Five years after the beginning of the economic recovery, after rock-bottom interest rates and trillions of dollars of quantitative easing by the Federal Reserve, the economy is growing about 2%.
No country has attained prosperity by printing money and weakening its currency, and the United States appears to be no different.
Monetary stimulus might be useful in the initial stages of a recession and recovery, but zero percent interest rates for years on end are a different matter altogether.
Under Fed Chairman Ben Bernanke and his successor, Janet Yellen, the dollar has fallen about 15% against the euro.
Pimco’s Bill Gross, manager of the $230 billion Pimco Total Return Fund, is among a growing group of investors and economists to suggest that the drop in bond yields since the beginning of the year reflects expectations of a lower Fed lending rate.
No one has explained the danger of endlessly low rates better than Columbia University professor Charles Calomiris, coauthor of “Fragile by Design: The Political Origins of Banking Crises ,” an insightful new history of the financial crisis recently published by Princeton University Press.
If the Fed expands its balance sheet by buying bonds from banks, but those banks simply increase their reserves at the Fed — and fail to increase loans and deposits on their balance sheets — then monetary policy has little effect through its traditional channels of expanding deposits and loans.
This is what has been happening, Calomiris told me.He continued: “When operating at near-zero federal funds rates, as the Fed has done now for several years, expansion of monetary policy does not stimulate investment or housing purchases through its effects on interest rates.
Some advocates are pressing the Fed to try to influence long-term interest rates by purchasing long-term bonds, but this has proved to have limited effects.”
Even worse, if the Fed fails to remove liquidity fast enough once the expansion takes hold, then aggressive monetary policy can spark inflation, which slows economic growth.
This may be happening already. The Bureau of Labor Statistics said Wednesday that the Producer Price Index jumped by 0.6 in April, well above expectations of 0.2%. Core PPI, which excludes food and energy, rose 0.5%.
That follows similar increases in March. Over the past year, the price of food has risen 2.7% — and inflation often starts with increases in food prices.
A rise in producer prices takes a few months to work their way into consumer prices, but the Consumer Price Index, released Thursday, showed that the cost of living rose in April at its fastest rate in 10 months.
The 0.3% increase brings the year-over-year advance to 2%. Let us compare this recovery, which began in June 2009, with those that began in November 2001, March 1991, and November 1982.
Despite massive monetary accommodation — or, perhaps, because of it — economic growth has failed to gather steam in the current recovery. Consider gross domestic product growth, for instance. Over the past four years, GDP growth has averaged 2.2%.
The advance estimate for GDP growth for the first quarter was an annualized 0.1%, mostly due to a buildup in inventory accumulation in the latter part of 2013 that dampened investment.
In the fourth quarter of 2006, which was 20 quarters into the last recovery, GDP was growing at 3.2%. It is unlikely the current economy is growing anywhere near this rate since it has not been making up the ground it lost — it is barely staying afloat.
Unemployment is another important measure, usually declining a year or two after the recovery commences. Unemployment rates were 4.5% in September 2006, 5.6% in January 1996, and 5.9% in September 1987 — four years and 10 months after the respective recoveries began. But this time unemployment has not returned to pre-crash levels.
The unemployment rate is 6.3%, 1 percentage point higher than the average rate at this point in the previous four recoveries. But the only reason it has declined to 6.3% is because the labor force participation rate has fallen to 1978 levels.
After recoveries are under way, labor force participation gradually increases, as people gain confidence, resume searching for work and eventually find jobs. This has yet to happen. Instead, labor force participation has dropped from 65.7% in June 2009 to 62.8%.
This is particularly pronounced among younger workers. The share of the unemployed who have been without work for over six months is 35%. In September 2006, this rate was 18%, and it was 16% in January 1996.
Compared with past recoveries, the current level of long-term unemployment is posing serious problems for the economy. Food stamps also indicate the quality of recovery.
The number of people enrolled in the Supplemental Nutrition Assistance Program — also known as food stamps — has grown by 37% since the recovery began, from 35 million to almost 46 million (which is 15% of the population).
After prior recessions, food stamp usage declined. When the Fed took a different path, recovery was faster. Between February 1994 and February 1995, the Fed increased rates from 3% to 6%, strengthening the dollar.
Mickey Levy of Blenheim Capital Management wrote in a paper presented at the Shadow Open Market Committee meeting in March: “This disinflationary monetary tightening paved the way to an extended economic expansion and robust performance in the second half of the 1990s, and built significant credibility for the Fed.”
Sluggish economic growth and early signs of inflation show that the Fed should be wary of continuing its zero-rate policy. Once present, inflation is hard to rein in.
marketwatch.com
No country has attained prosperity by printing money and weakening its currency, and the United States appears to be no different.
Monetary stimulus might be useful in the initial stages of a recession and recovery, but zero percent interest rates for years on end are a different matter altogether.
Under Fed Chairman Ben Bernanke and his successor, Janet Yellen, the dollar has fallen about 15% against the euro.
Pimco’s Bill Gross, manager of the $230 billion Pimco Total Return Fund, is among a growing group of investors and economists to suggest that the drop in bond yields since the beginning of the year reflects expectations of a lower Fed lending rate.
No one has explained the danger of endlessly low rates better than Columbia University professor Charles Calomiris, coauthor of “Fragile by Design: The Political Origins of Banking Crises ,” an insightful new history of the financial crisis recently published by Princeton University Press.
If the Fed expands its balance sheet by buying bonds from banks, but those banks simply increase their reserves at the Fed — and fail to increase loans and deposits on their balance sheets — then monetary policy has little effect through its traditional channels of expanding deposits and loans.
This is what has been happening, Calomiris told me.He continued: “When operating at near-zero federal funds rates, as the Fed has done now for several years, expansion of monetary policy does not stimulate investment or housing purchases through its effects on interest rates.
Some advocates are pressing the Fed to try to influence long-term interest rates by purchasing long-term bonds, but this has proved to have limited effects.”
Even worse, if the Fed fails to remove liquidity fast enough once the expansion takes hold, then aggressive monetary policy can spark inflation, which slows economic growth.
This may be happening already. The Bureau of Labor Statistics said Wednesday that the Producer Price Index jumped by 0.6 in April, well above expectations of 0.2%. Core PPI, which excludes food and energy, rose 0.5%.
That follows similar increases in March. Over the past year, the price of food has risen 2.7% — and inflation often starts with increases in food prices.
A rise in producer prices takes a few months to work their way into consumer prices, but the Consumer Price Index, released Thursday, showed that the cost of living rose in April at its fastest rate in 10 months.
The 0.3% increase brings the year-over-year advance to 2%. Let us compare this recovery, which began in June 2009, with those that began in November 2001, March 1991, and November 1982.
Despite massive monetary accommodation — or, perhaps, because of it — economic growth has failed to gather steam in the current recovery. Consider gross domestic product growth, for instance. Over the past four years, GDP growth has averaged 2.2%.
The advance estimate for GDP growth for the first quarter was an annualized 0.1%, mostly due to a buildup in inventory accumulation in the latter part of 2013 that dampened investment.
In the fourth quarter of 2006, which was 20 quarters into the last recovery, GDP was growing at 3.2%. It is unlikely the current economy is growing anywhere near this rate since it has not been making up the ground it lost — it is barely staying afloat.
Unemployment is another important measure, usually declining a year or two after the recovery commences. Unemployment rates were 4.5% in September 2006, 5.6% in January 1996, and 5.9% in September 1987 — four years and 10 months after the respective recoveries began. But this time unemployment has not returned to pre-crash levels.
The unemployment rate is 6.3%, 1 percentage point higher than the average rate at this point in the previous four recoveries. But the only reason it has declined to 6.3% is because the labor force participation rate has fallen to 1978 levels.
After recoveries are under way, labor force participation gradually increases, as people gain confidence, resume searching for work and eventually find jobs. This has yet to happen. Instead, labor force participation has dropped from 65.7% in June 2009 to 62.8%.
This is particularly pronounced among younger workers. The share of the unemployed who have been without work for over six months is 35%. In September 2006, this rate was 18%, and it was 16% in January 1996.
Compared with past recoveries, the current level of long-term unemployment is posing serious problems for the economy. Food stamps also indicate the quality of recovery.
The number of people enrolled in the Supplemental Nutrition Assistance Program — also known as food stamps — has grown by 37% since the recovery began, from 35 million to almost 46 million (which is 15% of the population).
After prior recessions, food stamp usage declined. When the Fed took a different path, recovery was faster. Between February 1994 and February 1995, the Fed increased rates from 3% to 6%, strengthening the dollar.
Mickey Levy of Blenheim Capital Management wrote in a paper presented at the Shadow Open Market Committee meeting in March: “This disinflationary monetary tightening paved the way to an extended economic expansion and robust performance in the second half of the 1990s, and built significant credibility for the Fed.”
Sluggish economic growth and early signs of inflation show that the Fed should be wary of continuing its zero-rate policy. Once present, inflation is hard to rein in.
marketwatch.com
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