Crashing Unemployment

Dear Mr. Dudley, Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful. In particular, your explanation that further rate hikes are needed to prevent crashing unemployment and rising inflation stunk of rotten eggs. Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that. Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the main concern.

 


US unemployment rate vs. labor force participation rate. The employment situation may not be as all-around copacetic as the U3 unemployment rate seems to indicate… just a hunch.

 

Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around.  What to make of it? For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit.  The once impossible is now commonplace.

For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality. Perhaps the imminent danger of crashing unemployment will give way to the impossibility of negative unemployment.  Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model.

Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication.  In short, Fed communication has regressed from backassward to assbackward.

During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations.  Through smiling teeth Greenspan would talk out of the side of his neck.  He’d jawbone down inflation expectations while cutting rates.

Certainly, a lot has changed over the years.  So, too, the Fed seems to have reversed its jawboning tactic.  By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates.

 

William Dudley indicates how far consumer price inflation is from its ideal height…

Photo via imbc.com

 

Congratulations and Thank You!

History will prove this policy tactic to be a complete fiasco.  But at least the Fed is consistent in one respect.  The Fed has a consistent record of getting everything dead wrong. If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.”

Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway.  But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one?

Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that “Stock prices have reached what looks like a permanently high plateau.”  By the month’s end the stock market had crashed and crashed again, never to return to its prior highs in Fisher’s lifetime.

 

Irving Fisher and Ben Bernanke – not exactly known as the best economic forecasters ever. Nevertheless, both provided plenty of central economic planning advice. Interestingly, their forecasting errors have done little damage to their reputations – notwithstanding the Econometric Society’s former motto “Science is Prediction” (that does actually not apply to economic science, but it is still widely held that fortune-telling is a task of economists; after all, if they cannot predict, how are they supposed to plan? It’s a dilemma…).

 

To be fair, Fisher wasn’t a Fed man.  However, he was a dyed-in-the-wool central planner cut from the same cloth.  Moreover, it is bloopers like these from the supposed experts like Bernanke and Fisher that make life so amiably pleasurable. Do you agree?

Hence, Mr. Dudley, words of congratulations are in order!  Because on Monday you added this future knee-slapper to the annals of economic banter:

 

“I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go.  This is actually a pretty good place to be.”

– William Dudley, June 19, 2017

 

Thank you, sir, for your shrewd insights.  They’ll offer up countless laughs through the many dreary years ahead.

 

Finding their way over at the Eccles building…

 

Too Little, Too Late

When it comes down to it, your excuses for raising rates are not about some unfounded fear of a crashing unemployment rate.  Nor are they about controlling price inflation.  These are mere cover for past mistakes.

The esteemed James Rickards, in an article titled The Fed’s Road Ahead, recently boiled present Fed policy down to its very core:

 

“Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates five years ago.  They’re trying to play catch-up, and yesterday’s [June 14] was the third rate hike in six months. Economic research shows that in a recession, they [the Fed] have to cut interest rates 300 basis points or more, or 3 percent, to lift the economy out of recession.  I’m not saying we are in a recession now, although we’re probably close.

But if a recession arrives a few months or even a year from now, how is the Fed going to cut rates 3 percent if they’re only at 1.25 percent? The answer is, they can’t. So the Fed’s desperately trying to raise interest rates up to 300 basis points, or 3 percent, before the next recession, so they have room to start cutting again.  In other words, they are raising rates so they can cut them.”

 

Unfortunately, Mr. Dudley, the Fed miscalculated.  Efforts to raise rates now will prove too little, too late.  To be clear, there isn’t a snowball’s chance in hell the Fed will get the federal funds rate up to 3 percent before the next recession.  You likely won’t even get it up to 2 percent.

 

Unexpected side effects of rate hikes to come…

 

Nonetheless, you should stay the course.  If you’re gonna raise rates, then raise rates.  Don’t cut them.  Raise them.  Then raise them some more. Crash stocks.  Crash bonds.  Crash real estate.  Crush asset prices.  Purge the debt and speculative excesses from financial markets.

Let marginal businesses go broke.  Let too big to fail banks fail.  You can even consult with Dick “The Gorilla” Fuld, if needed.  Let nature do its work. Best bring the paper money experiment to a close and shutter the doors of the Federal Reserve.  No doubt, the economy and millions of people will suffer a painful long-lasting restructuring.  But what choice is there, really?

Let’s face it.  The Fed cannot hold the financial order together much longer anyway.  Why pretend you can with utter nonsense like crashing unemployment?  It’s insulting. Your credibility is shot.  Better to get on with it now, before it’s forced upon you.

P.S.  What’s up with Neel Kashkari?  The man has gone rogue.

 

Chart by: St. Louis Fed

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Venezuela – An Economic Catastrophe in Charts
      The Final Stage of a Crack-Up Boom For economists the dire downward spiral of Venezuela's economy holds the same fascination black holes hold for physicists. Both illustrate what happens amid the most extreme conditions imaginable. It is thought that this may potentially provide clues of a more general nature. The remnants of massive imploded stars are inanimate and many light years distant; regardless of how violent conditions in their vicinity are, they cannot touch us. Unfortunately,...
  • The Degrading Facts of a Fake Money Hole in the Head
      Squishy Fact Finding Mission Today we begin with the facts.  But not just the facts; the facts of the facts.  We want to better understand just what it is that is provoking today’s ludicrous world. To clarify, we are not after the cold hard facts; those with no opinions, like the commutative property of addition. Rather, we are after the warm squishy facts; the type of facts that depend on what the meaning of ‘is’ is.   Fact-related pleas... [PT]   The facts,...
  • Thirteen Reckonings Hanging in the Balance
      A Fake Money World The NASDAQ slipped below 8,000 this week. But you can table your reservations.  The record bull market in U.S. stocks is still on. With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade.  Remember, anything and everything’s possible with enough fake money.   Driven by a handful of big cap tech companies, the Nasdaq Composite has made new highs – but the broad market (here shown in...
  • Jayant Bhandari - The US Dollar vs. Other Currencies and Gold
      Maurice Jackson Speaks with Jayant Bhandari About Emerging Market Currencies, the Trade War, US Foreign Policy and More Maurice Jackson of Proven & Probable has recently conducted a new interview with our friend and occasional contributor to this site, Jayant Bhandari, who is inter alia the host of the annual Capitalism and Morality seminar.   Maurice Jackson (left) and Jayant Bhandari (right)   A wide range of topics is discussed, from the strong US dollar and...
  • Gold-Silver Ratio Message - Precious Metals Supply and Demand
      Fundamental Developments Last week the price of gold fell three bucks, and that of silver fell a quarter of a buck. But let us take a look at the supply and demand fundamentals of both metals. Also, we have an interesting development in the gold-silver ratio, a topic we have not addressed in a while. First, here is the chart of the prices of gold and silver.   Gold and silver priced in USD   Next, this is a graph of the gold price measured in silver, otherwise...
  • September – The Most Dangerous Month to Invest
      The Biggest Crashes in History Happened in September and October In the last installment of Seasonal Insights we wrote about the media sector – an industry that typically tends to perform very poorly in the month of August. Upon receiving positive feedback, we decided to build on this topic. This week we are are discussing several international markets that tend to be weak during September and will look at what drives this recurring pattern.   Mark Twain, a renowned...
  • US Equities – Approaching an Inflection Point
      A Lengthy Non-Confirmation As we have frequently pointed out in recent months, since beginning to rise from the lows of the sharp but brief downturn after the late January blow-off high, the US stock market is bereft of uniformity. Instead, an uncommonly lengthy non-confirmation between the the strongest indexes and the broad market has been established. The chart below illustrates the situation – it compares the performance of the DJIA (still no new high since January, although...
  • Gold-Silver Ratio Hits 10-Year High - Precious Metals Supply and Demand
      Fundamental Developments The price of gold dropped five bucks, and that of silver 40 cents last week. But let’s take a look at the supply and demand fundamentals of both metals. Also, we continue to follow the development in the gold-silver ratio.   One can buy a lot of silver for one's gold these days. Silver has become extraordinarily cheap, but keep in mind that it was even cheaper vs. gold in the early 1990s (see the section on silver further below for the details)....
  • Honest Work for Dishonest Pay
      Misadventures and Mishaps Over the past decade, in the wake of the 2008-09 debt crisis, the impossible has happened.  The sickness of too much debt has been seemingly cured with massive dosages of even more debt.  This, no doubt, is evidence that there are wonders and miracles above and beyond 24-hour home deliveries of Taco Bell via Door Dash.   The global debtberg: at the end of 2017, it had grown to USD 237 trillion. Obviously this is by now a slightly dated figure, as debt...
  • Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk
      Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not...
  • Dubious Prophecies & Perverse Incentives - Precious Metals Supply and Demand
      Suspect Predictions, Ill Wishes and Worthwhile Targets of Scorn This price of gold fell three bucks, and the price of silver fell ten cents last week. Perhaps because of the ongoing $150 price drop so far since April, we saw some doozy email subjects and article headlines this week.   Panic on the inflation Titanic. [PT]   One notable one, from the man who confidently asserted we will have hyperinflation by the end of the year — in 2009 — now says that the...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com