Donut Holes?

Watched a TED video by the woman who developed this idea of doughnut economics (see book). Seems to be all the rage among the save the planet crowd.

TED Talk Kate Raworth

Interesting, but I think she’s tilting at a straw man. This is a measurement problem, not a mechanistic problem. First, GDP is a very blunt instrument for measuring improvements to the human condition, but it’s the only yardstick the politicians and policymakers have and they are judged based on these metrics. Same with U6 and CPI and PPI and poverty, etc. We get GPD numbers every week of the year and our information channels repeat them as grade reports.

Second, Ms. Raworth uses the word growth as a proxy for measuring change and consuming energy resources. Not all growth or GDP measurement is expansion of goods and services. Recycling is a measure of growth; developing alternative sources of energy is a measure of growth. What we are truly dealing with is how to manage positive CHANGE. When we mismanage change, we get negative GDP growth rates. When we manage it productively, we get positive changes in GDP, among other measurements of life quality, like leisure time and cultural and technological innovation.

Economics is the fine art of managing change through exchange. So we need better measurements that include those subjective values that are not so easy to measure.
Everything else here is fantastic hyperbole, saving the planet and all that…dollars to donuts?

Why…

…Aren’t Presidential Candidates Talking About the Federal Reserve?

Yes, why? Much of our economic and financial lives are being guided by an unelected board of Federal Reserve governors who have been flying blind for about 8 years now…manipulating interest rates and asset markets to what end? Nobody seems to know, except to try to prevent a financial reckoning for previous misguided policies. A less charitable interpretation is the financial industry’s desire to keep the casino open as the only game in town.

By Jordan Haedtler

In an election fueled by populist anger and dominated by talk of economic insecurity, why aren’t any of the presidential candidates talking about the Federal Reserve?

After nearly a decade of high unemployment, severe racial and gender disparities and wage stagnation, voters are heading to the ballot box in pursuit of a fairer economy with less rampant inequality. In California and New York, low-wage workers are celebrating historic agreements to raise the minimum wage to $15 per hour. And the economy and jobs consistently rank among the top concerns expressed by voters of all political stripes.

One government institution reigns supreme in its ability to influence wages, jobs and overall economic growth, yet leading candidates for president have barely discussed it at all. The Federal Reserve is the most important economic policymaking institution in the country, and it is critical that voters hear how candidates plan to reform and interact with the Fed.

Related: The Federal Reserve Bank, Explained [Well, kind of.]

The Fed too often epitomizes the problems with our economy and democracy over which voters are voicing frustration: Commercial banks literally own much of the Fed and are using it to enrich themselves at the expense of the American working and middle class. When Wall Street recklessness crashed the economy in 2008, American families paid the price.

At the time, JP Morgan Chase CEO Jamie Dimon sat on the board of the New York Federal Reserve Bank, which stepped in during the crisis to save Dimon’s firm and so many other banks on the verge of collapse. Although the Fed’s actions helped Wall Street recover, that recovery never translated to Main Street, where jobs and wage growth stagnated.

Commercial banks should not govern the very institution that oversees them. It’s a scandal that continues to threaten the Fed’s credibility. An analysis conducted earlier this year by my parent organization, The Center for Popular Democracy, showed that employees of financial firms continue to hold key posts at regional Federal Reserve banks and that leadership throughout the Federal Reserve System remains overwhelmingly white and male and draws disproportionately from the corporate and financial world.

Yellen-and-Rate-Hike-cartoon

When the Fed voted in December to raise interest rates for the first time in nearly a decade, the decision was largely driven by regional Bank presidents — the very policymakers who are chosen by corporate and financial interests. In 2015, the Fed filled three vacant regional president position, and all three were filled with individuals with strong ties to Goldman Sachs; next year, 4 of the 5 regional presidents voting on monetary policy will be former Goldman Sachs insiders. Can we trust these blue-chip bankers to address working Americans’ concerns?

Yet despite the enormous power it wields and the glaring problems it continues to exemplify, the Fed has received little attention this election cycle. As noted by Reuters last week, two of the remaining candidates for president, Hillary Clinton and John Kasich, have been mute on what they would do about the central bank. Donald Trump’s sporadic statements about the Fed have been characteristically short on details, prompting former Minneapolis Federal Reserve Bank President Narayana Kocherlakota to call for Clinton, Trump and all presidential candidates to clarify exactly how they plan to oversee the Fed’s management of the economy. Ted Cruz has piped up about the Fed on a few occasions, although his vocal endorsement of “sound money” and other policies that contributed to the Great Depression warrant clarification. [One expects that none of the candidates really understand the arcana of central banking and prefer to leave well enough alone.]

The most detailed Fed reform proposal from a presidential candidate to date was a December New York Times op-ed in which Bernie Sanders wrote that “an institution that was created to serve all Americans has been hijacked by the very bankers it regulates,” and urged vital reforms to the Fed’s governance structure.

On Monday, Dartmouth economist Andy Levin, a 20-year Fed staffer and former senior adviser to Fed Chair Janet Yellen and her predecessor Ben Bernanke, unveiled a bold proposal to reform the Federal Reserve and make it a truly transparent, publicly accountable institution that responds to the needs of working families. [That’s pretty vague, as the interests of all are best served by a monetary policy that insures the stability of the price level and value of the currency as a unit of exchange and store of value. Employment growth is best addressed through fiscal policy.]

The New York primary provides a perfect opportunity for the remaining presidential candidates to tell us what they think about the Federal Reserve. Candidates in both parties should specify whether they support Levin’s proposals, and if not, articulate their preferred approach for our federal government’s most opaque but essential institution.

As Trump, Cruz and Kasich gear up for a potentially decisive primary, they would do well to respond to the many calls for clarity on the Fed. And on Thursday night, Sanders and Clinton will have the chance to clarify their stances on the Fed when they debate in Brooklyn, just a few miles away from Wall Street and the global financial epicenter that is the New York Federal Reserve Bank.

As New York voters get ready to decide which of the remaining candidates would make the best president, they will be asking themselves which candidate will better handle the economy. The candidates’ positions on the Fed must be part of the equation.

Over Fed

Impotent Fed

From an interview of Bill Gross in Barron’s:

You have taken central bankers to task for impotence and ignorance, among other sins. In particular, you have written that Fed Chair Janet Yellen and others are ignorant of the harm done by their policies “to a classical economic model that has driven prosperity.” Just what did you mean, and what sorts of dangers do we face?

The Federal Reserve was created in 1913. President Nixon took the U.S. off the gold standard in 1971. For the past 40-plus years, central banks have been able to print as much money as they wanted, and they have. When I started at Pimco in 1971, the amount of credit outstanding in the U.S., including mortgages, business debt, and government debt, was $1 trillion. Now it’s $58 trillion. Credit growth, at least in its earlier stages, can be very productive. For all the faults of Fannie Mae and Freddie Mac, the securitization of mortgages lowered interest rates and enabled people to buy homes. But when credit reaches the point of satiation, it doesn’t do what it did before.

Think of the old Monty Python movie, The Meaning of Life. A grotesque, rotund guy keeps eating to demonstrate the negatives of gluttony, and finally is offered one last thing, a “wafer-thin mint.” He swallows it and explodes. It’s pretty funny. Is our financial system, with $58 trillion of credit, to the point of a wafer-thin mint? Probably not. But we’re to the point where every bite is less and less fulfilling. Even though credit isn’t being created as rapidly as in the past, it doesn’t do what it did before.

Central banks believe that the historical model of raising interest rates to dampen inflation and lowering rates to invigorate the economy is still a functional model. The experience of the past five years, and maybe the past 15 or 20 in Japan, has shown this isn’t the case.

So where does that leave our economy?

In the developed financial economies, as a bloc, lowering interest rates to near zero has produced negative consequences. The best examples of this include the business models of insurance companies and pension funds. Insurers have long-term liabilities and base their death benefits, and even health benefits, on earning a certain rate of interest on their premium dollars. When that rate is zero or close to it, their model is destroyed.

To use another example, California bases its current and future pension payments to civil workers on an estimated future return of 8% or so from bonds and stocks. But when bonds return 1% or 2%, or nothing in Germany’s case, what happens? We’ve seen the difficulties that Puerto Rico, Detroit, and Illinois have faced paying their debts.

Now consider mom and pop and other people who read Barron’s. They are saving for retirement and to put their kids through college. They might have depended on a historic 8%-like return from stocks and bonds. Well, sorry. When interest rates get to zero—and that isn’t the endpoint; they could go negative—savers are destroyed. And savers are the bedrock of capitalism. Savers allow investment, and investment produces growth.

Are you suggesting a recession looms?

No. I see very slow growth. In the U.S., instead of 3% economic growth, we have 2%. In euroland, instead of 2%, growth is 1%-plus. In Japan, they hope for anything above zero.

What governments want, and what central banks are trying to do, is produce, in addition to minimal growth, a semblance of inflation. Inflating is one way to get out from under all the debt that has been accumulated. It isn’t working, because with interest rates at zero, companies and individual savers sense the futility of taking on risk. In this case, the mint eater doesn’t explode, but the system sort of grinds to a halt.

It doesn’t look like anything is grinding to a halt around here. You can see gorgeous golf courses from one window and a yacht basin from the other.

This isn’t the real economy. It is Disneyland and Hollywood. It is finance-based prosperity, based on money that doesn’t produce anything anymore because yields are so low.

Even in a negative-rate environment, as in Germany or Switzerland, banks and big insurance companies have little choice but to park their money electronically with the central bank and pay 50 basis points. But an individual can say “give me back my money” and keep it in cash. That’s what would make the system implode. I’m not talking about millionaires or Newport Beach–aires, but people with $25,000 or $50,000. Without deposits, banks can’t make loans anymore, so the system starts to collapse.

Let’s say Yellen steps down and President Obama appoints you the new head of the Fed. What would you do differently?

What you’re really asking is: What is the way out? The way out is a little bit of pain over a relatively long period of time. That is a problem for politicians and central bankers who are concerned with their legacy. It means raising interest rates and returning the savings function to normal. The Fed speaks of normalizing the yield curve but knows it can’t go too fast. A 25-basis-point increase [in the federal-funds rate] in December had consequences in terms of strengthening the dollar and hurting emerging markets.

Will the Fed raise rates this year?

Yes, as long as the stock market permits it. They have to normalize interest rates over a period of two, three, four years, or the domestic and global economy won’t function. In today’s world, normalization would mean a 2% fed-funds rate, a 3.5% yield on the 10-year bond, and a 4.5% mortgage rate. Would this create some pain? Of course. Housing prices probably would stop rising, and might fall a bit. The Fed has to move gradually.

What will be the 10-year Treasury yield at the end of 2016?

Close to what it yields now. I expect the Fed to raise rates once or twice this year. That would put the fed-funds rate at 1%. Does the 10-year deserve to yield 1.90% with fed funds at 1%? Yes, so long as inflation is 2% or less. If the Fed raises rates, the euro and yen could weaken. That would mean rates in Europe and Japan don’t have to go negative, or to extreme lows. In a sense, the Fed is driving everything. But it can’t raise rates too much without threatening a country like Brazil, whose corporations have tons of dollar-dominated debt.

What will the global economy look like in five or 10 years?

Structurally, demographics are a problem for global growth. The developed world is aging, with Japan the best example. Italy is another good example, and Germany is a good, old society, too. As baby boomers get older, they spend less and less. But capitalism has been based on an ever-expanding number of people. It needs consumers.

Another thing happening is deglobalization, whether it’s Donald Trump building a wall to keep out Mexicans, or European nations putting up fences to keep out migrants. Larry Summers [former secretary of the Treasury] has talked about secular stagnation, or a condition of little or no economic growth. At Pimco, I used the term “the new normal” to refer to this condition. It all adds up, again, to very slow growth. The days of 3% and 4% annual growth are gone.

Gross

Same Old, Same Old?

chartdepositphotos.com

The president made his fourth or fifth, or maybe it’s the seventh or eighth, pivot to the economy on Wednesday, and a revealing speech it was. We counted four mentions of “growth” but “inequality” got five. This goes a long way to explaining why Mr. Obama is still bemoaning the state of the economy five years into his Presidency.

Some might say this is unfair, but a brief chronology of the president’s pronouncements on the economy makes it all but obvious.

  1. February 2009: The president tells Congress “now is the time to jumpstart job creation” and his agenda “begins with jobs.”
  2. November 2009: Meeting with his Economic Recovery Advisory Board, the president says his administration “will not rest until we are succeeding in generating the jobs that this economy needs.”
  3. April 2010: Obama goes on a “Main Street” tour, saying “it’s time to rebuild our economy on a new foundation so that we’ve got real and sustained growth.”
  4. June 2010: The president declares a “Recovery Summer” to highlight the jobs created by stimulus-funded infrastructure projects. “If we want to ensure that Americans can compete with any nation in the world, we’re going to have to get serious about our long-term vision for this country and we’re going to have to get serious about our infrastructure,” he said.
  5. December 2010: The president tells reporters “we are past the crisis point in the economy, but we now have to pivot and focus on jobs and growth.”
  6. August 2011: After lawmakers reach a compromise to avert default, the president vows “in the coming months, I’ll continue also to fight for what the American people care most about: new jobs, higher wages and faster economic growth.”
  7. February 2013: At the start of his second term, the president refocuses on job creation in his State of the Union address, saying “a growing economy that creates good, middle-class jobs–that must be the North Star that guides our efforts.”
  8. May 2013: Kicking off his “Jobs and Opportunity Tour,” the president says “all of us have to commit ourselves to doing better than we’re doing now. And all of us have to rally around the single-greatest challenge that we face as a country right now, and that’s reigniting the true engine of economic growth, a rising, thriving middle class.”

The problems we have with economic policy and inequality is that inequality is best addressed by distributing the benefits of growth as that growth occurs, not redistributing the wealth after the fact. As the WSJ puts it in today’s editorial:

The core problem has been Mr. Obama’s focus on spreading the wealth rather than creating it. ObamaCare will soon hook more Americans on government subsidies, but its mandates and taxes have hurt job creation, especially at small businesses. Mr. Obama’s record tax increases have grabbed a bigger chunk of affluent incomes, but they created uncertainty for business throughout 2012 and have dampened growth so far this year.

The food stamp and disability rolls have exploded, which reduces inequality but also reduces the incentive to work and rise on the economic ladder. This has contributed to a plunge in the share of Americans who are working—the labor participation rate—to 63.5% in June from 65.7% in June 2009. And don’t forget the Fed’s extraordinary monetary policy, which has done well by the rich who have assets but left the thrifty middle class and retirees earning pennies on their savings.

Mr. Obama would have done far better by the poor, the middle class and the wealthy if he had focused on growing the economy first. The difference between the Obama 2% recovery and the Reagan-Clinton 3%-4% growth rates is rising incomes for nearly everybody. …If only Mr. Obama understood that before a government can redistribute wealth, the private economy has to create it.