FedUpUSA

While retching my (late) coffee this morning, I got to read (and hear) this, along with the alleged “questioning”….

Chairman Ben S. Bernanke

Semiannual Monetary Policy Report to the Congress

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

February 26, 2013

Chairman Johnson, Ranking Member Crapo, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. I will begin with a short summary of current economic conditions and then discuss aspects of monetary and fiscal policy.

Current Economic Conditions Since I last reported to this Committee in mid-2012, economic activity in the United States has continued to expand at a moderate if somewhat uneven pace. In particular, real gross domestic product (GDP) is estimated to have risen at an annual rate of about 3 percent in the third quarter but to have been essentially flat in the fourth quarter.1 The pause in real GDP growth last quarter does not appear to reflect a stalling-out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending, even as demand by U.S. households and businesses continued to expand. Available information suggests that economic growth has picked up again this year.

Consistent with the moderate pace of economic growth, conditions in the labor market have been improving gradually. Since July, nonfarm payroll employment has increased by 175,000 jobs per month on average, and the unemployment rate declined 0.3 percentage point to 7.9 percent over the same period. Cumulatively, private-sector payrolls have now grown by about 6.1 million jobs since their low point in early 2010, and the unemployment rate has fallen a bit more than 2 percentage points since its cyclical peak in late 2009. Despite these gains, however, the job market remains generally weak, with the unemployment rate well above its longer-run normal level. About 4.7 million of the unemployed have been without a job for six months or more, and millions more would like full-time employment but are able to find only part-time work. High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole. Lengthy periods of unemployment and underemployment can erode workers’ skills and attachment to the labor force or prevent young people from gaining skills and experience in the first place–developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt.

The recent increase in gasoline prices, which reflects both higher crude oil prices and wider refining margins, is hitting family budgets. However, overall inflation remains low. Over the second half of 2012, the price index for personal consumption expenditures rose at an annual rate of 1-1/2 percent, similar to the rate of increase in the first half of the year. Measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years. Against this backdrop, the Federal Open Market Committee (FOMC) anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

Monetary Policy With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy. Under normal circumstances, policy accommodation would be provided through reductions in the FOMC’s target for the federal funds rate–the interest rate on overnight loans between banks. However, as this rate has been close to zero since December 2008, the Federal Reserve has had to use alternative policy tools.

Actually, you didn’t have to do any such thing if you hadn’t yet first poisoned the economy with massive, unbridled debt accumulation throughout the system, unbacked by anything!

These alternative tools have fallen into two categories. The first is “forward guidance” regarding the FOMC’s anticipated path for the federal funds rate. Since longer-term interest rates reflect market expectations for shorter-term rates over time, our guidance influences longer-term rates and thus supports a stronger recovery. The formulation of this guidance has evolved over time. Between August 2011 and December 2012, the Committee used calendar dates to indicate how long it expected economic conditions to warrant exceptionally low levels for the federal funds rate. At its December 2012 meeting, the FOMC agreed to shift to providing more explicit guidance on how it expects the policy rate to respond to economic developments. Specifically, the December postmeeting statement indicated that the current exceptionally low range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”2 An advantage of the new formulation, relative to the previous date-based guidance, is that it allows market participants and the public to update their monetary policy expectations more accurately in response to new information about the economic outlook. The new guidance also serves to underscore the Committee’s intention to maintain accommodation as long as needed to promote a stronger economic recovery with stable prices.3

The second type of nontraditional policy tool employed by the FOMC is large-scale purchases of longer-term securities, which, like our forward guidance, are intended to support economic growth by putting downward pressure on longer-term interest rates. The Federal Reserve has engaged in several rounds of such purchases since late 2008. Last September the FOMC announced that it would purchase agency mortgage-backed securities at a pace of $40 billion per month, and in December the Committee stated that, in addition, beginning in January it would purchase longer-term Treasury securities at an initial pace of $45 billion per month.4 These additional purchases of longer-term Treasury securities replace the purchases we were conducting under our now-completed maturity extension program, which lengthened the maturity of our securities portfolio without increasing its size. The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.

So what happens when there is no substantial improvement in the labor market?

Gee, The FOMC has run four years sequentially of extraordinary monetary policy and there has been not one bit of positive movement in the labor market.

So for exactly how long will Bernanke continue this charade?  You’re either a liar or you’re insane, tilting at windmills and accomplishing exactly nothing goodbut dramatically increasing the risk of very bad, and very violent, negative side effects.

The Committee also stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of their likely efficacy and costs. In other words, as with all of its policy decisions, the Committee continues to assess its program of asset purchases within a cost-benefit framework. In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC’s 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth–for example, through higher home prices–these developments have in turn supported consumer sentiment and spending.

So home prices are not inflation?  Nor are stock prices?  Nor gasoline and food prices?  How about health insurance prices, or health spending in general, up approximately 9% a year over at the Federal level since 1980 and, incidentally, reported as up nearly that much annually in the latest CPI report!

None of this is inflation?  I don’t exchange money for any of those things?

Highly accommodative monetary policy also has several potential costs and risks, which the Committee is monitoring closely. For example, if further expansion of the Federal Reserve’s balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC’s price-stability objective at risk. However, the Committee remains confident that it has the tools necessary to tighten monetary policy when the time comes to do so. As I noted, inflation is currently subdued, and inflation expectations appear well anchored; neither the FOMC nor private forecasters are projecting the development of significant inflation pressures.

Of course you’re confident.  You were also confident that subprime would be contained, remember?

How’s your record on these prognostications, if I may be so impolite to ask?

Another potential cost that the Committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage. On the other hand, some risk-taking–such as when an entrepreneur takes out a loan to start a new business or an existing firm expands capacity–is a necessary element of a healthy economic recovery. Moreover, although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses. In any case, the Federal Reserve is responding actively to financial stability concerns through substantially expanded monitoring of emerging risks in the financial system, an approach to the supervision of financial firms that takes a more systemic perspective, and the ongoing implementation of reforms to make the financial system more transparent and resilient. Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation.5

So let me see if I get this right.

• It’s good to have low rates because that supports the recovery.
• Low rates “might” encourage excessive risk taking.
• Excessive risk-taking would be bad.
• But low rates are not an explicit and inevitable subsidy to bad behavior, including in the Congress, because they do not make the cost of borrowing money artificially low and therefore drive decisions that are inherently uneconomic — and which would not take place but for those low rates?

I love it when Bernanke screws himself with his own words.  That’s the problem with lying, you see — you eventually fail to scrub all the interconnections between the lies and miss a few.

Another aspect of the Federal Reserve’s policies that has been discussed is their implications for the federal budget. The Federal Reserve earns substantial interest on the assets it holds in its portfolio, and, other than the amount needed to fund our cost of operations, all net income is remitted to the Treasury. With the expansion of the Federal Reserve’s balance sheet, yearly remittances have roughly tripled in recent years, with payments to the Treasury totaling approximately $290 billion between 2009 and 2012.6However, if the economy continues to strengthen, as we anticipate, and policy accommodation is accordingly reduced, these remittances would likely decline in coming years. Federal Reserve analysis shows that remittances to the Treasury could be quite low for a time in some scenarios, particularly if interest rates were to rise quickly.7 However, even in such scenarios, it is highly likely that average annual remittances over the period affected by the Federal Reserve’s purchases will remain higher than the pre-crisis norm, perhaps substantially so. Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.

Oh?

So let me see if I get this right.  If the blended average interest rate on the Federal Debt goes to just 3.5%, what is the total interest expense of the Federal Government on $17 trillion?  (Answer: About $600 billion a year.)  What percentage is this of tax revenues?  And who’s accounting for the additional $400+ billion a year load on the federal budget of this, which is approximately half of current Social Security, Medicare/Medicaid or Defense expenditures!

Thoughts on Fiscal Policy Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health. The economy’s performance both over the near term and in the longer run will depend importantly on the course of fiscal policy. The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery.

Riiight.  Just like it was in 2000, when Greenspan intentionally produced a bubble, and just as it was into the 1990s, when he intentionally glad-handed and ignored rampant and unbridled speculation — including outright bogus projections in various public companies that were being backed by and promoted through regulated financial institutions?

I seem to remember that one Ben Bernanke was on the FOMC for the latter bit of chicanery.

I think it’s the same Ben Bernanke that’s there now.

Significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015.8 As a result, the federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of GDP through much of the current decade.

The CBO, as I have repeatedly pointed out, is constrained to count every law that will expire as one that has in its forward projections.  Because it is required to account for current law and not likely or even nearly-certain revisions, such as occurred with the (until-recently) annual AMT patch, the CBO has an unbroken history of producing “estimates” that always underestimate spending and debt levels.

It’s not their fault — they have to operate within their mandate.  Their mandate is broken.

But the FOMC has no requirement to take these “estimates” at face value without adjusting them for these policy mandates.  So it is one thing for the CBO to produce an estimate but when the FOMC takes same as valid work product it is lying, because the FOMC is well-aware of the limitations — intentional limitations — of those “estimates” and the track record that the CBO has of historically radically underestimating both deficits and debt levels.

However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

Since GDP = C + I + G + (x – i) it is axiomatic that all spending cuts will reduce GDP.  Trying to claim that this is somehow “bad” is immaterial since it cannot be avoided.

At the same time, and despite progress in reducing near-term budget deficits, the difficult process of addressing longer-term fiscal imbalances has only begun. Indeed, the CBO projects that the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade, reflecting in large part the aging of the population and fast-rising health-care costs. To promote economic growth in the longer term, and to preserve economic and financial stability, fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and, given the current elevated level of debt, eventually places that ratio on a downward trajectory. Between 1960 and the onset of the financial crisis, federal debt averaged less than 40 percent of GDP. This relatively low level of debt provided the nation much-needed flexibility to meet the economic challenges of the past few years. Replenishing this fiscal capacity will give future Congresses and Administrations greater scope to deal with unforeseen events.

Duh.

Nine percent increase annualized in medical spending for the last 30 years.

This has not abated at all; the last 12 months in health insurance, if you believe the CPI, increased at nearly that level.  Further there are alreadyannounced 100% increases coming for many policyholders for the next 12 months due to Obamacare!

To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.

Nonsense.

The longer an exponential trend goes on the worse the consequence of addressing it. 

This is arithmetic, not politics.

The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policymakers should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure. Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face.

Senator Corker reamed Bernanke good, directly calling him out on the fake “wealth effect” he has been targeting along with more.

Incidentally, Bernanke’s claim that he won’t have to “sell assets” and will simply “let them run off” is a nice fantasy.

But if that turns out to be true then there will be no economic growth for the entire period, since it is precisely those assets that provide the “lever” by which monetary policy is enacted.  At present the interest-insensitive portion of the Fed Balance Sheet is zero (bills); as such the only way he can get away with that will be if there is never a need to sell assets in the SOMA account to implement policy.

In addition as rates rise the pincer closes on the FOMC and will destroy it, because as rates rise in order to keep the excess reserves on the balance sheetThe Fed will have to pay higher and higher interest on those reserves.  At the same time it cannot remove liquidity by selling assets or it will take a huge capital loss!

So which is it Ben?  The only way you can do what you claim is if we become Japan and are unable to generate any meaningful long-term economic growth which you said you would avoid because you’re smarter than they were and are.

Well?

This is not the report you wanted to see this morning.

Nonfarm business sector labor productivity decreased at a 2.0 percent annual rate during the fourth quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The decrease in productivity reflects increases of 0.1 percent in output and 2.2 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the fourth quarter of 2011 to the fourth quarter of 2012, productivity increased 0.6 percent as output and hours worked rose 2.4 percent and 1.8 percent, respectively. (See chart 1 and table A.) Annual average productivity increased 1.0 percent from 2011 to 2012. (See table C.)

The reason this is much nastier than one would like is that in the long run budget deficits on a sustainable level are inevitably tied to productivity improvements.

If economic output is improving in efficiency at 3% a year then you can have a budget deficit of 3% and the system will remain in balance.  The government is essentially stealing the productivity improvement of the people, and this is wrong on an ethical and moral level, but it is mathematically stable.

The Euro Zone, for example, has a hard budget deficit cap of 3%.  This has been routinely ignored and gamed, which is largely responsible for the mess they’re in today, and in fact the risks there are grossly under-appreciated (and likely to become realized risks soon enough!)

But here in the US I have believed for quite some time that we would be maintaining a rough 3% improvement in productivity over multi-year periods.  This report throws cold water — and a warning — on that expectation, as it is the second year running that productivity has run at 1% or below.

This has a profound impact on sustainable deficits; if you can run a 3% deficit then on a $15 trillion economy you can run a $450 billion deficit on a long-term sustainable basis. Again, this may be immoral and theft, but it’s mathematically stable.

With a 1% productivity rate you lose $300 billion of that spending; now you can only run a $150 billion deficit.  And this is the second year sequentially in which productivity has run 1% or less.

Should productivity go negative it gets even worse; you are then forced to run a surplus to remain in monetary balance.

The target, unfortunately, has to be moved to a 1% deficit from 3%.

And incidentally, that’s three times the size of the sequester in terms of the change required — and it has to be made right now.

Sorry folks.

The WSJ has an interesting opinion piece this morning that should be required reading — but it won’t be by far too many of the political wonks.

In a 1996 speech to the American Enterprise Institute, Federal Reserve Chairman Alan Greenspan famously warned about the dangers when “irrational exuberance” fueled asset inflation. By that he meant that rising values of stocks and real estate might reflect only a cheapened dollar, not an increase in their real worth. Since he was the man in charge of the dollar, his remark caused quite a stir.

We’ve learned a lot about asset inflation since that speech, but maybe not enough. The nearly 2,000-point rise in the Dow Jones Industrial Average since last June no doubt at least partly reflects asset inflation, since there has been very little in the economic or political outlook to justify it.

Actually, we’ve learned exactly nothing, save one point — politicians love asset inflation, and the more they can stoke it the more they love it.

The reason is simple — it gives them something to point to as a so-called “measure” of economic health, they get to tax it, and it is something they can twist knobs on in the monetary and fiscal policy realm to pretty-much dial up — most of the time.

This leads political sorts — and central bankers — to deduce that such is “free.”

But nothing is ever free.

Unbacked credit issuance is exactly identical to currency printing in economic terms.  And our history since the 1980s has, unfortunately, been to abuse monetary and credit systems as a means of covering up our desire to borrow and spend more and more to keep up the chimera of so-called “economic growth.”

This isn’t a “new” problem; our economy in the United States has put on roughly 3% in new credit above the rate of GDP growth since records became reasonable-available in enough detail to analyze — which dates to the 1950s.

Now take a look at this graph (again):

That’s the credit and GDP expansion quarter-by-quarter.  The modeling of it in terms of levels (as opposed to flows) is roughly this:

For those who think this isn’t what our debt picture looks like in the above, uh, well…

Now notice that since 2009 the pattern has changed.  That is, while we have fits and starts of credit creation net-net, we can no longer maintain it.  The markets are at present responding to what they believe is the old paradigm — but that paradigm no longer exists.

Instead, what is happening is that as the Federal Government becomes the only issuer of this new credit (and the Fed the only market sink) the impact shows up in reduced purchasing power that disproportionately falls on the lower and middle classes, since the economy in general refuses to “lever up” — because the people either can’t or won’t.

The consequence of this is not hard to figure out.

If you have 1,000 units of production and 1,000 units of credit or currency with which to buy that production, and you then emit another 1,000 units of credit into the system, the price of something will rise.  By bringing this pressure on market prices artificially you will spur people to produce more.  This is what all the politicians and monetary wonks claim is a “virtuous cycle”, but they’re wrong, because the demand that led to the increased output is not real.

If this was a one-time shot it might be defensible, but it can’t be due to the fact that the borrowed funds have to be paid back.  This in turn leads you to demand $X + 1 in “stimulus” next, because the “+1″ is necessary to cover the carrying costs on your original $X borrowing.

This is the trap into which Japan fell.  Now they’re trying to “force” inflation, when the natural economic state is a mild deflation — exactly as they have had! 

They can force inflation but in doing so they will destroy the purchasing power of their lower and middle classes, which eventually will lead to the collapse of their society and government.

This is exactly the policy being propounded here in the United States, and in fact the policy being run since 2008.  Barack Obama, with the full complicity and in fact cooperation of Congress, including the Republican House, have pursued the mathematically certain bankrupt strategy of deficit spending as a means to “reflate” the economy.

But while the stock market is close to its previous highs real purchasing power of the lower and middle classes, along with the labor force participation rate, is worse today than it was in 1980 and the rate of deterioration is accelerating!

There is no way out of this box without acceptance of the adjustment that must be taken in the economy as a whole, and the longer we continue to play the game of subsidy and handout, which is really nothing more than reaching into one pocket, withdrawing two $20s, putting one into the other pocket while the other on fire and then claiming to be $20 richer, the worse our outcomes in the economy and society will be.

No serious discussion or debate about the budget can take place without the removal of these cross-subsidy effects, and nowhere are they more serious than in the stock market and health care sector.  Those two areas, particularly the latter, must be addressed.

But as of right now they’re not even under discussion while we are but one small economic incident away from triggering the next major downturn — with no policy tools remaining to address it.

That incident is coming and is likely to be as simple as market recognition that the driver of asset inflation through the last 30 years is no longer present and cannot be restarted, despite claims to the contrary that it’s “just around the corner.”

When that recognition hits the markets – and it will – look out.

Pavlov’s dogs still run wild….

Selected excerpts….

The information reviewed at the July 31–August 1 meeting indicated that economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.

….

Manufacturing production decelerated significantly in the second quarter following a large gain in the first quarter, while the rate of manufacturing capacity utilization was unchanged on balance.

….

Real personal consumption expenditures increased at a slower rate in the second quarter than in the first quar-ter, primarily reflecting a decrease in spending for mo-tor vehicles. Meanwhile, real disposable personal in-come rose at a faster pace than consumer spending in both the first and second quarters, boosted in part in recent months by lower energy prices. Consumer sen-timent as measured by the Thomson Reu-ters/University of Michigan Surveys of Consumers (Michigan Survey) was more downbeat in June and July than earlier in the year.

….

Despite new historical lows for residential mortgage rates over the intermeeting period, refinancing activity remained relatively muted.

….

Consumer credit expanded further in May as a result of rapid increases in student loans and, to a lesser extent, auto loans.

….

The Committee had provided additional accommoda-tion at its previous meeting by announcing the continu-ation of the maturity extension program through the end of the year, and more time was seen as necessary to evaluate the effects of that decision. Nonetheless, many members expected that at the end of 2014, the unemployment rate would still be well above their es-timates of its longer-term normal rate and that inflation would be at or below the Committee’s longer-run ob-jective of 2 percent. A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional mone-tary accommodation would likely be warranted fairly soon unless incoming information pointed to a sub-stantial and sustainable strengthening in the pace of the economic recovery.

 

Here’s the problem with all of this.

Unless growth in the economy exceeds credit expansion plus population expansion (since GDP is reported gross and not “per-capita”) such credit expansionary policies in fact move the common man’s standard of living backward, and the more “accomodation” you provide the more backward movement takes place!

This is a function of basic arithmetic, and yet there is no evidence — anywhere — that The Fed’s policies up to this point have done anything except replace private unbacked credit emission (that is, mathematically counterfeiting) with government credit emission.

That’s it.  It has done nothing else.  It has only protected the banksters from having to pay the ultimate price for their hubris during the 2000s — bankruptcy.  And more QE will do nothing more than that; there is, again, zero evidence that it is capable of doing anything else!

Will the market figure this out?  Eventually.

One way or another.