"In effect, by pursuing indexation we have introduced a socialist way of allocating capital in the heart of the capitalist system... As we all know, socialism is the ultimate form of freeloading. It has never worked, and it never will. This indexation is one of the most obvious forms of parasitism we have ever encountered."
President Obama’s populist, class-warring, shut-out-the-legislature, ignore-the-long-term-consequences romp through every corner of life turned to the education sector. Problems with student loan programs are deep-rooted – thanks mostly to the government’s domination of the market – and were only worsened by Obama’s actions this week. In a better world, policymakers would take a cold, hard look at the effects of federally-funded student loan programs, including the good and the bad. Here are a few such observations that you’re unlikely to hear from your president...
Anyone reading the regular Federal Open Market Committee press releases can easily envision Chairman Yellen and the Federal Reserve team at the economic controls, carefully adjusting the economy’s price level and employment numbers. The dashboard of macroeconomic data is vigilantly monitored while the monetary switches, accelerators, and other devices are constantly tweaked, all in order to “foster maximum employment and price stability." The Federal Reserve believes increasing the money supply spurs economic growth, and that such growth, if too strong, will in turn cause price inflation. But if the monetary expansion slows, economic growth may stall and unemployment will rise. So the dilemma can only be solved with a constant iterative process: monetary growth is continuously adjusted until a delicate balance exists between price inflation and unemployment. This faulty reasoning finds its empirical justification in the Phillips curve. Like many Keynesian artifacts, its legacy governs policy long after it has been rendered defunct.
A simple way of grasping the precarious situation China has found itself in is with this useful diagram which summarizes the negative loop that China's economy (which essentially means housing market which as SocGen recently explained is indirectly responsible for 80% of local GDP) could fall into should the government not promptly move to address the emerging dangerous situation, i.e., resume aggressive easing.
Most of our readers probably know what we think of minimum wages, but let us briefly recapitulate: there is neither a sensible economic, nor a sensible ethical argument supporting the idea. So when we saw that the Swiss will vote in a national referendum May 18 on whether to create a minimum wage of 22 francs ($25) per hour, or 4,000 francs a month, we were stunned... If Swiss voters agree to introducing a new minimum wage law, they would end up doing incalculable damage to Switzerland's entrepreneurial culture. At the moment, Switzerland is still one of the freest economies in the world. It has been extremely successful so far and its achievements would clearly be put at risk. Hopefully Switzerland's voters won't be swayed by union's arguments.
Following the March Jobs Report, ConvergEx's Nick Colas got to thinking about the composition of employment growth rather than just the headline number. Is every new job created really the same when it comes to overall economic impact? Consider that the average household income in Maryland is $69,920, versus $39,592 in Mississippi. Or that Mining and Logging jobs pay, on average, $28.77/hour and Retail Trade positions average only $14.22/hour. To expand on this point, Colas came up with three 'Ideal' marginal hires, when considering which jobs bring the most "bang" for the wage/employment "buck". At this point in the cycle we should be focused on job quality as much as quantity.
Bad news is the best news this morning. A higher unemployment rate and worse than expected job creation is the new mother's milk for stocks which kneejerked instantly to new record highs. Bond yields are tumbling and gold is surging (back over $1300) as 'investors' believe this will signal an un-taper (because QE did so much good for so long) or lower-for-longer chatter (so more buybacks?). The USD is fading fast also.
With even Warren Buffett saying it's a bad idea, we can't wait to hear how President Obama will explain how his move to raise the minimum wage will create jobs and save the middle class....
With President Obama’s State of the Union Address and its associated campaign prominently featuring increased minimum wage, tired arguments for raising the minimum wage are being once again retreaded. Unfortunately, they compound failures of logic, measurement and evidence.
If one listens to Goldman's chief economist Jan Hatzius these days, it is all roses for the global economy in 2014... much like it was for Goldman at the end of 2010, a case of optimism which went stupendously wrong. Goldman's Dominic Wilson admits as much in a brand new note in which he says, "Our economic and market views for 2014 are quite upbeat." However, unlike the blind faith Goldman had in a recovery that was promptly dashed, this time it is hedging, and as a result has just released the following not titled "Where we worry: Risks to our outlook", where Wilson notes: "After significant equity gains in 2013 and with more of a consensus that US growth will improve, it is important to think about the risks to that view. There are two main ways in which our market outlook could be wrong. The first is that our economic forecasts could be wrong. The second is that our economic forecasts could be right but our view of the market implications of those forecasts could be wrong. We highlight five key risks on each front here." In short: these are the ten things that keep Goldman up at night: the following five economic risks, and five market view risks.
As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive? Fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms and by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors. But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? Two outcomes now seem possible. Europe’s north-south divide has become a time bomb lying at the foundations of the currency union.
Faith in the current system is as high as it has ever been, and folks don't want to hear otherwise. If you're one of those people who thinks it prudent to have intelligent discussion on some of these risks -- that maybe the future may turn out to be less than 100% awesome in every dimension -- you're probably finding yourself standing alone at cocktail parties these days. A helpful question to ask yourself is: if I could talk to my 2009 self, what would s/he advise me to do? Don't put yourself in a position to relearn that lesson so soon after the last bubble. Exercise the wisdom to look like an idiot today.
As we explained over two months ago, and as the Fed is no doubt contemplating currently, the primary topic on the agenda of central bankers everywhere and certainly in the Marriner Eccles building, is how to boost inflation expectations as much as possible, preferably without doing a thing and merely jawboning "forward expectations" (or more explicitly through the much discussed nominal GDP targeting) in order to slowly but surely or very rapidly and even more surely, get to the core problem facing the developed world: an untenable mountain of debt, and specifically, inflating it away. Of course, higher rates without a concurrent pick up in economic activity means a stock market tumble, both in developed and emerging countries, as the Taper experiment over the summer showed so vividly, which in turn would crush what many agree is the Fed's only achievement over the past 5 years - creating and nurturing the "wealth effect" resulting from record high asset prices, which provides lubrication for financial conditions and permits the proper functioning of capital markets. Perhaps this is the main concern voiced by JPM's chief US economist Michael Feroli who today has issued an interesting piece titled simply enough: "Raising inflation expectations: a bad idea." Is this the first shot across the bow of a Fed which may announce its first taper as soon as two weeks from today, in order to gradually start pushing inflation expectations higher?
The assessment on the attached chart is very simple: as Stone McCarrthy puts it "this is an indication of an increase in structural unemployment." That statement is quite obvious to the millions of Americans who have been out of a job for years since the Lehman collapse, and have been unable to find a new job despite the plethora of "job openings." However, that's not all. What the implied unemployment rate based on the current level of Job Openings is, is even worse - because it is precisely at the 5.5% level where the Fed would not only taper, not only end QE but begin tightening!