Posted on 04/01/2016 4:05:23 AM PDT by expat_panama
Speaking before a packed audience at the prestigious Economic Club of New York, Fed chair Janet Yellen basically announced that there would be no rate hikes for quite some time - maybe once before year end, maybe not. Her key point was that the global economy is worse today than it was in December, back when the Fed took its target rate up a quarter point. I think she's right.
I also think she is paying more attention to forward-looking, inflation-sensitive financial and commodity-market prices. This is good. Very good.
Yellen cited shrinking inflation spreads in the Treasury bond market, declining commodities (until recently), a flattening of the Treasury yield curve, and a stronger dollar. The sum total of these market-price indicators is stagnant growth and virtually no inflation. Hence, there's no need for the Fed to militantly raise its policy rates.
This price-rule approach is a lot better than the Fed's flawed models, which are based on a false tradeoff between lower unemployment and higher inflation. I've said it a million times: More people working does not cause inflation. Instead, more people prospering and producing makes the existing money supply less inflationary.
Austan Goolsbee, former chairman of the Council Economic Advisors, has long argued that Fed models have consistently over-predicted the economy. As a result, the Fed has consistently had to lower its forecasts in the face of stagnant 2 percent growth.
The possibility that Janet Yellen is escaping the defective Phillips-curve mentality gives one a bit of confidence, especially if she is watching market prices. She even noted in her speech that the Fed's favorite inflation indicator actually fell in February, and is up only 1 percent over the last year.
Now let me make a second point. Most financial-market people think the Fed's ultra-low target rates indicate ultra-easy money. They're wrong. The principal reason that market interest rates are so low is that the economy is stagnant and inflation is virtually nonexistent. Along with a strong greenback and falling commodity prices, you could argue that the Fed is tighter than anybody thinks.
I don't want more QE, which was a failed experiment. The fact is, rock-bottom interest rates generally indicate near-zero inflation and relative monetary tightness. If market interest rates were surging, that would be a sign of higher inflation, undoubtedly because the Fed was too easy.
Milton Friedman taught us this over 50 years ago. Interest rates are lousy monetary indicators. Better to watch the money supply or the velocity turnover rate of money, which can be captured by tracking nominal GDP. Over the past year, money GDP has increased only 3.1 percent. That's a sign of monetary tightness, not ease.
As free-market economist Alan Reynolds of the Cato Institute recently noted, government interest rates were rock bottom in the 1930s. That's because the Fed and most other central banks were way too tight.
Even worse today, having stuffed banks with excess reserves, central banks in Europe and Japan are punishing those banks with negative interest rates. They're also punishing savers. This is not good policy.
What we have now in these uncertain times is not so much a monetary problem as a major fiscal problem. In particular, corporate tax rates must be slashed in the U.S. for large and small businesses. We also need full cash tax expensing for new investment and an end to the double taxation of foreign profits.
This would rejuvenate economic growth. In the global race for capital, the U.S. would emerge victorious.
Incentives matter. I'm not just talking about 4 or 5 percent economic growth, but higher wages and stronger employment-participation rates. And my guess is that, as real economic growth jumpstarts, real interest rates would move higher. And that's when the Fed can follow market interest rates upward by raising its policy rates.
By the way, it's the same problem overseas. Europe and Japan and so many other countries are ignoring tax policies, which are in sore need of growth repair. Japan needs tax cuts across the board: corporate, personal, sales, you name it. Europe has relatively low business tax rates. But it needs to slash taxes on personal income, estates, and retail sales (VAT). Negative interest rates won't do the trick, but new tax incentives to work, save, and invest will.
So I support Janet Yellen's moratorium on rate hikes. But I wish she would be more outspoken about the need for corporate tax reform. If the U.S. economy starts moving back toward its potential - 4 or 5 percent economic growth over the next bunch of years - the Fed can normalize its interest-rate structure by following higher market interest rates which would respond to faster economic growth.
What we basically have here is a tax problem, not so much a monetary problem.
Larry Kudlow, NRO's economics editor, is host of CNBC's The Kudlow Report and author of the daily web log, Kudlow's Money Politics.
The problem is - tax and spend is fully supported by our Federal Reserve. An unbacked, fiat currency, issued by a Federal Reserve that can manipulate interest rates, create money out of nowhere, and buy up debt gives politicians carte blanche to run all the leftist political and social-engineering schemes they want.
Happy Friday Morning -- New Quarter -- April Fool's Day! After a week of what (imho) I'd call last weeks 'window dressing' stocks yesterday were "flat and quiet". My bandwidth's gone now so y'all need to find your own links, but earlier I saw futures expecting more flat stocks and more upbeat metals.
Hopefully I'll have a better connection by opening bell. If not, don't let anything happen till I can get there...
There is some chance that the direction one goes off the cliff will make something of a difference with regards to how soon we hit bottom, how much is left at the bottom, and how regrouping/rebuilding might go, but the manner in which these factors interact is almost anyone’s guess.
The only hope is to increase monetary velocity. Negative interest rates are intended to do that but the money needs a place to go. The increased regulations on banks (but not Fintechs) is distorting how small business owners and consumers borrow. As Obamacare continues to get implemented, it has proven to be as much of a drag on the economy as everyone here predicted.
Relatively low energy prices have kept the economy out of recession but has not increased velocity of money due to the lack of investment opportunities.
We have fiscal/cultural problems.
Dodd-Frank, Sarbanes-Oxley, the criminalization of carbon dioxide, ridiculous product liability laws, lax enforcement of copyright laws, government protection of favored entities, nascent fascism(but I repeat myself), political correctness interfering with the hiring process, Obamacare changing the relationship between employer and employee.......the vilification of the salesman, the entrepreneur, white males and the clergy in the culture and on college campuses, the exaltation of “public service” likewise, massive productivity losses due to the progressive tax code and the ubiquitous state lotteries.....creating a pervasive entitlement mentality, and a short-circuiting of boardroom decision making.
Fiscal/cultural problems combine to paralyze the entrepreneur and erode the work ethic.
Fully supported by the earth too, without the planet the entire federal government would drift into space until it fell into the sun. As for national policy I'd much rather be watching both the earth and the Federal Reserve supporting tax cuts and a respect for private property that would let America create wealth at the rates we had in past decades.
Then we can let governments all over the world "manipulate interest rates, create money out of nowhere" like they've been doing for centuries.
Let’s try tariffs, consumption(sales) taxes and eliminate income taxes. Gee that only worked for the first 130 years....
So the price of goods go up and consumers are *taxed* more on top of it?
Do you want to turn us into North Korea?
Entrepreneur’s are vilified?
Have you been to the bay area lately? Or any incubator in a major city?
Everyone wants to be an entrepreneur because of how worshiped they are now. And its a good thing.
There you go again defending the income tax like a good Communist that you must really be. Stuff it you progressive < expletive deleted >.
Where am I defending an income tax?
Your arguments on trade are right out of Bernie’s handbook.
They are incredibly wrong, come from dubious sources, and have been used by liberals since Reagan’s era.
You actually want higher tariffs+plus a consumption tax. Just imagine how much consumer goods will cost average Americans.
It’s just as likely that the ultimate outcome might be better with a more rapid conclusion, rather than a prolonged slide. What I will say is that there is no magical just-in-time emergency exit waiting for us, and everything will just be great going forward. A fiscal disaster is now unavoidable, and what comes after, nobody can predict, but all of the outcomes I can guess at are dire.
You are so brainwashed you cannot even read a post correclty because when you see the "tariff" your conscious goes into a psychotic rage. Like an animal. I know your type. They used to be called Fascists.
Do you think it was a good idea for Reagan to save Harley Davidson, or do you wish it had just been allowed to die, for an example of free-trade purity in action?
BFL
Until they can't. And then, all hell breaks loose.
Perhaps I should have said entrepreneurship? I suppose I am referring to the fact that in TV shows, kiddie cartoons, Hollywood films, yes, the evil factory owner is ubiquitous. Businessmen in general are depicted as void of any morality whatsoever. Greedy, haughty, corrupt, murderous, even, while those in government, who do display those qualities, are the good guys.
College commencement speeches invariably portray "public service" as the higher calling. Capitalism itself is maligned, if not vilified in the culture at large.
The business owner, small and large, is the openly declared enemy of tax and regulatory policies. It is assumed they are greedy and evil, all of them, and must be restrained by the "good" who chose public service.
I suppose the "budding" entrepreneur is somewhat exalted as you say, but once they achieve success, they join the reviled, in many, many cases.
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