I just finished reading the
FOMC notes released today. I find them more humorous and frightening each time they are released. It seems the folks who are setting monitory policy are some of the best mathematicians in the world of Economics but have the common sense of a doorknob.
This paragraph stands out:
Participants discussed reasons for the apparent fall over recent years
in the neutral real rate of interest--or r*--including lower
productivity growth, demographic shifts, and an excess of saving around
the world. Although several participants indicated that there was
uncertainty as to how long the low level of r* would persist, one
pointed to a growing consensus that the long period of slow productivity
growth and recent evidence that the neutral rate had fallen across
countries suggested that r* was likely to remain low for some time. A
number of participants noted that they had revised down their estimates
of longer-run r* in their contributions to the Summary of Economic
Projections for this meeting. Participants discussed the implications of
a fall in longer-run r* for monetary policy, including the possibility
that policy interest rates might be closer to the effective lower bound
more frequently and for a long period, or that monetary policy was ill
equipped to address structural factors such as the decline in
productivity growth. A couple of participants noted that a lower
estimated value for r* over the near term implied that monetary policy
was providing less accommodation than previously thought.
Followed by this:
Members continued to expect inflation to remain low in the near term,
but most anticipated that, with gradual adjustments in the stance of
monetary policy, it would rise gradually to the Committee's 2 percent
objective over the medium term.
In fact reading this statement was like riding on a merry-go-round. Their policies, essentially manipulating interest rates at near zero levels (along with ECB and JCB) with the thought that "cheap money" is the key to growing an economy irrespective of the multitude of other factors at play, are the most profound in the history of monitory policy. They have held rates so low for so long they are starting to think there a new normal. They are forcing rates down on one hand, then saying that "lower
productivity growth, demographic shifts, and an excess of saving around
the world" are influencing the natural rate of interest. Help me out here. Lets create a massive stimulative / accommodative monitory policy by doing everything possible as a Central Bank to keep interest rates low. Then after we do this for a while we will decide that the natural rate of interest has declined... And because inflation has not popped out of nowhere, we will continue doing the same thing, even though we are saying out of the other side of our mouths that there are structural, demographic and other factors affecting the natural rate of interest not recognizing those same structural, demographic and other factors are ALSO affecting the rate of inflation!!!
It's totally fricken obvious "that monetary policy was ill
equipped to address structural factors such as the decline in
productivity growth". Yet they keep doing the same thing.
They say:
The Committee also decided to maintain its existing policy of
reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities
and of rolling over maturing Treasury securities at auction, and it
anticipated doing so until normalization of the level of the federal
funds rate is well under way. Members noted that this policy, by keeping
the Committee's holdings of longer-term securities at sizable levels,
should help maintain accommodative financial conditions.
Do these folks even understand the dynamics of what their policies have done to distort the economy? Do they understand that low investment accompanied by expanding debt by a corporate America that is just taking advantage of historically low interest rates to buy back stock is a function of their policies? Do they not understand that holding interest rated near zero for so long has created an environment where firms that produce have no need to raise prices when technology has rapidly made producing everything cheaper, that production overcapacity in this world of negative or anemic population growth in the entire developed world means they simply can't sell more, yet their cost of production continues to drop as they borrow money for nothing and continue to consolidate the production of just about everything meaning they need fewer employees and that they can actually afford to keep people they don't really need cause they are making so much money selling stuff, without raising prices, productivity is being affected everywhere? Do the central banks not see that if they would just run down their balance sheets as securities mature and allow the market to start pricing debt again that their may still be some chance of normalization of rates without them having so terribly distorted the market that any change becomes grossly destabilizing? Do they understand there are an entire generation of people who have nearly a decade in the workforce who have only seen zero interest rates and would not know what to do if they were in a real interest rate environment? Do they understand what happens when the expectations of mortgage rates are 3.5-4% for so long that everyone completely
re-balances their entire living budgets on this distortion? Is it possible the average car price of some $35k with a 7 year payment cycle is only possible because of the total expectation that mortgage rates are stuck at this level for eternity? Do they see that inflation will not return while the price of money is zero? Do they not see their own actions are what is driving the "new normal r*"?
Lets look at an example in rough terms. Energy producers are facing difficult times. For decades they had one business model, growth in demand, thus growth in investment and output along with prices. Now they are faced with a dilemma; shrinking demand. Households are getting more energy efficient. From appliances, to heating and cooling systems, to light bulbs and electronics are all getting more energy efficient. Building codes demand more energy efficiency and breakthroughs in fossil fuel recovery has dropped prices in their cost of inputs. They are seeing lower demand, lower costs of input and very low cost of borrowing, all deflationary. Does the Fed expect that cheap money means people will consume more energy? Does the Fed think that cheaper money will drive up fossil fuel costs? (Almost contrary, cheap money allowed 1/2 a trillion dollars to flow into the sector to employ technology that gets even more out of the ground, creating a surplus, driving down prices, hello!) Does the Fed think cheaper money means people will consume more energy? Does the fed think cheaper money means all the gains in energy efficiency in every category is going to make energy efficiency reverse? (Well, for autos, the answer is YES as idiots go out and buy massive energy consuming trucks that cost upwards of $50k cause money is flowing like water and gas is cheap again, but otherwise, NO.) So do the energy producers lay off thousands of workers and shrink their energy production and distribution? NO. They have to maintain their networks cause there is demand, it's just lower. Does this mean lower productivity, YES unless they do lay off workers, invest in cheaper delivery technologies and figure out how to operate in a "new normal". Is there investment in energy production? Yes. Renewables. Does this investment replace the loss in investment in legacy energy? At times, maybe, other times not, end result, "anemic" growth in investment in the entire sector as a whole. Will cheap money and low rates change these fundamental realities? No. But the Fed fails to see this example can be applied across the spectrum of industries now. Efficiency, technology, consolidation, weak demand driven by fundamentals and demographics etc. the overcapacity is simple to see. Getting us back to normal interest rate environment should be a priority cause they are creating other distortions that are, over time, going to be very difficult to break from.
Another example I use is Ketchup. I make Ketchup. I have made Ketchup for years. I bred my own tomatoes for efficiency so they are perfect for mechanical harvesting, have less water etc. Now I make Ketchup more and more efficiently. The packaging I use fluctuates in price based on energy prices, but the producers have also become more efficient and I can rely on steady prices. The distribution I have over the years includes just about every outlet possible, though I still compete for restaurant chains etc., the bottom line is my product's growth rate depends on the long run on the population growth rate, unless I can get people to start using Ketchup to run their cars or something, there is no way I can sell more. Now, I have to show my shareholders I am growing my profits and revenues so I buy my competitors, I shrink my selling sizes at the same price, I find creative ways sell my product for more money etc. But is cheap money going to make me invest more to make my Ketchup even cheaper? No. I have plenty of capacity at a profitable level and growth is anemic so I may revamp every few years and buy out another competitor, if any are left without me becoming a monopoly, but for now, all cheap money allows is for me to borrow money to buy back my stock, boosting my per share earnings and pay dividends, hence stock incentives for executives o now take a vast amount of the earnings further creating disparities in income levels, and happy investors who see my per share profits increasing. But are my earnings increasing cause I am selling more or growing my business? NO. I could go on with this scenario and show how I now buy the mustard guys, then the mayo guys then the salad dressing guys etc till the entire economy for my products is one huge oligopoly... Oh, yea, cheap money allows this kind of consolidation on the cheap, but does it hire more people? No, it results in consolidation, loss of jobs and stagnation in investment cause growth is dependent on demand and demand for my product depends on demographics, plain and simple...
Face it, the Fed is blind. They are going around circles. They don't understand business, just numbers. They have no common sense, just charts and theories. They would not know how to operate dress shop or manufacturer of anything, but could give you models that assume things will be just fine if you just follow the numbers... They have no inkling that the biggest companies by market capitalization in the US now make nothing at all, just buy servers and programmers and if they represent a product, it is made elsewhere, where it's cheaper and this is called "free trade" and companies seeing the globe as their production base and customer base just like the Econ 101 textbooks teach us. So why are they following their current policies till now? Clueless for sure.
