thing I like about Janet Yellen is that unlike Bernanke and Greenspan, she
speaks understandable English and is not prone to sugar coating everything. I
disagree with much of what she says, but not all of it.
Please consider these excerpts from Janet Yellen's Outlook for
Recovery in the U.S. Economy.
painful as this recession has been, I believe that we succeeded in avoiding
the second Great Depression that seemed to be a real possibility.
regret to say that I expect the recovery to be tepid.
if the economy grows as I expect, things won’t feel very good for some
time to come. In particular, the unemployment rate will remain elevated for a
few more years, meaning hardship for millions of workers.
own forecast envisions a far less robust recovery, one that would look more
like the letter U than V. A large body of evidence supports this guarded
more credit losses are in store even as the economy improves and overall
financial conditions ease.
households remain stressed. In the face of high and rising unemployment,
delinquencies and foreclosures are showing no sign of turning around. Even
recent-vintage loans are experiencing rising delinquency rates.
chances are slim for a robust rebound in consumer spending, which represents
around 70 percent of economic activity. Consumers are getting a boost from
the fiscal stimulus package. But this program is temporary.
may well be that we are witnessing the start of a new era for consumers
following the traumatic financial blows they have endured. While certainly
sensible from the standpoint of individual households, this retreat from
debt-fueled consumption could reduce the growth rate of consumer spending for
business contacts indicate that they will be very reluctant to hire again
until they see clear evidence of a sustained recovery, and that suggests we
could see another so-called jobless recovery in which employment growth lags
the improvement in overall output.
if credit flows were restricted by these types of financial headwinds, the
Fed would ease the stance of monetary policy by cutting its federal funds rate
target. But the funds rate is already at zero for all practical purposes,
leaving the Fed’s traditional policy tool as accommodative as it can
Many versions of the Taylor rule, a well-known policy benchmark based on the
state of the economy and inflation, indicate that we should lower the funds
rate well below this zero bound—if such a thing were possible.
This brings me to the complex topic of inflation. In my career, I have never
witnessed a situation like the one that exists now, when views about
inflation risks have coalesced into two diametrically opposed camps. On the
one hand, one group worries about the long-term inflationary implications of
a seemingly endless procession of massive federal budget deficits. At the
same time, others fear that economic slack and downward wage pressure are
pushing inflation below rates that are considered consistent with price
stability and even raising the specter of outright deflation.
This dichotomy is on display among the participants in the Survey of Professional
Forecasters. The lowest quartile of forecasters focuses on disinflation over
the next five years. The top quartile is preoccupied with the possibility of
rising inflation five to ten years out.
My personal belief is that the more significant threat to price stability
over the next several years stems from the disinflationary forces unleashed
by the enormous slack in the economy.
Today, we are starting with very low inflation. Core PCE price inflation has
averaged just under 1½ percent over the past twelve months, which is
already below the 2 percent rate that I and most of my FOMC colleagues
consider an appropriate long-term price stability objective. With slack
likely to persist for years, it seems likely that core inflation will move
even lower, departing yet farther from our price stability objective.
From a monetary policy point of view, the landscape will continue to present
challenges. We face an economy with substantial slack, prospects for only
moderate growth, and low and declining inflation. With our policy rate
already as low as it can go, it’s no wonder that the FOMC’s last
statement indicated that “economic conditions are likely to warrant
exceptionally low levels of the federal funds rate for an extended period.”
I can assure you that we will be ready, willing, and able to tighten policy
when it’s necessary to maintain price stability. But, until that time
comes, we need to defend our price stability goal on the low side and promote
full employment. Thank you very much.
a long speech, well worth a read in entirety. Unlike much of the undeserved
praise Bernanke heaps upon himself (See Orwellian Madness
"Bernanke Saved The World"), Yellen's
speech appears to be genuine.
Moreover, Yellen does not sugar coat the grim jobs picture or the credit
problems that lay ahead. Indeed what she is describing seem more like an
L-Shaped recession than a "U". In contrast, I often wonder if
Bernanke really believes what he is saying or if he is simply trying to
absolve himself of blame just as Greenspan does.
On April 8, 2008 I made the Case for an
"L" Shaped Recession and I do not see
any reason to change that stance.
Certainly the recession has already gone on longer than most thought.
Although we are coming out of recession now, it's important to note Yellen is
calling for "another so-called jobless recovery".
Well, a jobless recovery when unemployment is at 5% is one thing, a jobless
recovery is another thing indeed when the rate is 10-11%.
For more on jobless recoveries please see Dismal Unemployment
Situation In Chart Form.
Here is one of the charts from the article.
Job Loss Recovery
click on chart for sharper image.
No Driver For Jobs
In the 1980's and 1990's an internet boom created massive numbers of jobs.
Between 2000 and 2007 a housing boom created massive numbers of jobs. I keep
asking what the next driver for jobs will be. Inventory replenishment will
not do it. Nor will one-time stimulus efforts like road building.
Nothing on the energy front seems capable at this time of producing such a
boom. Commercial real estate is massively overbuilt as is the retail sector.
So don't look for Home Depot (HD), Lowes (LOW), Target (TGT), or Walmart
(WMT) to lead the way. Forget about banking too as Citigroup (C), Wells Fargo
(WFC), and Bank of America (BAC) have their hands full and then some.
And although one can never tell in advance when technology breakthroughs will
happen, as we have seen, internment booms are not that common. In 2001
everyone was waiting for the next "killer app". Everyone is is
still waiting so don't look at Intel (INTC), Microsoft (MSFT), or the
technology sector either.
So while everyone is tooting horns and cheering the end of the end of the
recession before it has even ended, those graphs and comments from Bernanke
himself will put the pending job loss Recovery into better perspective.
Yellen Supports Inflation Targeting
My biggest gripe with Janet Yellen (aside the fact that the Fed should not
exist at all) is her support of inflation targeting. Since when is a 2%
annual rise in prices stable? Here is a chart that shows what I mean.
Inflation Targeting at 2% a Year
click on chart for sharper image.
Eventually, on such an insane scheme, wages are bound to not keep up with
prices. Moreover, the Fed ignores asset bubbles in its calculation of
Finally it is far beyond silly to think the fed can control prices in the
first place. The last four years should be proof enough.
Thus, not a single person who is thinking clearly believes Yellen when she
says "I can assure you that we will be ready, willing, and able to
tighten policy when it’s necessary to maintain price stability. But,
until that time comes, we need to defend our price stability goal on the low
side and promote full employment. Thank you very much."
Janet Yellen does not know price stability from asteroids, and even if she
did, the Fed has proven it will not act on asset bubbles. Moreover, the Fed
has proven it cannot control prices even if it wanted to.
Yet, amazingly Belief In Wizards
Inflation Targeting and Price Stability Questions
should inflation be targeted at 2% and not 1% or 3%?
should any inflation be targeted at all?
if it was smart to target prices, can prices really be measured it
do central banks do to overcome lag effects of monetary tightening and
this just blind faith "we know neutral when we see it"?
For more on the total ridiculousness of Fed promoted price stability please
see the Fallacy of
That the Fed ignored asset prices in its measure of "inflation" is
one of the reasons we are in this mess.
Correct Inflation Target Is Zero
Here's the deal. The correct inflation target is zero. And we will never get
there with a bunch of Fed clowns who think micromanaging interest rates is
the way to achieve stability.
Inquiring minds are reading Does Inflation
Targeting Make Any Sense?
"I don't get it," ... By setting 2% as an inflation objective,
the Fed is "telling people in a generation they're going to be losing
half their purchasing power."
Inflation Targeting Is A Moral Hazard
Given that inflation benefits those with first access to money, any targeted
inflation at all is morally wrong. Finally, for all this silly talk about
inflation fighting and inflation targeting, it's important to remember what
inflation really is. Inflation is an expansion of money supply and credit,
where credit is marked to market. Prices generally follow money supply but
there is a variable time lag, productivity and consumer sentiment are huge
factors, as are a host a host of global factors including interest rate
differentials and currency fluctuations.
So even if the Fed could achieve that magic 2%, the whole shebang would
eventually blow sky high anyway (as it just did) because wages will not keep
up with prices causing asset bubbles to pop.
Yellen is a
likable person who does not sugar coat everything and appears to speak from
the heart. However, praise has to stop there. When it comes to
"inflation targeting" she is as much a clown as Bernanke.
Mish's Global Economic Trend
Thoughts on the great inflation/deflation/stagflation
debate as well as discussions on gold, silver, currencies, interest rates,
and policy decisions that affect the global markets.