Economic nonsense comes a dime a dozen. For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.” She even told the University of Michigan’s Ford School of Public Policy so earlier this week. Does she know what she’s talking about?
If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does. The unemployment rate is at 4.5 percent, which is considered full employment. What’s more, inflation is ‘reasonably close’ to the Fed’s 2-percent inflation target. But what does this mean, really?
According to Fed Chair Yellen, it means that now’s the time to tighten up the nation’s monetary policy.
By now you’ve likely seen this upcoming – choice – quote from Yellen. Nonetheless, we can’t resist repeating its remarkable idiocy. For Yellen, who was in the greater Detroit metropolitan area, was kind enough to humor us all with a nifty automotive analogy to explain how to go about normalizing monetary policy. Here Yellen elaborates with a variety of technical terms:
“Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy. We want to be ahead of the curve and not behind it.”
As far as we can tell, Yellen’s merely huffing and blowing gas. What curve she wants to stay ahead of is unclear. We assume she’s referring to the inflation curve, although this does seem a bit out of context.
By our account, inflation of the money supply is, indeed, inflation. Hence, the Fed fell behind the curve between September 2008 and December 2014 when it inflated its balance sheet from $905 billion to $4.5 trillion. By our back of the napkin calculation that tallies up to nearly a 400 percent inflation of the Fed’s balance sheet. But what do we know?
Apparently, the Fed is so thrilled with the economy’s health that it wants to start shrinking its balance sheet later this year. In fact, New York Fed President William Dudley wants to execute balance sheet shrinkage by ending reinvestment of maturing principal. Easy come easy go, right?
Unfortunately, Dudley’s plan ain’t gonna be easy. When it comes down to it, it’s unlikely the Fed will ever be able to shrink its balance sheet in any meaningful way. Quite frankly, both the economy and financial markets simply can’t afford it.
Sure Yellen says that “we have a healthy economy now.” However, the economy may not be nearly as healthy as she believes. This becomes much more evident when looking beyond just the unemployment rate.
In particular, as of 4th quarter 2016, GDP is increasing at a lethargic 2.1 percent. Yet that’s not the half of it. As of April 7, the Federal Reserve Bank of Atlanta’s own GDPNow model forecast for real GDP growth in the first quarter of 2017 is just 0.6 percent. By the time you read this they’ll have published an update.
The point is, in the face of 0.6 percent GDP growth, Yellen’s statement that we have a healthy economy is patently absurd. For all practical purposes, 0.6 percent GDP growth is at economic flatline. Clearly, it’s not the type of growth that will lighten the load of today’s massive public and private debt burden. Nor is it the type of growth that propels first term presidents into a second term in high office.
Hell To Pay
President Trump doesn’t want 0.6 percent GDP growth. He wants 4 percent GDP growth. He demands it. He’s even promised it.
But promising something and then delivering on it are two entirely different things. One takes cheap blather. The other takes hard work, persistence, tenacity, and good luck.
Like many of President Trump’s promises, we’re certain the promise of 4 percent GDP growth will be broken. But Trump’s only fault in the matter is promising it to begin with. It’s been over 13 years since the U.S. economy had a single year of 4 percent GDP growth. The simple fact is, the U.S. economy’s too larded over with debt and intervention to attain it.
On top of that, Trump has the cards stacked against him. The Fed’s plans to increase the federal funds rate and shrink its balance sheet, either simultaneously or in sequence, will likely be counterproductive to President Trump’s GDP target. As the price of credit becomes more expensive, less borrowing and spending will occur.
Of course, over the long-term, less borrowing and spending is precisely what the economy and financial markets need. Contracting credit. Deflating asset prices. Bankruptcy and default of marginal businesses. Most of all, default of U.S. government debt. Liquidate it all.
These are the solutions to an economy that’s been distorted so far out of balance – where a median income job doesn’t buy a median priced home. This is also the solution to a government that’s gotten too big for its britches. Cutting off the government’s overdrawn credit line will be the surest way to shrink it down to right size.
No doubt, there’s hell to pay for 100 years of ever escalating financial insanity. Take it in stride. The downside is here and it’s not going away any time soon.
for Economic Prism