Janet Yellen: False Prophet of Prosperity

07/11/2017Ron Paul

Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.” Yellen’s statement should send shivers down our spines, as there are few more reliable signals of an impending recession, or worse, than when so-called "experts" proclaim that we are in an era of unending prosperity.

For instance, in the years leading up to the 2008 market meltdown, then-Fed Chair Ben Bernanke repeatedly denied the existence of a housing bubble. In February 2007, Bernanke not only denied that “sluggishness” in the housing market would affect the general economy, but predicted that the economy would expand in 2007 and 2008. Of course, instead of years of economic growth, 2007 and 2008 were marked by a market meltdown whose effects are still being felt.

Yellen’s happy talk ignores a number of signs that the economy is on the verge of another crisis. In recent months, the US has experienced a decline in economic growth and the value of the dollar. The only economic statistic showing a positive trend is the unemployment rate — and that is only because the official unemployment rate does not count those who have given up looking for work. The real unemployment rate is at least 50 percent higher than the manipulated “official” rate.

A recent Treasury Department report’s called for rolling back of bank regulations could further destabilize the economy. This seems counterintuitive, as rolling back regulations usually contributes to economic growth. However, rolling back bank regulations without ending subsidies like deposit insurance that create a moral hazard that incentivizes banks to engage in risky business practices could cause banks to resume the unsound lending practices that were a major contributor to the growth, and collapse, of the housing bubble.

The US economy is already faced with several bubbles that could implode at any time. These include bubbles in student loans and automobiles sales, and even another housing bubble. The most dangerous of these bubbles is the government bubble caused by excessive spending. According to a 2016 study by the Mercatus Center, at least four states could soon join Puerto Rico and Illinois in facing bankruptcy.

Of course, the mother of all government bubbles is the federal spending bubble. Despite claims of both defenders and critics of the president’s budget, neither President Trump nor the Republican Congress have any plans for, or interest in, reducing spending in any area. Even the so-called cuts in Medicare and other entitlement programs that have generated such hysterics are not real cuts, but “reductions in the rate of growth.”

Some fiscal conservatives are praising the administration’s proposal to finance transportation spending via government bonds. However, the people will eventually have to pay for these bonds either directly through income taxes or indirectly through the inflation tax. Government-issued bonds harm the economy by diverting investment capital away from the private sector to the “mixed economy” controlled by politicians, bureaucrats, and crony capitalists.

If Congress continues to increase spending and the Federal Reserve continues to facilitate that spending by monetizing the debt, Americans will face an economic crisis more severe than the Great Depression. The crisis will likely result from a rejection of the dollar as the world’s reserve currency. Those of us who know the truth must redouble our efforts to ensure a peaceful transition away from the Keynesian system of welfare, warfare, and fiat currency to a society of peace, prosperity, and liberty.

Reprinted with permission.

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June FOMC Announcement: Rate Hike and Balance Sheet Plans

06/14/2017C.Jay Engel

June's FOMC meeting concluded today and the meeting announcement revealed an interest rate hike of .25% to bring the Federal Funds target to between 1 and 1.25%. Additionally, we also learned that the FOMC anticipates one more rate in 2017, 3 more in 2018, and the beginning of a balance sheet reduction effort starting this year. Of course, the balance sheet reduction is actually just a taper in the amount of reinvestment. Since they are simply slowing down how much in assets they are buying every month, the balance sheet will still be increasing. 

There are still concerns at the FOMC (and in monetary officialdom in general) that the devaluation of our purchasing power (colloquially known as "inflation") is not occurring rapidly enough. From their own statistics, which exclude things most important to consumers such as food and energy, price inflation dipped a bit to 1.7%. This, of course, is an utter outrage to the experts.

We also got more specific detail about the balance sheet plan, which as we have said all year is going to be the primary narrative of the second half of 2017 in place of interest rate hike talks. Bloomberg reports:

In a separate statement on Wednesday, the Fed spelled out the details of its plan to allow the balance sheet to shrink by gradually rolling off a fixed amount of assets on a monthly basis. The initial cap will be set at $10 billion a month: $6 billion from Treasuries and $4 billion from mortgage-backed securities.

The caps will increase every three months by $6 billion for Treasuries and $4 billion for MBS until they reach $30 billion and $20 billion, respectively.

Officials didn’t reveal the exact timing of when the process will begin this year, as well as specifically how large the portfolio might be when finished.

On the interest rate decision it was Minneapolis Fed President Neel Kashkari who once again dissented, preferring no change. He is one of the more dovish members of the Fed, preferring to see the core inflation rate (according to Fed-preferred statistics) solidly above 2% before additional rate hikes. 

The next FOMC meeting is at the end of July, but no rate hikes are expected again until September. 

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John Williams: Longer Term Economic Challenges

05/30/2017C.Jay Engel

San Francisco President John Williams spoke last Sunday, reiterating his position that the Fed would hike 3 times this year. Looking only at the inflation rate (as measured by the PCE) and the unemployment levels, the Fed considers its dual mandate as having been met. On the surface this justifies a rate hike, according to mainstream economic orthodoxy.

However, Williams also expressed concern about the long-term prospects of slowing economic growth. CNBC quotes Williams:

"I personally view that the biggest challenges the U.S. faces are really longer run challenges, not about next month, next year. They're about the fact that productivity growth is very slow, we have a shortfall of infrastructure in the U.S.," he said.

"We have a lot of longer term challenges that really revolve around needing more investments in education, job training, infrastructure, research and development, all the things that propel an economy over the longer term."

The fact of the matter is the last 3 decades have seen a central bank-induced false prosperity in which the true capital stock of the United States (and the global economy) has been depleted. By artificially lowering interest rates and expanding the money supply worldwide, the central planners have brought consumption spending forward, neglecting the necessary savings required for long term economic growth. 

Williams mentions several areas requiring increased investment, which allegedly propel an economy over the long term. The problem is that the world has far less capital to actually invest in the long term-- and the central bankers falsely believe that the creation of more money and the suppression of interest rates will suffice. But money is not the same as savings, as capital. Frank Shostak:

Money can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples, the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.

The only way that the economy can be prepared for investment in various areas for the long term is by first accumulating a large capital stock. But the Fed's entire academic framework rests on the opposite of this; namely, to keep interest rates basically at all time lows and to encourage spending and consumption. With this the goal in mind, growth rates simply can't recover.

It seems that this theme of "rate hikes immediately but concern about the long term" could be a sign that the Fed is hiking now so that it has room to slash them in a future recession. Watch for this theme to become more prominent toward the end of the year.

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Janet Yellen on Workforce Development

03/29/2017C.Jay Engel

As often noted, the Fed's economists and bureaucrats operate on the assumption that everything they do is part of the solution, but they are never part of the problem. Yellen's recent speech at the National Community Reinvestment Coalition is centered around the theme of "creating a just economy." Allegedly, a just economy needs an institution with the authority to bail out banks, subsidize the world's largest financial institutions, and explicitly aim to increase the cost of goods and services for people everywhere. 

To solve the problem of stubbornly high unemployment rates in lower-income areas, Yellen has some ideas. Spoiler: there's nothing about halting the Central Bank's interest rate manipulation, which destroys capital by misallocating resources and makes economies less wealthy. There's also nothing about the effect of minimum wage laws on those trying to find work, but who are priced out of the labor market.

Instead, we get this, as solution number one:

Probably the most important workforce development strategy is improving the quality of general education.

As if merely "educating people" (having them spend 14 years of their lives in the classroom with government approved curriculum) can solve the problem of an increasingly stagnant economy. 

Yellen says:

While the job market for the United States as a whole has improved markedly since the depths of the financial crisis, the persistently higher unemployment rates in lower-income and minority communities show why workforce development is so essential. 

It appears that Yellen stumbled upon the fact that all the Fed's tremendous Treasury buying and balance sheet expansion hasn't really solved the employment problems in the lower-income community. And yet, the Fed has joined the "inequality" narrative.

The most obvious way to help the employment situation in these specific communities is actually to remove the restriction on hiring them! There is no mention of the fact that there are all these people willing and wanting to work, and yet cannot because it is illegal. That's what the minimum wage laws do.

Yellen and other central bankers need more self-reflection. The economy is not fixed by their efforts, it is torn apart by their desire to use the tools of monetary interventionism to fulfill their goals. Central banks cannot create a "just economy" (a phrase with no definition), no matter how hard they try.

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Janet Yellen’s 2017 Outlook

01/23/2017C.Jay Engel

Fed Chair Janet Yellen’s recent speech at Stanford University certainly was much like Ms. Yellen herself: predictable and safe. She is less opaque than Alan Greenspan, and less combative that Ben Bernanke. But she shares both men’s ability to say very little that is interesting or controversial.

Yellen opened with self-congratulatory Fed-speak. Citing the falling official unemployment number as a sign of Central Planner heroism, Yellen completely washes over the troubling reality of the participation rate. The statisticians, in true form, put the attention on how many in the labor force have a job, but shoo away the fact that the denominator— the labor force itself— is hardly in a healthy state. After all, if tens of millions who need a job have given up looking and are no longer calculated in the labor force, how can this be a labor market recovery?

Consider the problem in graph form, courtesy of Jeff Snider at Alhambra Partners.

Two Labor Stories

Yellen expressed resolve to achieve even more devaluation of the currency on her quest toward 2% inflation. Of course, being well-trained central bankers Yellen and Co. are completely oblivious that their interest rate manipulation devastates the very pillar of a sound economy: the intertemporal structure of production. The aim to “heat up” the economy by tampering with interest rates doesn’t just put upward pressure on consumer prices, it also sets the economy up for a future recession.

Yellen thoroughly defends the honor of the discretionary policy advocates by clearly warning about the dangers of a policy rule. That is, whether monetary policy should be left up to the “discretion” of the FOMC (discretionary monetary policy) or in accordance with predetermined rules, such as the Taylor Rule, Yellen upholds the former. She argues that the Fed needs a level of flexibility to respond to unforeseen events that various “rules” don’t provide. Of course, this entire debate over discretionary vs. rule-based is ludicrous: both of these positions aim to set money supply and interest rates at variance with what the market would provide.

What we need is the market to properly allocate scarce capital according to price signals and in response to the desires and decisions of individual actors throughout “the economy.” In other words, we don’t need more “policy.” We’ve suffered enough.

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