| Yellen Yap: Silliness, Outright Lies, and Some Refreshingly Accurate Reporting Posted: 16 Jul 2014 09:45 PM PDT Yellen Yap SillinessThe spotlight on Fed Chair Janet Yellen is rather amusing given she is more disingenuous than former Chair Ben Bernanke. Some of the headlines are downright silly. For example, Bloomberg reports Dollar Rises to Highest in 3 Weeks on Yellen Comments. The dollar reached the strongest in a month versus the euro as wholesale prices in the U.S. rose more than forecast and the Fed saw modest to moderate growth in June. New Zealand's dollar slumped the most in seven weeks after inflation accelerated slower than expected and a gauge of dairy prices dropped to its lowest since 2012. South Korea's won slid to the weakest since April.
Yellen testified before the House Financial Services Committee today that she's not seeing "alarming warning signals" in markets.
"My general assessment at this point is that threats to financial stability are at a moderate level and not a very high level," she said. While some asset values "may be on the high side and there may be some pockets where we see valuations becoming stretched," in general "price equity ratios and other measures are not outside of historical norms." US Dollar Weekly Chart click on chart for sharper imageQuestions of the Day- Did the US dollar rise because of what Yellen said or in spite of what Yellen said?
- Was the move based on wholesale prices or other economic data, as opposed to anything Yellen said?
- What about none of the above? Was this a random fluctuation not attributable to anything?
- Even if the move in the US dollar could reasonably be attributed to Yellen, was the move worth mentioning in a headline?
Yellen Yap LiesLet's move from silliness to outright lies, and an excellent post by Yves Smith on Naked Capitalism that discusses the lies (whoppers). In response to the New Yorker article The Hand on the Lever regarding "How Janet Yellen is redefining the Federal Reserve", by Nicholas Lemann, Smith accurately assesses the setup in her coverage Yellen Tells Whoppers to the New Yorker A Nicholas Lemann profile of Janet Yellen in the New Yorker, based on interviews with her, is creating quite a stir, and for many of the wrong reasons. The article verges on fawning, but even after you scrape off the treacle, it's not hard to see how aggressively and consistently the Fed chair hits her big talking point, that's she's on the side of the little guy.
In fact, as we'll discuss, Yellen's record before and at the Fed shows she's either aligned herself with banking/elite interests or played two-handed economist to sit out important policy fights. Even if she actually harbors concern for ordinary citizens, she's never been willing to risk an ounce of career capital on it.
The article is also generously larded with standard defenses of the Fed, that it lacked the power to do much of anything about dodgy mortgage lending in the runup to the crisis. In fact, the Fed was so firmly in denial that even in 2007, Fed officials were convinced that banks were victimized by subprime borrowers, which is hardly a pro-intervention stance.
And why did the Fed take so little interest? The real reason was that prior to the crisis, if borrowers bought more costly housing than they could afford, the losses fell mainly on them. There was enough of an equity cushion on average that the banks came out at worst only mildly dented.
In other words, readers are supposed to take Yellen's claims at face value, when the Fed's policy of saving banks by goosing asset prices and convincing itself that ordinary people would benefit because the "wealth effect" would lead to more consumption. The result has been widening income and wealth disparity and corporate profits at record levels as a percent of GDP, meaning workers are getting less than they've ever gotten.
At the Fed, Yellen is given more credit than she deserves for sounding some mild concern about rising housing prices. She's also been cited as the best forecaster on the FOMC, but given how the FOMC failed to see the crisis coming, her "success" is tantamount to declaring her the winner of a height competition among peanuts.
In other words, Yellen was in the center to center-right of the Democratic party technocratic elite of the 1990s and never departed from conventional thinking. She's now trying to rewrite her record by making pious statements and getting her interlocutors to focus on what she presents as her character in the hope that they won't bother looking at her actions.
Yellen's contention that she's really out to help little people would be far more credible if she acknowledged her past anti-middle class policy positions and claimed that she'd made a Pauline conversion. But her institutional and political loyalties preclude that. BingoThe Fed is the number one cause of widening income and wealth disparity and corporate profits at record levels, as I have pointed out on numerous occasions. It is very refreshing to be on the same side of the debate as Yves Smith, possibly because her article did not go into solutions. I advocate free market solutions while Yves tends to advocate more intervention. Regardless, Yves did an outstanding job bashing the disingenuous nature of Yellen. Her article merits a read in entirety. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| "Treasury Bond Undervalued" Says Hoisington Second Quarter Review; Path to Fiscal Ruin Posted: 16 Jul 2014 11:42 AM PDT The Hoisington Investment Management, Second Quarter 2014 Review and Outlook makes the case " Treasury Bond Undervalued". Thirty-year treasury bonds appear to be undervalued based on the tepid growth rate of the U.S. economy. The past four quarters have recorded a nominal "top-line" GDP expansion of only 2.9%, while the bond yield remains close to 3.4%.
To put the 2.9% change in nominal GDP over the past four quarters in perspective, it is below the entry point of any post-war recession. Even adjusting for inflation the average four-quarter growth rate in real GDP for this recovery is 1.8%, well below the 4.2% average in all of the previous post-war expansions.
Fisher's Equation of Exchange
Slow nominal growth is not surprising to those who recall the American economist Irving Fisher's (1867-1947) equation of exchange that was formulated in 1911. Fisher stated that nominal GDP is equal to money (M) times its turnover or velocity (V), i.e., GDP=M*V. Twelve months ago money (M) was expanding about 7%, and velocity (V) was declining at about a 4% annual rate. If you assume that those trends would remain in place then nominal GDP should have expanded at about 3% over the ensuing twelve months, which is exactly what occurred. Projecting further into 2014, the evidence of a continual lackluster expansion is clear. At the end of June money was expanding at slightly above a 6% annual rate, while velocity has been declining around 3%. Thus, Fisher's formula suggests that another twelve months of a 3% nominal growth rate is more likely than not. With inflation widely expected to rise in the 1.5% to 2.0% range, arithmetic suggests that real GDP in 2014 will expand between 1.0% and 1.5% versus the average output level of 2013. This rate of expansion will translate into a year-over-year growth rate of around 1% by the fourth quarter of 2014. This is akin to pre-recessionary conditions.
An Alternative View of Debt
The perplexing fact is that the growth rate of the economy continues to erode despite six years of cumulative deficits totaling $6.27 trillion and the Federal Reserve's quantitative easing policy which added net $3.63 trillion of treasury and agency securities to their portfolio. Many would assume that such stimulus would be associated with a booming economic environment, not a slowing one.
Readers of our letters are familiar with our long-standing assessment that the cause of slower growth is the overly indebted economy with too much non-productive debt. Rather than repairing its balance sheet by reducing debt, the U.S. economy is starting to increase its leverage. Total debt rose to 349.3% of GDP in the first quarter, up from 343.7% in the third quarter of 2013.
It is possible to cast an increase in debt in positive terms since it suggests that banks and other financial intermediaries are now confident and are lowering credit standards for automobiles, home equity, credit cards and other types of loans. Indeed, the economy gets a temporary boost when participants become more indebted. This conclusion was the essence of the pioneering work by Eugen von Böhm-Bawerk (1851-1914) and Irving Fisher which stated that debt is an increase in current spending (economic expansion) followed by a decline in future spending (economic contraction).
In concert with this view, but pinpointing the negative aspect of debt, contemporary economic research has corroborated the views of Hyman Minsky (1919-1996) and Charles Kindleberger (1910-2003) that debt slows economic growth at higher levels when it is skewed toward the type of borrowing that will not create an income stream sufficient to repay principal and interest.
John Maynard Keynes (1883-1946) correctly argued that the severity of the Great Depression was due to under-consumption or over-saving. What Keynes failed to note was that the under-consumption of the 1930s was due to over-spending in the second half of the 1920s. In other words, once circumstances have allowed the under-saving event to occur, the net result will be a long period of economic under-performance.
Implications for 2014-2015
In previous letters we have shown that the largest economies in the world have a higher total debt to GDP today than at the time of the Great Recession in 2008. PSRs [Personal Savings Rates] also indicate that foreign households are living further above their means than six years ago. According to the OECD, Japan's PSR for 2014 will be 0.6%, virtually unchanged from 2008. The OECD figure is likely to turn out to be very optimistic as the full effects of the April 2014 VAT increase takes effect, and a negative PSR for the year should not be ruled out. In addition, Japan's PSR is considerably below that of the U.S. The Eurozone PSR as a whole is estimated at 7.9%, down 1.5 percentage points from 2008. Thus, in aggregate, the U.S., Japan and Europe are all trying to solve an under-saving problem by creating more under-saving. History indicates this is not a viable path to recovery.
Japan confirms the experience in the United States because their PSR has declined from over 20% in the financial meltdown year of 1989 to today's near zero level. Japan, unlike the U.S. in the 1940s, has moved further away from financial stability. Despite numerous monetary and fiscal policy maneuvers that were described as extremely powerful, the end result was that they have not been successful.
With U.S. rates higher than those of major foreign markets, investors are provided with an additional reason to look favorably on increased investments in the long end of the U.S. treasury market. Additionally, with nominal growth slowing in response to low saving and higher debt we expect that over the next several years U.S. thirty-year bond yields could decline into the range of 1.7% to 2.3%, which is where the thirty-year yields in the Japanese and German economies, respectively, currently stand.
Van R. Hoisington
Lacy H. Hunt, Ph.D. Reflections on Keynesian AnalysisUnlike the Hoisington authors, I have no praise at all for Keynes. That said, Hoisington politely blasts Keynes in this snip: " Keynes failed to note was that the under-consumption of the 1930s was due to over-spending in the second half of the 1920s. In other words, once circumstances have allowed the under-saving event to occur, the net result will be a long period of economic under-performance." I like the discussion on personal savings rates, especially this comment: " In aggregate, the U.S., Japan and Europe are all trying to solve an under-saving problem by creating more under-saving. History indicates this is not a viable path to recovery." Bingo. Path to Fiscal RuinThe OECD predicts Japan's PSR for 2014 will be 0.6%, but Hoisington points out that assessment is " likely to turn out to be very optimistic as the full effects of the April 2014 VAT increase takes effect. A negative PSR for the year should not be ruled out." The US and Japan are both on the path of fiscal ruin. It appears highly likely Japan will get there first thanks to a big head start followed by Abenomics. Yesterday, in Corporate and Government Bonds: Where to From Here? and in sharp contrast to all of those who see a US treasury bond bubble, I stated: " The worry about US government bonds is, for the time, overblown." Hoisington provides much analysis that shows why my statement is correct. There is much more in the article and it merits a full read. Ignore any positive references to Keynes, but accept all of the negative ones, and the article reads perfectly. Personal UpdateI am in Glacier National Park, Montana (to be more precise, just outside the park). There is no phone or internet in the park. It can take 1 hour to do an email on the park satellite Wi-Fi. Liz and I went on a 10 mile round-trip hike to Iceberg Lake. It has about a 1,200 foot elevation change, all up on the way to the lake, all down on the way back. Here are a couple of images. Iceberg Lake Iceberg Lake Closeup Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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