Yellen’s Economy Echoes Burns’s More Than Greenspan’s – Bloomberg 07-07-14

Salient to Investors:

  • The economy resembles the 1970s more than the 1990s.
  • Alan Blinder at Princeton sees risk of the economy moving in the same direction as it did after 1973, though we are a long way from seeing a sustained rise in inflation. Blinder said the long-term trend in productivity growth is what is important in determining the inflation outlook.
  • Stephen Stanley at Pierpoint Securities said June’s drop in the unemployment rate to an almost 6-year low highlights the dilemma facing the Fed: slower productivity growth is causing joblessness to fall faster than the Fed expected while GDP is rising more slowly than expected. Stanley expects the Fed to raise interest rates in June 2015.
  • Martin Feldstein at Harvard sees rising inflation and expects the Fed to respond too weakly, too slowly.
  • Joe LaVorgna at Deutsche Bank Securities sees long-term interest rates going a lot higher, with the 10-yr T-yield hitting 4 percent, as price pressures intensify and the Fed’s response lags.
  • Michael Feroli at JPMorgan Chase said the Fed’s model recognizes that unexpected changes in productivity growth can affect inflation, so the question is whether this impacts their decisions on interest rates. Feroli expects the Fed to raise interest rates in Q3 2015 because the Fed’s mandate is not strong productivity growth, but full employment and price stability. Feroli said the economy’s cruising speed is 1.75 percent or lower, versus the Fed’s projection of 2.1 percent to 2.3 percent.
  • Charles Plosser at FRB of Philadelphia is not worried about short-term inflation, but dislikes Yellen’s emphasis on wage growth, which is a lagging indicator of inflation.

Read the full article at http://www.bloomberg.com/news/2014-07-07/yellen-s-economy-echoes-arthur-burns-more-than-greenspan.html

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Why Is US Inflation So Low? – Project Syndicate 06-28-13

Salient to Investors:

Martin Feldstein at Harvard writes:

  • Historically rapid monetary growth fuels high inflation. Germany’s hyperinflation in the 1920s and Latin America’s in the 1980s.
  • More moderate shifts in US monetary growth rates fuel inflation. In the 1970s, money supply grew at an average annual rate of 9.6% and inflation averaged 7.4%. In the 1990s, monetary growth averaged only 3.9%, and inflation averaged 2.9%.
  • Quantitative easing is not the same thing as printing money which explains why we have not seen inflation.
  • The stock of money that relates most closely to inflation is primarily deposits that businesses and households have at commercial banks. Traditionally, increased Fed bond buying has led to faster growth of this money stock, but a fundamental change in the Fed’s rules in 2008 broke this link. As a result, the Fed has bought a massive amount of bonds without causing the stock of money, and thus inflation, to rise.
  • When the Fed buys Treasury bonds or mortgage-backed securities, it creates reserves for the commercial banks, which they deposit at the Fed. Commercial banks are required to hold reserves equal to a share of their checkable deposits. Before 2008, excess reserves earned no interest, giving commercial banks an incentive to lend to households and businesses. After 2008, the Fed began to pay interest on excess reserves which induced the banks to keep excess reserves at the Fed instead of lending.
  • The volume of excess reserves held at the Fed has increased from under $2 billion in 2008 to $1.8 trillion now, while the broad money stock, M2, grew at an average rate of just 1.5% a year. Not surprising that inflation has remained lower than in any decade since the end of World War II, and that QE has done little to increase nominal spending and real economic activity.
  • When bank lending resumes, high rates of long-term unemployment and underemployment may persist as inflation rises, thereby causing the Fed to decline from tightening and giving investors cause to worry that inflation could return.

Read the full article at  http://www.project-syndicate.org/commentary/the-inflationary-risk-of-us-commercial-bank-reserves-by-martin-feldstein

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Feldstein Says U.S. Fixing Cliff May Not Avoid Recession – Bloomberg 11-20-12

Salient to Investors:

Martin Feldstein at Harvard said:

  • The US economy would still be perilously close to a recession in 2013 even if we don’t go over the fiscal cliff.
  • The end of payroll tax cuts will reduce GDP by 1 percent, and other tax increases and spending cuts may bring over 2 percent of GDP tightening.
  • Congress should not raise tax rates but increase revenue by restricting deductions and credits in the tax code for such things as mortgage interest and investments in renewable energy.
  • The fiscal cliff would be a disaster and would push the economy into a serious recession.

Read the full article at http://www.bloomberg.com/news/2012-11-20/feldstein-says-u-s-fixing-cliff-may-not-avoid-recession.html

Euro Strength Seen by Stiglitz Removing Greek Debt – Bloomberg 06-11-12

Salient to Investors:

Greece accounts for just 2.3 percent of EU GDP, and 4.3 percent of EU debt. Without Greece , the EU would have had a trade surplus in 2011.

Germany has posted a trade surplus every month since May 1991 and has avoided recession since 2009.

OECD says the euro is undervalued against 10 of 12 major counterparts.

Predictions:

Nobel laureate Joseph Stiglitz believes losing Greece will strengthen the EU, and expects the euro to rise.

Nomura Holdings’ Jens Nordvig sees a stronger and more stable monetary union if Greece exits if followed by additional integration – with the euro rising as much as 8 percent. But with no additional integration, capital flight would accelerate and the euro would drop significantly. A Greece exit wouldn’t greatly impact the remaining economies.

George Soros said European leaders have a three-month window to correct their mistakes and reverse current trends. He expects the euro to survive because a breakup would be devastating also for Germany.

Harvard’s Martin Feldstein believes a Greek exit would be chaos short-term, but allow Greece to devalue its new currency and return growth and employment.

Berenberg Bank’s Christian Schulz opposes a Greece exit, but if it happens then it is better for the other EU countries because they are more harmonized already.

Eaton Vance’s Michael Cirami said a Greek exit would lead to a stronger and more stable currency bloc in the medium to long-term.

Read the full article at http://www.bloomberg.com/news/2012-06-11/euro-strength-seen-by-stiglitz-removing-greek-debt.html

Greece Should Leave Euro to Rebuild Economy, Feldstein Says – Bloomberg 06-07-12

Salient to Investors:

Martin Feldstein said Greece cannot be fixed. A Greek departure would be chaotic short-term, but longer-term would return Greece to growth and more robust employment. Italy is in good shape. Spanish regional budget deficits pose a bigger problem than the banking crisis. European leaders lack a longer-term strategy on how to deal with indebted member states.

Read the full article at http://www.bloomberg.com/news/2012-06-07/greece-should-leave-euro-to-rebuild-economy-feldstein-says.html