The End of Monetary Policy

I apologize in advance since this post isn't as tight as I'd like it but I've been dwelling on three things this evening, the President-elect's news conference on Monday in Chicago, the expected fed funds rate cut on Tuesday and some comments by Paul Krugman in Germany's Der Spiegel. So with this introduction . . .

Another reduction to the Federal Reserve's funds rate, the interest banks charge each other on overnight loans, is all but certain to be announced tomorrow. The Fed's funds rate is already near historical lows at 1.0% but most economists expect the Federal Reserve to cut the rate in half to 0.5%. Some economists are even pushing for a more aggressive three-quarters of a point reduction. Their argument is that such a cut might cushion some of the economic fallout and prevent a tailspin. Well, I think that's already too late. I think I am sanguine when I say we'll be lucky to lose only 750,000 jobs next year.

My sense is that a fed rate cut is spit in the ocean. Not that I am against the rate cut, it should be cut, but rather that the cut in and of itself isn't likely to spur the American economy much less the global economy. The bitter truth is that we have reached the end of monetary policy as an instrument. To spur the economy, we really waiting on President Obama's fiscal stimulus. Only a Keynesian style investment program is likely to soften the edges of the economic downturn.

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The Balance Sheet Recession

In its 4Q08 report released today, the UCLA Anderson Forecast for 2009 is rather grim reading. Widely respected, the UCLA Anderson Forecast predicts that the current recession affecting the US economy will last at least four quarters of negative growth followed by very low growth rates of well under 3% with rising unemployment rates that last through 2010. The UCLA Anderson Forecast unit expects real GDP to shrink by 4.1% in this the final quarter of 2008 and by another 3.4% and 0.8% in the first and second quarters of next year, respectively, as consumer and business spending weaken and as the foreign trade that had propped up growth much of this year sags. Indeed, the trade deficit widened today as exports fell sharply. The unemployment rate, according to the report, is forecast to rise from October 2008's 6.5% to 8.5% by 4Q09/1Q10. Put into meaningful numbers, that's a loss of two million jobs over the next 12 months.

"Because Europe and Japan are already in recession and China and India are suffering from a significant slowdown in growth, the export boom of the past few years will wane," the report said. "Make no mistake the global economy is in its first synchronized recession since the early 1990s."

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US Economy faltering...

The US economy is faltering and should become a prominent issue in the 2008 elections.  The unemployment rate hit a 2 year high rising from 4.7% to 5.0% in December.  The economy added 18,000 jobs in December, however that number is elevated due to an increase of 30,000 in government jobs.  Private sector job growth actually contracted in December, the first time since the 2001 recession.  

The ISM manufacturing, a key survey highlighting industrial activity, fell below 50, a sign that industrial activity is declining.  High gas prices, falling home prices and tightening credit conditions are starting to dent consumer confidence.  In typical fashion, the Bush administration is late to the game and is contemplating a fiscal stimulus package (ie cut taxes) to jumpstart the economy this year - too little too late.  According to Stuart Schweitzer, global markets strategist at JPMorgan Wealth & Asset Management:

"It's not a done deal, but if we're going to have a recession, it's too late to do anything about it."

The Democrats need to start raising this as an issue more aggressively than they the coming months it will become quite clear that President Bush can add the economy to his long list of major failures like Iraq.  

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Who Killed the Middle Class?

Frankly, it is not really much of a murder mystery but seemingly a large swath of America lives obliviously to the fact that the broad-based prosperity built by Franklin Delano Roosevelt and that reached its zenith under Lyndon Baines Johnson has been under assault almost continuously since the 1970s. But give the devil his due, and by devil I mean the GOP, for they have successfully managed to convince an absurdly large percentage of the population that the greatest evils we face are big government, high taxes, gay marriage, abortion rather than our burgeoning socio-economic inequality.

Over at the Financial Times, Edward Luce writes on The Crisis of the American Middle Class combining anecdotal evidence with cold hard facts. The anecdotes are painful to read and I leave them for you to read but the cold hard facts of our retreat from the Roosevelt's New Deal America defined by a progressive tax structure that permitted interventionist and redistributive government to construct the broadest prosperity the world has ever known merit highlighting.

This is the country that Reagan and Bush have engendered:

The slow economic strangulation of . . . middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The zenith of American equality was 1964 when the ratio of CEO to average worker pay stood at 24:1. By 1973, the starting point for Luce, it had barely moved to 26:1. Even by 1980, the ratio was still a modest 35:1. The great divergence would begin the Reagan years. By the time Reagan left office it was 71:1. The ratio would surge in the 1990s  and hit 525:1 at the end of the recovery in 2001. The fall in  stock market valuations reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 153 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the ratio was racing towards the stratosphere once again hitting 411:1.


The Politicking Populist

Over the Labor Day weekend in Milwaukee and again today outside Cleveland, President Obama delivered a strong defense of his presidency as he outlined a new $50 billion infrastructure investment proposal and a $100 billion proposal that will permanently extend research and development tax credits for businesses as part of his economic recovery program. The President also called for an end to the Bush-era tax cuts for the wealthy, saying the country cannot afford $700 billion in tax breaks that benefit “millionaires and billionaires.”

The speech was vintage Obama. Helene Cooper of the New York Times termed the speech a "sharply populist speech that sought to appeal to the middle class" in which the President also "urged voters not to allow Republicans to 'ride' fears about the economy into the election booths in the midterm elections in November." Over at The Atlantic, Marc Ambinder exalted that the President had written "his thesis statement."


The text of the President's speech is beneath the fold.

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