Monday, June 13, 2016

Paul McCulley — Our nation can't afford past-its-sell-date economic orthodoxy


Paul McCulley unloads.
I've had it with my profession, macroeconomics. More specifically, I've had it with the consensus of practitioners in my profession.
My disgust reached new heights Friday a week ago, when the U.S. reported "shockingly weak" or alternatively, simply "dismal" employment growth during the month of May: only 38,000 job gains, in contrast to a monthly average increase well over 200,000 over the last two years.
Rather than focus on the existential macroeconomic cause of the disappointing data, my profession's town barkers immediately jumped to the conclusion that the Federal Reserve had "egg on its face" in the wake of its forward guidance in the weeks prior to the data's release, rhetorically "preparing the markets" for a hike in its policy rate this summer.
It must be noted that the hike putatively being "put in play" was lifting the Fed's policy rate by one-quarter of a percentage point, to a level still far south of even 1 percentage point. Most ordinary people would submit that as long as we're talking about interest rates in terms of zero-point-something, we're talking about the moral equivalent of zero.
Yet the Fed is somehow responsible for the U.S. labor market's sudden slowdown? And should have egg on its face?
No, the egg belongs on the face of my profession, which refuses to openly acknowledge that the economy's existential woe is a deficiency of aggregate spending, for which fiscal policy expansion — read dramatically larger fiscal deficits — is the solution, not near-zero Fed policy rates.
To be sure, many in my profession will mouth these words in private. But in public, they demur, citing the lack of brains or courage, or both, of political leaders charged with fiscal policy to do the right thing.
Meantime, the very same pundits religiously sing praises to the Federal Reserve's independence from politics, hailing it as the only responsible "game in town," even if the institution's face is momentarily egg-smacked.
These macro mavens assured the world that notwithstanding May's soggy jobs data, all would continue to be right with Wall Street, because the Fed would surely forget about any nearby hike further away from zero for its policy rate, supporting current lofty valuations for stocks and bonds.
Exactly how that outcome would reinvigorate job creation, or generate a more just distribution of wealth and income growth in our country, was not discussed.
What mattered to the natters was that release of data saying no such thing was happening in the economy was, ironically, good news for Wall Street, because the Fed would "have no choice" but to keep on keeping on, acting as bartender for a hope-it-trickles-down party, tickets reserved for the rich.
Enough is enough.
Not that the Fed has done the wrong thing since the financial crisis of 2008. Quite to the contrary, the Fed has performed brilliantly, and I have been, proudly, a much-maligned cheerleader of the Fed, under both Chairs Ben Bernanke and Janet Yellen.
But it is also true that after a financial crisis, itself spawned by bursting of a bubble in private-sector debt creation, the power of monetary policy to generate robust aggregate spending growth is severely truncated: The private sector is in a de-leveraging state of mind, which is inherently anathema to strong credit-generated aggregate demand growth.
In such circumstances, the economy needs a spender and borrower of last resort: the public sector.
To be sure, monetary policy accommodation can ease the burden of the private sector's existing excessive debt. And by lifting the ceiling of fair valuation for long-dated assets, monetary accommodation can also create bull markets in those assets, owned primarily by the rich.
And, yes, some of those winnings for the rich will be spent, trickling down to jobs and income for the non-rich.
But there is a large slip between the champagne crystal of the rich and the mouths of the non-rich. Put differently, fattening the wallets of the rich generates far less aggregate demand bang for the buck than generating jobs and wage increases for the non-rich.
While the rich spend a lot in absolute terms, their spending is miserly as a share of their income, in contrast to the budget constrained non-rich, especially those who live, literally, paycheck to paycheck (assuming they have a job, of course).
At the macroeconomic level, one entity's spending is another entry's income.

Thus, if there is a deficiency of aggregate spending in the economy, there will be a deficiency of aggregate jobs and income.
This is not a dirty secret, but rather the essence of macroeconomics, in contrast to individual household economics: Spending drives jobs and income, not the other way around.
Thus, it should be self-evident that the public sector needs to spend more, and not "pay for it." This was the right blue-book exam answer when we macroeconomists were in graduate school. (And still is.)
Yes, fiscal deficits need to be dramatically bigger, so as to lift economy-wide spending, with the Federal Reserve at the ready to thwart any fear-mongering by Wall Street about the "evil" risk of associated upward pressure on inflation and thus, interest rates.
The only way that interest rates would "need" to go up in the wake of debt-fueled fiscal expansion would be if such fiscal action were to "work," generating robust aggregate demand and fostering an "overheated" economy, most importantly in jobs.
Please throw our country into the briar patch!
It is beyond me that our political leaders don't recognize the latitude they have to spend money they putatively don't have. They do have it!
The Federal Reserve, which is a creature of Congress, can and does create money out of thin air. The moral question — which is the foundation of politics in a democracy — is: for whom and for what?
It is time for my profession to say this publicly, owning the egg on its own face: We can't enable the world in the cruel belief that fiscal austerity is somehow always and everywhere a good thing.
It is only always good for the moneyed class.…
McCulley goes on to explain what needs to be done.

Strong stuff.
 
The Hill
Our nation can't afford past-its-sell-date economic orthodoxy
Paul McCulley, a senior fellow with the Jack G. Clarke Program on the Law and Regulation of Financial Institutions and Markets at the Cornell University Law School. He retired last year as chief economist and managing director of PIMCO.
ht Michael Stephens at Multiplier Effect

47 comments:

Bob said...

Four comments on that article, two of them Anti-Keynesian. Not looking good...

Andrew Anderson said...

Well, if new fiat creation benefited all citizens equally or roughly so then who would object?

But currently it doesn't and so we have strife and division.

Andrew Anderson said...

The very odd thing is that I must justify deprivileging the banks and equal protection under the law wrt fiat for all citizens.

One would think that the burden of proof should be on those who defend privileges for the banks, not on those who wish to abolish them.

Let me guess, since fiat is expensive and scarce we must restrict its use to settling accounts between nations and depository institutions and let the population make due with bank liabilities?

Except fiat is not expensive and need not be scarce at all so that excuse is obsolete if it were ever valid to begin with.

Bob said...

Economics becomes routine and boring when there's no scarcity. It may even become obsolete in a post-scarcity society.

Andrew Anderson said...

You may be on to something. Progressives seem to have a need for control and a just economic system would leave them little to meddle with. But regulating an inherently unjust/unstable money/credit system - there's job/importance security!

Andrew Anderson said...

Which is why we need a BIG so people no longer have to justify their income with a job - any job, even if it does negative work such as the TSA.

Bob said...

I've been following the debate between the BIG and the JG for years now. It's still going strong, and consensus is elusive.

Each era has its pharisees. They don't like being made obsolete.

Andrew Anderson said...

Actually, the true solution is asset redistribution, both financial and real.

It logically follows from the need for restitution for a thieving money and credit system whereby the poor are and have been forced to lend to banks for the benefit of the rich, the most so-called creditworthy.

And then the State can shrink drastically - there being far less need for it.

Bob said...

Objective is asset redistribution, to which there are competing solutions?

The wealthy are opposed to higher taxes.
Capital/owners are opposed to strengthening the hand of labour/non-owners.
Libertarians are opposed to a nanny state. Some are opposed to the state.
Conservatives are opposed to a welfare state. Some are opposed to democracy.

Look at all this opposition that is purely for the benefit of the poor. Without these brave interest groups fighting on their behalf, the poor would be toast. Everyone knows the poor are incapable of advocating for their own interests.

Andrew Anderson said...

Speaking of the US, who could legitimately oppose the abolition of government-provided deposit insurance? Politically speaking, who will dare oppose accounts for all at the Fed and the distribution of about $20,000 per adult citizen to accomplish that abolition properly?

There's the start. Something we should all agree on and which almost all will, once it's understood.

Bob said...

The banking industry and its lobbyists will oppose it. For the good of everyone else, naturally.

Bob said...

Have to get millions of people into the street demanding change. The labour protests in France are an indication of what must occur.

Andrew Anderson said...

Of course the banks will but $20,000 per adult citizen is a lot of good to compete with.

And that's just a start since all future fiat creation besides normal deficit spending would be by equal fiat distributions to all citizens - the way it always should have been.

Bob said...

Critics of Bernie Sanders would turn their tactics on you. 'Crazy Anderson' wants to give everyone free money. Just like Crazy Bernie.

Andrew Anderson said...

Actually, it would be the banks begging Congress to pass out the free fiat once the abolition of deposit insurance started.

Otherwise the banks would not have the reserves* for the xfer of formerly insured deposits to inherently risk-free accounts at the Fed and would have to liquidate assets at firesale prices.

I believe the applicable expression is short squeeze?

*Assuming the Fed shrank its balance sheet before or during the abolition period to its traditional size.

Bob said...

This is what bankers are working on:
http://www.zerohedge.com/news/2015-10-28/weve-all-been-warned-cyprus-bail-model-coming-country-near-you

The bail-in, coming to a branch near you...

Andrew Anderson said...

Great!

The day Americans start having to bail-in their banks is the day inherently risk-free accounts for all at the Federal Reserve will go from a "balmy" idea (per Yves Smith) to a blindingly obvious right.

Andrew Anderson said...

And once we can all have inherently risk-free accounts at the Fed, the abolition of government-provided deposit insurance will quickly follow and so-forth.

Bob said...

I guess there's not much else to do but encourage bankers to reach for the stars :)

Andrew Anderson said...

Well, there still remains the task of convincing the MMT crowd since their "solution" would be (so far) unlimited deposit insurance instead of equal protection under the law.

Bob said...

Well here is a circle graph of deposit insurance in Canada:
http://www.cdic.ca/en/about-cdic/our-role/Pages/infographic.aspx

Andrew Anderson said...

Government-provided deposit insurance is an obvious kludge* and one kludge leads to another as that graph hints at.


*From the POV of the depositor. From the POV of the banks, it's a looting mechanism disguised as consumer protection. Dante had a place for bankers and increasingly I do not wonder at it.

Bob said...

From the CDIC "About" page:

We are not a bank. We are not a private insurance company.
We are funded by premiums paid by our member institutions and do not receive public funds to operate.

Parliament established the Canada Deposit Insurance Corporation in 1967, to achieve the following:

provide insurance against the loss of part or all of deposits;
promote and otherwise contribute to the stability of the financial system in Canada;
act for the benefit of depositors while minimizing loss.

Bob said...

What are your views with regard to the State Bank of North Dakota?

Andrew Anderson said...

We are funded by premiums paid by our member institutions and do not receive public funds to operate. via Bob

If government-privileged* banks were truly insurable then the private sector could do so credibly. But they aren't truly insurable so those "premiums" don't cover the systemic risk and are just another sham.


*Whether completely private banks are insurable is an open question since we haven't had those in centuries, if ever.

Andrew Anderson said...

North Dakota is not monetarily sovereign and is only a state so I haven't given it much thought yet.

I doubt I'd like it but since those folks are of Scandinavian descent* they may have a solution that works for them - for a while anyway.

*Someone quipped that Norway would be the only European country seriously affected by the Rapture. :)

Bob said...

If government-privileged* banks were truly insurable then the private sector could do so credibly. But they aren't truly insurable so those "premiums" don't cover the systemic risk and are just another sham.

None of the large chartered Canadian banks have gone belly up so I couldn't tell you. I would imagine that the CDIC does not seek a healthy profit margin as private insurers would.

Perhaps they have a tin cup hidden in a vault. When everything goes south is when the tin cup makes it way to Ottawa seeking a bank bailout.

Andrew Anderson said...

"Perhaps they have a tin cup hidden in a vault. When everything goes south is when the tin cup makes it way to Ottawa seeking a bank bailout." Bob

Or a loan from the cb.

Has it not yet occurred to Canadians that the allowance of accounts for all citizens at the central bank makes government-provided deposit insurance unnecessary?

Bob said...

Has it not yet occurred to Canadians that the allowance of accounts for all citizens at the central bank makes government-provided deposit insurance unnecessary?

Nope.
Canadians are not overly worried about losing their savings at a bank or credit union. And when you have no savings...

Andrew Anderson said...

Canadians are not overly worried about losing their savings at a bank or credit union. Bob

It's not the nominal loss of savings that's the issue. It's the being forced to lend to a bank to lower the borrowing costs of the rich. Government-provided deposit insurance is part of that scheme.

And when you have no savings... Bob

Otherwise, the banks would have to honestly borrow reserves from the poor and then the poor might have some savings, at least in real terms, since the scheme tends to inflate away the purchasing power of the poor.

I suggest that Canadians start to ponder why they are forced to lend to banks or be limited to physical fiat.

Bob said...

Canadians wouldn't view it as lending, not with current interest rates and bank fees. We keep money in the bank for security and to pay bills. For investment, the temptation is to go for higher returns in mutual funds. Keeping your savings in term deposits is very conservative.

Andrew Anderson said...

One good thing about the abolition of physical fiat, aka "cash", should it occur, is that then the citizens shall not be able to deal with their nation's fiat AT ALL. Only depository institutions, aka "banks", in the private sector* shall be able to use fiat.

Then it should be obvious that the banks, a government-privileged usury cartel, are the only true citizens of a nation. I wonder if that will wake people up?

*also state and local governments, unless they create banks themselves**.

**I just found out that the Bank of North Dakota has an account at the Fed but is not insured by the FDIC. I wonder why not?

Bob said...

We're still at a stage where people believe there is a shortage of money. Have to learn how to crawl before you can walk.

Gold bugs have their own ideas and solutions. Then there are free banking advocates, and full reserve advocates.

All I know about the Bank of North Dakota is that it is the only state bank in the US. The other bankers don't like the fact that this institution exists. It makes them look bad, or something.

Andrew Anderson said...

Gold bugs have their own ideas and solutions Bob

Should have put "solutions" in scare quotes since gold is just a previous scam.

Bob said...

Yes, I wonder why they don't advocate for a fixed quantity of fiat. That would ensure that the value of that currency would increase as the population and economy grew. More rigid than gold, whose supply continues to grow and which has other important uses.

Andrew Anderson said...

That would make their loot by deflation scam too obvious ("but pigs get slaughtered")?

Also, gold-bugs like Gary North claim the historic mining rate of gold (~2% per yr) roughly matches the historic real economic growth rate - perhaps never thinking that, under a gold standard or equivalent, the former has limited the latter? Unnecessarily so?

Andrew Anderson said...

Then there are free banking advocates, Bob

Free banking has never really been tried since it is obvious, at least in retrospect, that the monetary sovereign has an inherent duty to provide a risk-free accounting and transaction service for its fiat for all citizens, at-cost at most.

and full reserve advocates. Bob

Full reserves would be impossible to enforce. Besides, accounts for all at the central bank would be better than full reserve accounts at banks since they would dealing WITH RESERVES THEMSELVES, not mere claims to reserves held by a bank.

Bob said...

Could China have maintained its high growth rate through a gold-backed currency? How would the exchange rate be affected?

Andrew Anderson said...

Expensive fiat is too dumb to think about. At one time, gold and silver may have been useful as an anti-counterfeiting measure but that use has been obsolete since the invention of the Tally Stick at the latest.

And no, China could not have maintained its high growth rate through a gold-backed currency.

Exchange rate? A floor near the price of gold, I imagine, depending on the credibility of the Chinese. It's not worth thinking about though since gold as money is stupid and unjust.

Bob said...

Well it's something for the gold bugs to think about. Another nail in their coffin of unworkable "solutions".

Andrew Anderson said...

The gold-bugs are concerned about unlimited fiat creation.

But why should that bother them if every adult citizen gets an equal share of any fiat created beyond normal deficit spending? And if the banks are deprivileged so that they don't dare inflate away the distributions?

Bob said...

To answer to those questions likely has more to do with their attitude toward government than the technical details.

Andrew Anderson said...

Then they're hypocrites if they wish government to enforce their gold idolatry and deflation.

Also, we would need far less government with ethical fiat and credit creation.

Bob said...

"Also, we would need far less government with ethical fiat and credit creation.

That should get their attention. Always frame it in terms of "less government". Not all gold bugs are obsessed with the size of government, but many are.

Andrew Anderson said...

There's bigger fish to fry than mere gold-bugs.

Bob said...

You mean the fish that Tom recently posted about?
They still believe that government is like a household and is revenue constrained. They believe that banks require reserves in order to lend. Unlike gold bugs they're not concerned with the desirability of fiat.

Andrew Anderson said...

Bigger yet - those who want to save the banks from themselves when the objective should be to save us from the banks. I won't name names since they deserve time to think it over.