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Wednesday, June 22, 2011

In Shock

I made the mistake of watching Gentle Ben's presser, and it will take days to recover. That was not a good experience.

I note that others seem unimpressed as well:
Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”
CR seems to be angsting a bit, and the markets reacted about as you would expect to this performance. Well, you go to economic crises with the Fed you have, not the Fed you wish you had....

In the interests of Fed/public relations, I would like to offer some help to Ben about those confusing and frustrating slow recovery features. How about a fall in real earnings? The BLS puts out a series that the Fed might find very helpful known as "Real Earnings". The next release is scheduled for July 15th, and Ben might want to read it. As BLS notes in the narrative regarding all employees:
Since reaching a recent peak in October 2010, real average weekly earnings have fallen by 1.4 percent.

Real average hourly earnings fell 1.6 percent, seasonally adjusted, from May 2010 to May 2011. A 0.6 percent increase in average weekly hours combined with the decrease in real average hourly earnings resulted in a 1.0 percent decrease in real average weekly earnings during this period.
The highlighted bits are pieces that are important in forecasting the near term future, so Gentle Ben might want to focus on those.
For production and non-supervisory employees on private nonfarm payrolls:
Since reaching a recent peak in October 2010, real average weekly earnings have fallen by 1.6 percent. Real average hourly earnings fell 1.8 percent, seasonally adjusted, from May 2010 to May 2011. A 0.6 percent increase in the average workweek combined with the decrease in real average hourly earnings resulted in a 1.2 percent decrease in real average weekly earnings during this period.
This information is further explicated in the detail tables A-1 & A-2. The YoY data is the most important for forecasting the future, because it tracks the changes over time. Looking at the deflators used to calculate real wages, we find that the YoY for CPI in Table 1 is 3.6%, and in Table 2 the same number is 4.0%.

The moving parts here are nominal wages paid, CPI over the year, and most importantly, the average work week. Now let us turn to the ever-helpful St. Louis Fed Fred. Here I am going to just revolutionize modern economics nearly back to Adam Smith:
The economic moving parts we have been discussing pretty much are shown here.

The strong orange line is CPI-W. The strong blue line (most variable) is Real Retail Sales.

The week red and green lines wages and salaries (not benefits) paid to private workers and government workers, and the line over the other weak line is of course government workers.

One thing Ben might want to note is the sudden bend up in CPI-W, which, oddly enough, almost seems to have something to do with the fall in real retail sales.

Now - revolutionizing ECONOMICS AZ WE KNOWZ IT:

This hyah is real retail sales level and the compounded annual rate of change for the private worker series shown in the above graph, adjusted by CPI.
Note that the private worker series ends before the retail sales series.

When contemplating this graph:

A) For a self-sustaining recovery, the red line must be above the blue line as an average for a while. Otherwise, workers are withdrawing from savings or borrowing to sustain spending. Both trends have an end; the correction on the borrowing-to-spend is inevitably worse, because when you stop spending your savings, all you do is cut spending to income levels. When you have been borrowing to spend, when you stop you have to cut spending to income levels less debt repayment. The way we entered the 2007 recession was that households got behind the income/spending ball in 2005, and for the next two years, households borrowed very large sums of money to sustain spending. Of course the more they borrowed the more they fell behind each month, so when the correction came it was rather brutal.

B) We achieved that the magic red-line-above-blue-line. Toward the end of the last quarter of 2010 we were getting close to the margin, but remember that in the last quarter you always have holiday spending - the big recovery in real wages over the previous eighteen months basically funded that. So there wasn't going to naturally be a big dip, just a correction in rate of change of spending. Note the highly positive shift in annual compounded rate of change of real wages and salaries preceded emergence from the recession in 2009. Funny how that happens.... In an income recession, that must happen. It had very little to do with the governmental stimulus, in all sincerity.

C) You might think the Jan-April blue line trend (retail) looks odd. It is odd, but it occurred that way because of the FICA give back (mostly went to the top 30% of earners) plus the sudden rise in cost of basic goods. Now that the rate of cost changes is disseminating from basics through the economy, even higher income households are having trouble sustaining spending. Because the lower 30-40% spend so little relative to the top 30%, no one ever notices or worries when they're shoved to the wall. Their plight is only noticed when the incomes of the top 30% get affected. This is inevitable. Unfortunately, this relative invisibility means that most Wall Street forecasters are doomed to fail, because they always get surprised when the inevitable happens.

D) The red line stops short, but here we can refer to the "Real Earnings" release from BLS referred to above! Holy Moly, Ben, here's the missing clue! That red line is plummeting to negative! The blue line must follow! Oops. The changes are worse for the lower incomes. A quick check of CPI-U detail for May shows that the 3 month annualized inflation rate for food at home was 8.7%, with dairy and meat/protein up over 15%. All items less food and energy 3 month annualized rate of change was 2.5%, with the 6 month rate of change 2.1%, by which we see that we have just begun to fight.

Now, I kind of think that Ben might know all this and might somehow be hoping that the red line bends up again, like it did several times in the precursor to the recession. But it is not going to do so in the next few months, because as the CPI-W shown in the first graph makes clear, inflation is just really beginning to hit the economy. It can't peak in economic effect before the end of the summer and probably won't have peaked by then, and then it will either take a price bust to mitigate or it will take several years before real incomes can possibly recover, perhaps three years if we factor in the 2% increase in wage taxes. This is why you are seeing bank accounts suddenly jack up - people are moving back into survival mode.

E) For projecting forward the red line this summer, we need to look at wage indicators ex CPI.
1) Retail trade series
CES4200000035 aggregate weekly payrolls. Table B. For some reason this is very sensitive to even minor economic changes. From December to May, this dropped a bit. There was a big spike up in April, but that was bleeping McDonald's with hour expansions. The trend is not our short-term friend on this one, and indeed I have a hard time understanding how this could happen:

When you stop and think about it, those stores should still be open and May should have shown at least at that level. There must be job/hour losses elsewhere.

Or this is a mistake. It isn't usually.

2) Temporary Help Services. A strong predictor of future economic strength.

A few months of a small decline - since March, this has fallen a bit.

3) That oldie but goodie, diesel (distillate). YoY supply is currently down over 5%. Given CPI trends and wage/employment indicators, the economy cannot thrive this summer. One only has to look at May retail sales to get a sense of the problem. On a nominal basis, retail sales fell and sales at grocery stores fell. There was almost no increase at pharmacies, which is another bad sign. Gas prices may be falling, but consumers on net are still losing ground on food and other items like clothing and household goods.

"Well, you go to economic crises with the Fed you have, not the Fed you wish you had...."

Is that something like going with the cancer you have, not the cancer you wish you had?

If you get acid on your skin you should use baking soda to neutralize it. Maybe to neutralize Bernanke you can use the soothing tones of Jim Grant: http://bloom.bg/ioDdcX#ooid=xlYmpqMjqGaY5EJ9gmju7N5CkV1abEKL
"Bernanke admitted that he had no clue what was actually causing the current fragility"

Maybe he would have more of a clue if he spent less time perusing economic statistics and more time reading George Eliot...

"Fancy what a game of chess would be if all the chessman had passions and intellects, more or less small and cunning; if you were not only uncertain about your adversary's men, but a little uncertain also about your own . . . You would be especially likely to be beaten if you depneded arrogantly on your mathemactical imagination, and regarded your passionate pieces with contempt. Yet this imaginary chess is easy compared with a game man has to play against his fellow-men with other fellow-men for instruments."
Foo - This is making a nervous breakdown look attractive.
David - it is difficult to tell how exactly Bernanke processes all this.

I think he knows what is going on but is not willing to admit it.

He has embarrassed himself quite enough by taking credit for the stock market gains while disclaiming any responsibility for food and fuel gains.

So I would suspect that the passions of the chessmen in his own mind are his first and most fierce adversaries, as indeed they are for most of us. Most people would have trouble expressing both those positions together.
CR seems to be angsting a bit

I haven't checked it out, but if he is, it's time to be worried. CR is one of these people with an unnatural excess of serotonin. All the way up to the crash, (and I think, partly into it), he was thinking UE would stay less than 7% - while presenting all the reasons it was going to be much worse.
"I think he knows what is going on but is not willing to admit it."

I think you and David are looking at it things from different perspectives.

You are looking at it from more of a macro-economic perspective and saying that even from that perspective there is information providing some insight about what's going on, and that Bernanke probably has at least some clue about those things but isn't letting on (presumably because he's busy playing a psy-ops game and he considers sharing those insights to be counter-productive).

I believe David is pointing out that macro-economics itself is to a degree a fallacy. People are *people* and they have free will and will make decisions based on what *they* see as their best interest. That is fairly directly stated in the sentences from George Eliot's "Felix Holt" immediately following the part David quoted:

"He thinks himself sagacious, perhaps, because he trusts no bond except that of self-interest; but the only self-interest he can safely rely on is what seems to be such to the mind he would use or govern. Can he ever be sure of knowing this?"

In other words, Bernanke can't really know how anyone will judge their own self-interest and how they will subsequently act, much less how everyone will, much less how all of those actions will ripple in real-time into more decisions and actions. No human can know these things.

That idea is at the core of Austrian economics. It is also directly stated in the Jim Grant video I linked to above. Grant says "We're going to listen to the fed hand down his decision on what the funds rate should be. How do they know that?". (The idea actually permeates that video -- it's there when he talks of things like "unintended consequences", "false values" and replacing the gold standard with a "PhD standard".)

That's not to say macro-economics is always useless. It's just rather incomplete, at least sometimes misleading, and you can never by sure of any prediction or prescription made based on it.
"So I would suspect that the passions of the chessmen in his own mind are his first and most fierce adversaries, as indeed they are for most of us. Most people would have trouble expressing both those positions together."

But does he really believe what he says, or is it just a lie he considers part of his tool kit? It's hard to tell when the evidence for both possibilities seems so abundant. I suspect that a lot of public figures knowingly promote this ambiguity between deception and incompetence. It allows for plausible deniability later when what they say becomes more widely understood to be false.

At some point, it seems to me that you have to look at how many things Bernanke has just been wrong about, and realize that the probability of being wrong so often and in such big ways purely by chance is pretty low. That's why you get people like Jim Rogers saying "the man's never been right about anything" (http://www.youtube.com/watch?v=-G3uCl0Y_h4). But even that doesn't settle it. It could still be lies/psy-ops or it could be that Bernanke's model of how the world works is just so at odds with reality that it is doomed to failure. Of course, lots of people have their opinion, such as Marc Faber who comes straight out and says "Mr Bernanke, he's a liar" (http://www.youtube.com/watch?v=2gBV8ihVTH0).

Personally I can't tell, and from my perspective it doesn't really matter. He should not have the power he has over my life and everyone else's. No one should. The federal reserve needs to cease to exist.

When you live under a tyrannical dictator, you don't try to psychoanalyze him to figure out if he's a "bad" dictator on purpose. You overthrow him and end the dictatorship.

If you're up for a bit of profane humor and truth...: http://www.youtube.com/watch?v=-6Fpoebz2LE
Foo - I am really ill with a sinus infection, but there is a lot in both your last comments. Which I will take up later when my eyes start focusing.

Profane - yes, I have veered that way. I'm struggling to get the "humor" part incorporated!
You say the Fed needs to cease to exist. And be replaced by what exactly? Seriously.
The President is the reason the economy is not doing better. Health care in particular. No energy policy is another big issue. Some other small stuff. Pity.
"You say the Fed needs to cease to exist. And be replaced by what exactly? Seriously."

In case you didn't see or understand the significance of my first sentence in this thread, let me repeat it in a slightly modified form: When the doctor says he has to remove a cancerous tumor, do you ask him what he is going to replace it with?

The current central bank is the 3rd central bank this country has had. We got rid of the first two. The world didn't end when we did so. (The 2nd central bank did retaliate, but it back-fired because the people of that period realized that the resulting economic problems were directly due to intentional central bank sabotage, which made them all the more eager to see it go away.)

One (mis-)function of the federal reserve, one I was talking about earlier in this thread (and that the Jim Grant video discusses) is market manipulation. Specifically, the fed goes about setting the price of capital. It does this by manipulating the US Treasury rates, which it does through "primary dealers" (which include foreign financial institutions: http://www.newyorkfed.org/markets/pridealers_current.html) who make out like bandits by acting as scalpers. (This can get pretty blatant such as during QE2. The primary dealers know when and how much the fed is going to be buying -- that info is all made public well in advance. So they can get out ahead of the fed and buy multi-year treasuries, and within days flip most of that to the fed for instant profit. By law the fed isn't allowed to keep its profit, so it should come as no surprise that the fed, owned and effectively run by the banks, is used as a tool by the banks to line their pockets in such indirect ways.)

Setting scalping losses aside, this market manipulation is itself extremely harmful. It injects incorrect price signals into the economy which then cause malinvestment.

What happens if the federal government steps in and lowers the price of pretty much any good (or service) by 50%? Demand rises and supply dries up, resulting in that good no longer being available (except on black markets). But it doesn't stop there -- those that were producing the good don't just stop current production, they stop investing in future production. Any industries that are needed to support the production of this good also eventually get the signal to cut back on both current and future production. On and on the effects ripple until the economy aligns itself to the new reality that this good shall not be (openly) produced. Furthermore, capital that is no longer going into the direct or indirect creation of this good will seek return elsewhere, and that will have its own long-lasting impacts on the structure of the economy. Business get created and destroyed, people get hired and fired, capital gets committed to different purposes. These changes are painful and expensive, and can't just be undone overnight. In some cases hysteresis effects mean they never get undone. So even if/when the government finally comes to its senses and gets rid of the price mandate, recovery is far from instant, potentially involves significant pain, and might never be 100%.

Having the federal government (or a quasi-government agency such as the federal reserve) conduct price controls on capital is no less disastrous than when it conducts price controls in other areas. So there is no need to replace this disease with anything. The free market will, once allowed to do so, determine the true price of capital.
Another mis-function of the federal reserve is acting as the base for fractional reserve banking. Fractional reserve banking, combined with central bank notes pressed into service as currency via legal tender law, taxes and other prohibitions on competing currencies, and government insuring and otherwise backstopping banks, is one big web of fraud. It causes debt which has risk to be treated as if it is risk-free capital. Most US dollars in existence, whether paper or electronic, were actually created out of thin air as a result of debt creation, and are effectively extinguished if/when that debt is repaid. The US paying off its debt would be Bernanke's worst nightmare as, due to this system of banking, that would be massively deflationary. That's some seriously messed-up conflict of interest. Again, there is no need to replace this disease with anything. Just get rid of the fed, repeal the legal tender laws, get rid of the taxes and other prohibitions on the use of alternative currencies, stop backstopping banks, and the free market can take over. Banks can issue notes backed by whatever commodities they like (or backed by nothing at all) so long as it is all done transparently and without fraud. People will use what currency they wish. IOUs created via debt will actually look like IOUs instead of looking like capital. Insurance companies can trade risk (IOUs) for capital as they see fit, but that will be real capital and should that insurance company fail (unlike banks failing now) there is no debt-cycle busted and no artificial creation of funny money and therefore no inflation-ratcheting event.

Let me turn your question around on you: What does the fed do that a free society and free market capitalism wouldn't do better? (And things like "lining banker's pockets", "monetizing government debt" and "destroying people's wages and savings" doesn't count. It has to be something that is good/fair, not evil/corrupt. And don't confuse free market capitalism with crony capitalism, fascism and other non-capitalism systems.)
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