Tag Archives: Yellen

Keynesian Blather

YellenPolitical bloggers were not kind to Chairman Yellen’s keynote speech at Jackson Hole. David Stockman called it “Keynesian blather.” Someone else called it an insult to America’s intelligence.

The Fed Chairman makes an easy target, especially if you don’t understand the technical terms. After all, who cares if you’re unemployed for cyclical reasons or structural ones?

Jeremiah prefers to assume people are generally competent for their jobs. We downloaded the speech here. Remember that this is a keynote speech, kicking off a symposium on the labor market. So, when Yellen refers to the unsolved mysteries of employment, that doesn’t mean she’s confused – she is introducing the topics.

Jeremiah was pleased to see that Yellen does not take the headline unemployment figure at face value. She acknowledged the growth in part time employment and the drop in labor force participation. Here are a few of the topics:

  • Is labor force participation off because people have retired, or are they coming back? If people come back en masse, that will drive wages down.
  • Is there “pent up wage deflation?” If so, wages may jump once it has run its course.
  • Have the midlevel jobs gone, to Asia and automation, never to return?

You can see that these are all relevant to ordinary Americans, and relevant to Fed policy. The Fed needs to know whether there is still slack in the labor market, or if our current wretched economy is the new normal. The dual mandate requires the Fed to keep credit conditions easy as long as there is any chance it will help someone find work. This brings us to the Keynesian part.

Keynes reckoned that inflation could reduce unemployment, and this is why the Fed has a dual mandate instead of simply maintaining price stability. In fact, Keynes’ definition of full employment is the level at which inflation can’t help one more guy find work.

Men are involuntarily unemployed if, in the event of a small rise in [inflation], both the aggregate supply of labor willing to work for the current nominal wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

Lower wages will put more people to work – basic supply and demand – and the role of inflation is to give everyone a pay cut, by reducing the value of their nominal wage. This is a pretty incompetent way to create jobs, and it’s not even a good definition.

There is no magic formula for full employment, any more than there is a magic diet pill. Keynes didn’t have it and, when the symposium is over, Janet Yellen won’t have it either.

Labor is employed when entrepreneurs have profitable projects, capital to invest, and a stable political environment. As public policy, this means the rule of law and – a predictable tax and regulatory regime. Various surveys, including the Fed’s own Beige Book, have indicated this is what’s holding back the job market.

Keynes wrote a system of equilibrium equations, like the ideal gas law. In such a system, aggregate demand for goods cannot be more or less important, as a policy objective, than the aggregate demand for labor.

When companies are starved for workers, they compete by offering higher wages. You guessed it – full employment causes inflation.


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New Fed Bashing Hero

AudreyHepburnJeremy Grantham gave an insightful interview to Fortune magazine, which they have subtitled “Fed bashers have a new hero.” Business Week picked up the story, calling Grantham a “noted gloomster.” This is what passes for analysis in journalism today. Everything is ad hominem and partisan. If you have actually read Grantham’s published research, you know that he is rigorous, objective, and precise. When he says that stocks are overvalued, this is based on solid analysis of corporate earnings – documented elsewhere by his colleague James Montier. Temperamentally, Grantham is bullish on America, but he is not in business to make overpriced investments.

“The only ones who have really benefited from QE are hedge fund managers.” – Jeremy Grantham

A related headline is, “Grantham calls Yellen ignorant.” What he actually said was, “either she is ignorant of the markets, or else she is cynical about manipulating them.” Congress had asked the Fed Chair if markets were overvalued, which is not her area of expertise. The Fed studiously avoids pricing stocks, gold, or Bitcoin. They look instead at employment, yields, and consumer prices. Financial analysts, obviously, feel the Fed should also study the markets.

The New York Times presents this roundup of Fed bashers. The Times is married to Paul Krugman’s idea that printing money somehow helps the common man – dogma long past its sell-by date. Opinions are more varied than the tabloids let on, and the consensus is much as Jeremiah has presented. The Fed was right to step in with the first round of quantitative easing, but now it has gone too far. Easy money has created a variety of perverse incentives and moral hazards.

Speaking of moral hazards, look at the list of Fed critics – Gundlach, Grantham, Einhorn, Hunt, Chanos, Spitznagel, and Druckenmiller. The Times says they’re all wet – and a minority.  So, what does the rest of Wall Street have to say? Not a damned thing. They’re taking the money.

See also: Inflation at Tiffany’s

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Goodbye, Ben Shalom

ben-bernankeRegular readers know that Jeremiah was for QE before he was against it.  This is actually the consensus view of professional economists – Raghuram Rajan, for instance, since we were just talking about him.  Chairman Bernanke will be remembered for QE #1, which averted a certain disaster.  Subsequent rounds of QE were more risky and less effective.  Before stepping down, Bernanke also began the process of tapering off QE.

It now seems obvious that central banks should have done what they did … restored liquidity to a world financial system that would otherwise have been insolvent

The strong dollar people hated QE from the beginning.  Their fears were confirmed by inflated returns in the stock market.  At the other end of the spectrum, Paul Krugman is still beating the drum for more.  You can’t please everyone.  Bernanke also had a hand in shoring up the euro.

It is often the mundane achievements that turn out to be the most durable.  Chairman Bernanke took huge steps in making the Fed more transparent, with regular statements, published minutes, and quantitative targets.

But no amount of transparency can offset the cultism which now surrounds the Fed.  On Monday, the stock market was idle, as the world waited for the new Chairman’s testimony.  Bernanke retires with a good record, on balance, but there is work to be done.

Chairman Yellen must disabuse Congress, and the world, of their superstitions about the Fed.  Monetary easing is a poor remedy for unemployment, not to mention inequality.  Jeremiah would like to see the new Chairman remind Congress of its own responsibilities, and maybe even question the “dual mandate.”

Update:  Well, that was just embarrassing.  Congress begged the new Chairman for help with unemployment, inflation, mortgage lending, inequality, and the weather.  The price of gold went straight up.

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