we’ve got. Bernanke recognizes that. The only problem is that the bond market has done his work for him so even QE isn’t an option unless he’s going to try to pin the 30-year at Japanese levels.
trouble is that funding/repo rates can’t really get lower, can they? the juice for the market is kind of a one-timer. extending to permanent zero only minimally effects any financing costs beneath equity positions.
one has to remember that the financial sector deleveraging can (will?) still happen regardless of rates because of contracting cash flows under any shot at austerity. japan went to permanent zero and its equity market still fell, what, 80%? — and this despite actually subscribing to deficit spending in fits and starts. less than the balance sheets of the financial entities radically downsizing, the composition of their balance sheets changed dramatically as they well understood their hidden capital impairment and looked for assets that required no loss reserve.
So, it looks like a double dip recession based on the graph.
The fact that their policies are useless has never sopped hem before….
Activity has fallen because the Phillies and Eagles are really good this year and nobody is getting any real work done. At least that is the case with me
My productivity is at an all-time low. Planning out what iggles game to attend!
And an addendum, TPC are you implying that QE1 and 2 does not help the banks’ balance sheets? Please tell me you are not serious on that point.
qe1 definitely did — by lifting toxic real estate assets, etc.
qe2 is more of a flows effect, imo — the idea being to cut short-end cost of financing to zero, maximizing net interest differential. and that’s supportive of leverage, obviously, so it has had that balance sheet effect.
but where do you go now? looks to me like the market benefit of permanent zero is probably done. cutting rates on the longer durations may actually hurt bank cash flows significantly by bringing down the margin on the whole borrow-short-lend-long concept.
There we go! I wholeheartedly agree that QE2 was not as effective as QE1 for the banks, but it still helped.
Where we go from here, who knows, but again, we’ve got an election in 2012 and BB is the helicopter man.
Worrying about inflation now is insane, at least for the US. BB is going to pull the trigger with fiscal assistance from Treasury, and we should see some interesting plans I think.
How the rest of the world handles it, who knows!
yeah, might mean inflation in china, commodity hoarding, with residual uptick on commodity pricing here barring a severe china slowdown. but that’s of course a far cry from Inflation.
That is exactly my read.
The FED can only help a banks balance sheet if it overpays (creates net new financial assets) for a purchase. In QE1 the FED bought a lot of questionable assets. Those may have helped banks. QE2 was only treasuries. It should have been just a reserve swap.
I don’t know how QE2 would help the banks. It swapped tsys at 1.5%+ interest rate by reserves at 0.25%. Anybody here that thinks it helped the banks and would want to be helped in the same way, pls let me know and I will start my own QE2 program with your US treasuries anytime.
Haldane – BOE – http://t.co/VKKbW7G
Macroprudential…don’t buy it, taxpayer cannot shoulder anymore toxic debt and no way can allow banksters to take more risks. Need to let the debts, personal, sovereign and commercial, be cleansed with the pain that entails. New currency required to reset the system and end the Fed.
http://t.co/VKKbW7G
Cullen,
In 2008, Greenspan proposed that the Fed buy up mortgages from the private sector, and then burn down the houses. Has there been any indication that the Fed, rather than pursuing a fruitless QE program, will decide to pursue an exotic strategy that directly targets non-financial private sector balance sheets?
As crazy as it sounds, that is a brilliant strategy.
They might. But the devil would be in the details. They won’t buy mtgs and burn down homes in my opinion. That would be kind of crazy. We’ll have to play it by ear. I think the Fed is concerned about QE3 because they think it might have been inflationary.
The free market solution is to temporarily suspend the arson laws in order to spur the fire creators to practice their love all across this country.
)
http://www.youtube.com/watch?v=J25J8lQee40
The Fed is powerless, the market just doesn’t know it yet. If Bernanke even hints at doing QE before 2013, he’ll be drawn and quartered before you can say “Don’t mess with Texas.”
Let me make the point again will less subtlety. Rick Perry has already hamstrung the Fed by calling its actions treason. The Republicans would like nothing more than to make a spectale of QE3 on the public floor. Likewise, fiscal action is increasingly unlikely.
We’re on our own until the election is over. Hope you’ve deleveraged and buckled up, because this coaster isn’t stopping for another two years.
Perry would do well to shut his mouth on these matters. It’s tough being in charge.
Pure austerity would have the nation collapse just as it is deleveraging. As of now we should hopefully be able to muddle through.
Dollars to dimes that if anyone in the Republican field besides Romney gets the nomination and wins, policy is going to get really weird. I’m half convinced that everyone else really believes what they’re saying, and that taking the White House with a congressional majority would probably lead to new Fed legislation.
How does an inflation target of 1% and no employment mandate strike you?
Is QE3 politically feasible?
It would be a shame to issue it and then be dragged down by Europe anyway.
We are caught between a rock and a hard place.
I think a big factor in favor of QE3 or some fairly big policy from the Fed is the problem in Europe. Otherwise I think, barring any crazy push from Obama, the Fed might have just kept rates low and let the economy muddle along.
Obama cannot get stimulus through Congress unless it includes major tax cuts. I think he will have the Fed do his bidding.
Geihtner telegraphed this in many prior interviews. Treasury could assist. Fed is ALREADY starting up reverse repos again to ensure liquidity.
TPC,
Can you send me one link to a piece where you did this, i.e., discuss the purpose of QE2 and its intended results? (and I don’t mean the bs that Brian Sack was spewing) I won’t bother you with any questions until I refresh myself with your work. thanks
You’re not bothering me. It’s just that I’ve covered all of this in so much detail over the last year. http://pragcap.com/quantitative-easing-3-another-monetary-non-event
I think the gov’t and fed know they have to do something. Congress is paralyzed so that leaves the fed. Everyone knows QE3 isn’t what we need but it’s all we got. Sad. We need real leadership and real programs and all we get is BS.
The economy is a tanker. It can’t not be stopped easily.
We are done.
The “All Knowing” bond market seems to agree with you, George.
QE is heroin for a heroin addict. It is misguided and fails to address what ails the economy. It is NOT what the U.S needs. We are in balance sheet recession and Dr. Hussman has given some excellent views on this. And he is spot on.
For gods sake…if QE1 worked…there would be NO need for QE2 or QE3 How can anyone say that treating a heroin addict you must continue a non stop drip of Heroin..infitem.
The market, Wall St. and the banks are like crying baby. You don’ pick them up(no more QE) you leave them. You reorganize them. You restructure them. F the financial shoring up our banks. It’s the people that need shoring up. Direct the money and nations resources to the PEOPLE!
To that end…I’m going to go off subject and get to real world stuff.
WE bought intra day at 1101..I put my trades out here. I said we would sell at 1230. I Tuesday I didn’t think we’d get there…we sold raised 37% cash. We sold the rest yesterday..which I posted yesterday. We are 57% Cash.
What next: the Philly, Empire numbers look bad. Rosie is calling for a sub 50 ISM print. Based on his numbers it’s looking to come in at 49 ish. He also did this two months and was wrong. But I hope this next part adds to the TPC.
WE see a retest down to 1040-1100. not far now. We are going to be buyers scaling back in at the first move under 1100. and will go 100% down to 1060. WE see a rally back into the new year. BUT we think 2012 goes lower. We don’t anticipate too many long positions. Althought….looking today at the valuations on some of the good companies..well I think one can do just fine with some of the prices today. But…I would recomend the TPC readers look at companies you like now and this weekend. I think between now and the next month you will be able to buy some stuff to hold into the new year and do well. So do your homework and get ready. This is the first wave. the second is the counter trend rally into the end of the year.
Once again…I could give 100 different analogies on QE- You either continue QE until it hits QE50 or you stop it now and deal with the disease. Focus on the disease not on what the BANKS want. Fu$$ the banks. YOu think they will lend with those spreads. There not compensated to lend.
But once again…IF QE works Why are we doing it again and again and again…
1040 would appear to be the line in the sand. I would expect big moves one way or the other if we get there and I am afraid we are.
Hi Michael…
Yes agreed…I think it holds(hell I don’t know) but we have a process and it requires we scale in in advance. I also think..at that level some companies look so attractive. So I’m ok with it.(ok until it goes to 700 and then I’ll be at the local bar hiding from the TPC)
I do think we end up going lower…but probability says…we normally rally into the new year. Again…Mr. Market never calls me and I think he hates me but you at least get one persons decisions and thoughts prior to. Never said I’m right but I have a process and always appreciate your thoughts Michael.
VII,
I enjoy your comments. As a fellow financial advisor, may I ask what your process is i.e. when you decide to scale in? I have been pretty conservative through this mess, so have done well, but have a hard time deciding when to put money to work. Holding ALOT of cash. thanks!
McGhee- I’ll post it tomorrow. My wife is getting jeoulous of cullen
If Mama’s not happy, no one’s happy!
I’m going to post on AAII thread on TPC
Hi VII aka V…
“For gods sake…if QE1 worked…there would be NO need for QE2 or QE3 How can anyone say that treating a heroin addict you must continue a non stop drip of Heroin..infitem.”
I’m no expert on heroin or any addiction for that matter, but from what I’ve seen on tv it seems that if the patient is cut off cold turkey he either dies, or reverts back first chance he gets.
My point is what seems obvious is not always the case. I am not advocating another QE, I think it is a non event at best, but size matters.
Now lets say you are very hungry. You eat one bite and you are still hungry. You do not say the sandwich is the wrong thing, I’ll have some water. You keep eating until you are full. Yes it is an elementary example, but everyone can relate to it. Same with stimulus or tax cuts, etc. Implemented in the wrong proportions will not yield the desired result. That does not mean that the opposite is the correct course of action.
Dimm-
First things first…Different Chris has aske me to put you on “need a image blast”. and I agree. Your a thoughtful contributor here and we’d love to see an image. It’s cool when you go through you can spot your TPC “friends” easier.
Yes…heroin is nasty. I won’t get into people I know(I have no personal experience here) but your right. 100% on your reply.
It’s time to go in the right direction. Be honest and work toward my sons future and everyones future. No matter how tough. We need long term solution that address the problems. I don’t see QE as one of them.
For me it’s real simple…THE FACT THE BANKS AND WALL ST. CRY FOR IT….well that’s all I need to know it’s not for the people. Focus on our country..allocate capitol correctly. I have come to think so highly of Dr. Hussman and many others. And while I can tell you QE doesn’t pass the smell test..they will explain with the needed data to support this.
Good to see you today Dimm…hope your family is well.
Hi VII,
I’m here every day as well as few other sites, though I seldom post.
I’ll see what I can do for the picture. Anonymity is great but a meaningless picture won’t hurt.
On the other side it would be super cool to do a TPC conference: room , blackboard , chairs, no name tags, vote on topics upfront and brainstorm on the blackboard. At the end maybe try to guessing who is who. Of course Beowulf and some others will be spotted instantly. I’ll pay money to sit in the back and watch some of those discussions live.
Best Dimm
Is Beowulf famous or something?…Dood beowulf are you a finance rockstar?
Good idea…but I can’t speak for everyone but someone posted something that bothered me once so out of respect for my wives comments…”what ever you do promiss me you won’t get arrested again” her advice to me on my annual guys trip…I’ll stay home and watch it from live web cam.
Hilarious : ) made me laugh again. I would listen to the wife : ). They do know better.
It was a great line…I said it to this guy at the end of the bar who I was getting into it…I actually said…”..you know what my wife told me one thing..what ever you do don’t get arrested…(then I looked him in the eyes and I said) but right about now I don’t give a F***) My friends looked at me..and he and his friend left. We repeated that over and over again. It still goes down as one of the funniest lines.
I would use it Dimm if you ever get in a pickle. It has this troubling affect on the other person.
I’ll keep that in mind.
Note to myself. Do not mess with VII.
WAHOOOOOO….DIMM……LOOKING GOOD.
DIFFERENT CHRIS IS GOING TO ONE HAPPY MAN.
I have a question, maybe someone here can help me out.
I’m not a financial or economics guy; I’m an engineer. The recession hammered my business, so starting in late 2008, I’ve read everything I can get my hands on about economics/finances in the hope I could get a handle on where my business might go. Here’s what I think I know. I know I might sound like a noobie, and know I might be completely wrong.
It’s my understanding that QE 1 was meant to put more cash in the hands of big banks, hoping they would spread it through the economy by lending. The lending would put more cash in the hands of consumers, who have been responsible for something like 70% of the economic activity in this country. Big banks got the QE 1 money, and either innvested it overseas or horded the cash. Or maybe there wasn’t a very big demand for consumer loans. Whatever, QE 1 money never got in the hands of consumers, so consumer demand has remained depressed.
As for QE 2, I haven’t a clue what it was for, and there is little agreement on this website.
Here’s my question. If the QE money never gets from Wall Street to consumers, why even mess with Wall St.? Why not just bypass Wall St. and put the money directly in the hands of consumers? I understand I can’t expect to see Washington send a check to everyone in the country, but why not expect to see government repair/modernize our crumbling infrastructure? Instead of giving big piles of money to Jamie Dimon and Lloyd Blankfien, who spend it giving out record bonuses, why not give it to states/municipalities that need a new bridge, an upgraded airport, or a 21st century electrical grid?
If someone wants to say, ‘You just don’t get it’, that’s good, but please tell me what I don’t get.
Actually you do get it. The government should be putting money in the hands of the public through either deficit spending on projects or tax cuts.
There is an enormous wealth of information on this site which proves that you are right, there was no point putting more money into the banks if they don’t lend it out. Further, the banks have and always had plenty of availability of funds to lend out if they felt that they wanted to and it never was a question of lack of inventory (reserves) but instead was a lack of attractive price/risk.
You just don’t get it.
The response to the economic crisis in the last two years has showed us, if nothing else, the Fed and Congress DO NOT CARE ABOUT THE PEOPLE.
They care only about the banks. Their policies have hurt the people and helped the banks. They could care less about the American people.
“Big banks got the QE 1 money, and either innvested it overseas or horded the cash.”
I think they mostly lent it back to the government and earned interest on the spread. Backdoor bailout.
Everyone is suffering for one simple reason. The social contract is falling apart. In that regard the US is becoming Greece. Almost no one pays taxes. E.g. more than 66% of corporations and multinationals do not pay any taxes. Some of them have a negative rate(extract money from the government).
Criminality is not prosecuted. That is all. It is not about business conditions, taxation, confidence fairies, human capital, infrastructure, resources, etc. None of this matters unless the law is upheld and criminality is prosecuted.
I think you understand it better than the people in charge.
The guys down in Washington think that if they give banks money they’ll lend it to people and grow the economy. However that’s not how the banking system works, but please don’t tell anyone in Washington, you’ll give them indigestion.
If you’re intersted in understand how the MONETARY portion of the economy works from a pretty down to earth perspective read Cullen’s post here…
http://pragcap.com/resources/understanding-modern-monetary-system
I have never seen a solution that was supposed to work be debated more.
QE: If it worked there would be NO debate. There would be no need for a second or third or fourth treatment. The doctor said it would take one at the beginnning.
Would you go to a hairstylest 3 times when each time you didn’t get the result you were told. How about a restuarant, how about a surgeon…HOW ABOUT A FEDERAL RESERVE POLICY…Oh well that’s different. It works..the banks are better off today. REALLY…is that our problem? The banks.
Get the money directly to the people. Not inderectly to the institutions who got us here in the first place. If you think given money to them is the solution..then god save us all.
Bypass this layer…and stimulate the people. QE should stop now. Regardless of the short term move down in stocks. ONCE a more effective prudent long term strategy is implemented we wont’ have stocks correcting everytime the babies on Wall ST. QE wears off and they need more. Short term pain…LONG TERM GAIN/
watching CNBC this am with Joe Kernan who constantly raises the free market flag and quoted on of his friends who said that money in the US is running away from socialism while speaking with Arthur Laffer who never saw a tax cut he didn’t like.
These idiots don’t have a problem when the markets are artificially propelling into higher ground never making a rational analysis of the fundamentals but when markets are falling its all about how socialism is taking over our country and how money will ‘take flight out of the US’ if we don’t lower our taxes.
Kernan and Laffer of course will argue that they represent the free market camp and there should be 0 friction to money and money should be allowed to flow whereever minds chose it to flow. This argument is foolish and simply dismisses the fact that societies are built on the productive deployment of capital which assures a free and productive citizenry. If this is not fulfilled then the citizenry will look for another economic and social order. Instead they would argue that labor ie citizens are slaves to money and if the money is threatened then the citizenry must go to war to protect the rights of money.
This is why the markets will continue to decline until a new order is in place. The citizenry of various nations including these United States will not be the slaves to money.
I see 5 comments after my first, and there seems to be a common thread. That is, a big part of our problem is a mindset on the part of the movers and shakers in this country, or maybe worldwide. The mindset is that big banks, or great wealth, must be protected at all cost. Anyone with low wealth can be sacrificed to protect greater wealth.
Are we talking class warfare here? Not the phony complaining you hear from talking heads on any cable network. Not the prospect of the peasants rising up with torches and pitchforks. The class warfare I’m talking about is when those with wealth/power promote government policies that protect the buyers of that policy from anyone or any business that can’t afford to buy their own government policies or programs?
Global
Panem et Circenses
Until it is not enough.
Africa, Middle East, Greece, England. Soon in theaters near you.
The problem with Wall St. is that if things had been done properly, it should not be around in the current way. A significant part of the financial industry should have been taken over by the government (the same way GM was) to ensure that their required socio-economic function was prioritized over any shareholder/debtor needs. By itself and with the Fed as the lender of last resort, this critical financial system would have ensured that small companies did not get hammered by lack of lending. The key financial infrastructure – the part of banking that is socially beneficial – would have been protected and the rest of the system would have fallen as deserved. That would have opened lots of opportunities for smaller commercial and investment banks that actually did things right. Now, that would have required a lot of planning before sh!# hit the fan – but hey, the crisis was totally unexpected. The Fed was simply not ready for it. They do not seem to do scenario planning, or not enough.
Obviously, this would necessary but not sufficient, but it would have been a great way of reducing the crisis impact because the drop in aggregate demand – which as you said above does drive the economy, would have been smaller. A well directed and properly sized (probably 1.5x-2x depending on how much money you “throw” away) stimulus bill that focused on building/rebuilding infrastructure would have been the other key ingredient. It would have given jobs to most of the people that depended on construction and keep most of the system working.
QE1 would not have been necessary because it would have been done automatically by the government controlling the banking infrastructure that was critical to the system.
The current situation is pretty critical: for political reasons, republicans are loving these economic indicators and market crashes – as long as they think they can keep themselves away from being perceived “part of the problem” they can blame everything on Obama. They are even rejecting the idea of increasing the payroll tax vacation with the excuse it is too “piece meal.”
At the same time, the whole debt ceiling debacle was as irrelevant economically as it was tragic socially: people have come to the realization that we have no real leaders and the only ones ready to stick to their guns are the extremists which I think has influenced social attitudes to the worse.
But do not worry, things could get worse. With the coming waves of austerity the situation will be made even worse. The republicans could win the presidency and the senate in 2012, and keep pushing even crazier economic austerity policies to the point the country is in shambles by 2016. Then, probably there will be a radical change and as Churchill said once, we will end up doing the right thing, after having exhausted all the other possibilities.
If we go double dip I think we will see some major changes in how things work globally. Every economic trend is like watching a slow speed train crash, there is just no way to stop it. It has to lose momentum on its own. Maybe the neoliberalism model will have finally run its course and will be replaced by some amalgamation of different policies. It’s pretty obvious what governments in the US and Europe have been doing lately is not working. Everything is a band-aid because the artery has not totally ruptured. Once it does change has to happen.
QE3 would be great if they bought labor, supplies, construction management, and told them to fix our crappy infrastructure.
Real quantitative easing requires deficit spending (net new financial asset creation) which 99.5% of the time comes from the Treasury!
True – but they could do it. When the Fed has to start buying stuff besides their usual short term Treasurys, monetary and fiscal policy sort of starts to dovetail…not properly, but it’s closer than normal. If the Fed were to build a bridge with new money and no intention of selling the bridge, we’re basically seeing a unitary fiscal and monetary actor at work.
If only. Probably less likely than seeing the Fed start targeting rates across the yield curve.
Until the country realizes deficits under certain conditions are not to be feared–that we do not have to borrow money or tax to spend, i.e. we do not have to rack up debt or suck money out of the private sector–muddle through is certainly optimistic.
There is not enough money in the system to support healthy aggregate demand. It’s been funneling to foreign countries from whom we are making the bulk of our purchases (even the New York Fed has acknowledged there is strong demand for our money; they acknowledge this in their article on how money gets into circulation) and therefore we are left with an insufficient quantity domestically. This hasn’t changed. Look at the trade gap. More money is going out than is coming back in. Ironically this is the cure to our problems in my estimation, but we can speed it up and make this a lot less painful if not eliminate the pain entirely. Print the money (or as Mosler argues, let them keep their own money with a tax holiday), we’ll continue to purchase products made over seas, strong demand in emerging markets will raise prices which will raise their wages which will make us more competitive which will bring production home. Jobs, the kind we need, will be ours again. Problem solved.
Robert,
How does the current account work into your analysis? I have this debate with a lot of people. I can’t recall if I’ve read your outlook, but I’d be interested in how it fits into your thinking. Thanks.
Cullen, forgive me as I’m horribly busy right now (probably doesn’t seem like it with how much time I’ve spent here recently
), but I will see if I can get something over to you on this.
On a related noted, I started working on my thoughts regarding the intro to MMT as I mentioned I would, but that also will probably take a bit. I’d like it to be pretty refined before sending it over.
If there is anything scarce in this world it is time. We need biotech to extend our lives significantly with good health built in:
http://www.youtube.com/watch?v=QLCi8L0UaRw&feature=related
http://www.youtube.com/watch?v=hgLRhxvRlKg&feature=related
http://www.sens.org
Aubrey is fantastic and a kindred spirit.
Haha. The S&P lost ten points between 10:00am – when this was released – and 10:02am.
Anything significant being released tomorrow?
I would like to go on record here…..
When the Bulls lost to the Heat….I said here the BULL MARKET was over…no one picked it up and I couldnt’ get anyone to acknowledge my post. But well..I was right. Forget about all the data..it was the BULLS losing that killed the bull.
NOW…I’d like to go on record HERE….and be the first one to say..that with the Melee in China vs. Georgetown basketball and how the Chinease and fans had such hatred toward the americans..as well as Joe Bidens speech…I would load up on defense stocks…simply because….Well…We’ll be at war with China!
I Know these are preatty….Zerohedge calls….but sometimes I like to be a littlw wacky….This is my Krugman moment. I’ll take credit for it if it happens and just say I was kidding if it doesn’t.
And I love how the talking heads on TV keep saying we won’t have a recession. NBER will eventually classify this as a Depression, only 10 years after the fact.
http://www.creditwritedowns.com/2011/08/on-private-debt.html
When do u guys find time to work?
We don’t sleep much.
When I get tired I tell myself “you can sleep next month”
Despite this report, I am reassured by the New York Reserve ratio of 1 to 125 of another recession!!
Dr. Bernanke is torn between not making the natives restless here over their 401ks AND not making the natives overseas restless over the price of bread.