201401.09
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Sharp Contrasts

I suppose the key difference this January is that taper is a reality and not just some theoretical jawboning. But he we are again in January discussing FOMC ruminations about what might appear “slightly” concerning about asset prices and levels. As Janet Yellen takes over to focus the Fed’s considerable (in its models’ estimations) might in trying to “alleviate all that human suffering”, there is the obvious disparity between inflation expectations due to policy and where inflation actually resides.

Apparently the FOMC is beginning to realize that there is little marginal benefit to continuing QE at any pace. And again like early last year, there is some statistical improvements in employment that are giving the committee cover to taper QE while maintaining some semblance of manipulative consistency in their psychological efforts.

But these comments exhibit the exact kind of inconsistency that should cause an even greater retreat and re-assessment. Yellen’s philosophy, not all that much different than Bernanke, is that the Fed both can and should help “Main Street.” Yet, there is widespread recognition that “Main Street” has been left out any of the beneficence to date. It is acknowledged officially that the recovery has been at best “uneven.”

On the other side there is the fractious group of voting and non-voting members that are more and more vocal about the potentially pernicious side effects of all that inflation psychology.

In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans.

That sure sounds like an “uneven” recovery where financial agents are feeling good about policy positioning, having returned already (if not exceeded) to previous peaks of the last bubble. That is an amazing and sharp contrast to the purported emphasis on “Main Street.”

In her recent Time magazine interview, Yellen addressed this bifurcation in what amounts to nothing more than wishful thinking. She clearly states the orthodox position, but it flies directly in the face of not only empirical reality, but the very fracture in her own FOMC.

You know, a lot of people say this [asset buying] is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.

Where is all this spending? Where is all this job creation? Job growth has not even kept pace with population growth, which more than suggests that any economic growth to date in this “recovery” has been solely based on simple demographic expansion rather than productivity, innovation and the capitalist potential. That, rather than Yellen’s fairy tale, sounds much more like what we have actually experienced as even the existence of recovery is itself debatable. It has been so very far from what has been promised that most people have completely forgotten what a recovery actually looks like, instead believing this unbelievable reduction in economic standards.

Employment growth that just keeps pace with population growth is not a recovery or even a functioning economy, it is a symptom that something is very wrong. Given the contrast between the Fed’s expressed concerns over financial imbalances, we don’t really have to search for much of an answer as to why there might exist this durable dysfunction. The real problem is getting the economist class to connect the dots and realize there is no transmission between asset prices and the real economy absent a robust credit channel.

It would be even better if the orthodoxy rethought any such appeal of a credit-based system to begin with, but we are talking about baby steps here. Rather than being fully cynical, I count this fracturing in the FOMC as progress, small as it may be. Couple that with the Summers/Krugman groping into a negative natural rate of interest and you get a growing sentiment among these philosopher kings that their ideology just might be askew of the real world. It’s not quite a full admission of failure or guilt, but it’s far better than the unqualified confidence once displayed and exuded.  Unfortunately, I think it is all too little/too late for this cycle.


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