The only thing that can be said about Janet Yellen’s simple-minded paint-by-the-numbers performance yesterday is that the Keynesian apotheosis is complete. American capitalism and all political life, too, is now ruled by a 12-member monetary politburo, which is essentially accountable to no one except its own misbegotten doctrine that prosperity flows from the end of a printing press.
To be sure, this non-sensical and historically disproven proposition gets all gussied up in neo-Keynesian Fed-speak about dual mandates, monetary support to aggregate demand, “slack” in labor markets and remaining shortfalls from potential GDP, among endless like and similar jargon. But it did not take long during yesterday’s presser to reveal that Yellen’s mind dwells completely in a circular puzzle palace.
For once she got a decent question or two, but answered by lapsing instantly into ritual incantation about the macro-cycle the Fed pretends to be superintending. Thus, when asked about the tepid rate of business investment in future productivity and growth, the answer was: Right, that’s why we need ZIRP for longer! That is, until we can inflate the GDP tire by monetary accommodation, expect CapEx to run flat.
Heavens to Betsy Janet! CapEx has been running flat for 14 years. The compound growth rate of real plant and equipment spending is less than 1% since 2000 and is still 5% below its 2007 interim peak. There is nothing remotely this dismal during any extended period in modern history.
Likewise, with the structural unemployment and labor force drop-out problem. This has been building for 14 years as documented by the fact that there are now 102 million persons in the working age population who do not have jobs compared to 75 million back in 2000 when the maestro was being hailed for his monetary policy genius.
And no, Janet, these 27 million did not move to a golf course community in Florida for a much deserved and pleasurable retirement. In fact, there are only 7 million more people on OASI retirement today than there were 14 years ago. So don’t dismiss the graph below as representing retirement as normal; its actually an indictment of the Fed’s manic money printing during the interim.
The monetary politburo has been pushing on an employment string for more than a decade, but this is not a cyclical problem. We have a debt-saturated failing economy that is not generating genuine growth, jobs or earned household incomes. Yet the Cool-Aid drinkers in the Eccles Building seem to think that a vast population (at least 30-40 million) that has moved onto food stamps and disability, or into mom and dad’s basement, or onto the student loan bonanza at on-line colleges, or on to the streets is just waiting for “lower for longer” to work it magic.
In fact, Yellen’s lame answer to the chart below was “Its conceivable there has been some permanent damage”. Indeed.
Never mind. Yellen has a hockey stick embodied in the Fed’s DSGE model that always predicts a return to the full employment GDP path 2-5 years down the road. And by the internal logic of this misbegotten model—which is only a vast set of discredited regression equations and data that embody the Neo-Keynesian world view—-all economic performance problems cure themselves after the Fed has gotten “aggregate demand” re-aligned with its theoretical full employment path. Its one-decision economic levitation writ large.
Except….except… it should be damn obvious after five years of what can only be described relative to all prior history as lunatic monetary expansion—that this mysterious Keynesian ether called “aggregate demand” is not realigning with the postulated full employment path of GDP embedded in the DSGE. That much is blatantly evident in yesterday’s markdown of its estimates for 2014 GDP to take account of the -2% hole in Q1 results.
So as recently as early 2012, the Fed was confidently predicting “escape velocity” would be in full force by 2014, with GDP growth accelerating to 4% and thereby representing the catch-up phase of the macro-cycle. That “above trend” performance, in turn, would bring the nirvana of full employment a few more years down the road. Until then, “unusually accommodative “policy would be warranted.
Well, here we are in 2014 and there is no escape velocity in sight despite roughly $1.8 trillion of bond-buying in the interim, and the GDP forecast is drastically marked down to the 2.1-2.3% range. Was there any detailed explanation for this stunning repudiation of everything the Fed has predicted for meeting after meeting. Nope! Nothing but the passing of winter, which does come every year, even if this one was somewhat harsher than normal.
But if ZIRP and QE were working, the lost GDP due to snow and cold should be quickly recovered during the balance of 2014. Why did the Fed not upgrade its remainder of the year forecast to 6.0%/quarter to get back to its 4% annualized escape velocity? After all, virtually every one of the barriers that it blamed for the tepid recovery to date back in 2012 have now been overcome.
Back then it blamed fiscal drag. But the Obama White House has noisily pointed out that in the interim we’ve had the largest reduction in the Federal deficit ever recorded—-even if it still has clocked in at nearly $500 trillion so far this year. So on the fiscal drag front, we’re there. Check!
Then there was the household deleveraging matter. But we’re there, too. Aggregate household debt finally blipped up in the first quarter after years of decline. Even credit card debt recently got a boost. So, check, there too.
And what about global growth and the US export recovery? That one has to be an automatic, postulated…. check, check. Every major central bank in the world still has its shoulder to the wheel of extraordinary accommodation. The BOJ is literally printing itself silly and will soon have a balance sheet of nearly 50% of GDP; the ECB is diving into the monetary nether world of negative deposit rates and back-door money-printing on a vast scale; and the red capitalist overlords in China can’t keep their hands off the RMB print button, even as they fret about the monumental Ponzi rising up all about them. So, yes, check, global growth has to happen.
And never mind the graph below which documents the preposterous deflation of the Fed’s 2014 forecast. You heard Yellen’s words yesterday. No problem! Escape velocity has been rescheduled for 2015 and 2016. Check.
But here’s the point. If you are not wearing Keynesian blinders, it is self-evident that the $3.5 trillion expansion of the Fed’s balance sheet since September 2008 has all gone into the reflation of financial assets—a staggering gift to speculators and the small portion of households (10%) which own more than 80% of all financial assets. The reason for this diversion of the Fed’s vaunted “extraordinary accommodation” into windfall gifts to the 1% is that the historic “credit expansion channel” of monetary policy transmission is broken and done.
We are at “peak debt” folks. Household debt normally amounted to about 75% of wage and salary income back in the prosperous days before we launched into monetary central planning in 1971. But after a 40 year parabolic ratchet to a peak of 220% in 2007, the one time credit fueled boost to household consumption is done. Indeed, the household debt ratio is still at a precarious 180% of GDP, and that’s only on average and therefore only part of the story.
Take out the top 10% of households with their vastly, if temporarily, inflated financial asset troves, and the bottom 30% who live hand to mouth at Wal-Marts and can’t carry any debt except pay-day loans, and it is obvious that there has been no material deleveraging. The middle class core of main street households are still laboring under a crushing load of debt—so zero percent interest rates until the cows come home will not enable or induce them to borrow.
And on the business side of the peak debt story, the picture is now even worse. Non-financial business debt has grown from $11 trillion on the eve of the financial crisis to nearly $14 trillion at present. But this staggering gain of $3 trillion or 25% has not gone into incremental investment in plant and equipment—that is, the building blocks of future productivity and sustainable economic growth. Instead, and just like during the prior Greenspan housing bubble, it has gone into financial engineering and rank speculation.
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