US Fed's Fischer warns of poor growth … The Federal Reserve's vice-chairman has pointed to weak labour force participation and a soft US housing recovery as two reasons for disappointing global growth, saying this could be a long-term phenomenon. Stanley Fischer's comments reflected continuing concern about the economy that has fuelled debate over whether the Fed should move sooner than expected to raise interest rates, despite solid job growth and strong gross domestic product expansion in the US. "This pattern of disappointment and downward revision [in growth] sets up the first, and the basic, challenge on the list of issues policy makers face in moving ahead: restoring growth, if that is possible," Mr Fischer said on Monday in a speech in Stockholm. "It is also possible that the underperformance reflects a more structural longer-term shift in the global economy, with less growth in underlying supply factors." – Financial Times
Dominant Social Theme: Things are slowing down for some reason. The big brains among us need to try harder.
Free-Market Analysis: This article in the Financial Times is a good example of reporting on something without saying anything. That's not the fault of the Financial Times so much as it is of the vice-chairman of the Federal Reserve, Stanley Fischer.
Fischer has given a Keynesian speech in Stockholm. Keynes, of course, wrote a huge book about economics without ever explaining the mechanisms that create recessions and depressions. Keynes's reason for writing the book – his General Theory – was to suggest solutions. The solutions he suggested included the use of central bank money printing and government job programs.
This is why we maintain that Keynes's great work was a predetermined one. He was a Fabian socialist, and it was obviously his task to write an economics book that provided a justification for government activism.
This was necessary to do, hypothetically, because otherwise, classical economics was going to win out as a primary economic theory. And classical economics – Austrian economics, really – didn't have any use for government activism when it came to the economy. And those running government behind the scenes didn't like that at all.
When government interferes in the economy, its mandates are essentially forcible ones. And when something is forced, it is "fixed" – as in a price fix. Price fixes are inevitably distortive because they force people to do things they wouldn't do otherwise. But after Keynes, government officials had a manual they could use. Never mind that it didn't work – that wasn't the point. It told a good, convincing story.
The power elite manages society via dominant social themes. These stories shape perception and culture. The power elite doesn't need or want stories that are truthful. Elite globalists want stories that reinforce memes of control. Keynes provided that.
So does Fischer, and we can see that in his speech.
This seems to us an important speech, because it is setting a tone for decreased economic expectations in Western economies. There may be many reasons for this – and we'll discuss some of them below – but the really important point is that Fischer chose to give it and that it's getting massive mainstream media coverage. Here's more from the Financial Times:
… Labour force participation rate has remained disappointing, coming in at 62.9 per cent last month. Mr Fischer said although the reduction in the labour supply reflected demographic changes, such as the ageing population, the "surprising weakness" may also be due to discouraged workers who have stopped looking for a job.
The Fed recently revealed that the rate-setting Federal Open Market Committee believed that labour resources were being underutilised and there was more capacity for improvement, which could spur it to wait for more progress in the jobs market before it raises interest rates. But there is some pressure for the Fed to reconsider its timeline, with Philadelphia Fed president Charles Plosser being the first to dissent this year in favour of tightening policy because of economic progress.
… Outside the US, the recoveries of advanced economies had been "well below average", while performance in emerging markets, especially in Asia, is sharply down. The challenge for policy makers was separating the "cyclical from the structural, the temporary from the permanent," Mr Fischer said. "The difficulty in disentangling demand and supply factors makes the job of the monetary policy maker especially hard since it complicates the assessment of the amount of slack, or underutilised productive capacity, in the economy," he added.
Mr Fischer said he believed the Fed's quantitative easing policy had been largely successful but monetary policy would become more complicated as the central bank considers its future moves, which will affect the Fed's balance sheet.
You can get a hint from the above that Fischer is commenting on RESULTS not underlying causes, and thus this speech follows in the path of Keynes's General Theory. The idea, unfortunately, is to describe without explaining. If you have to explain, you have to deal with underlying economic distortions. And in the modern era, if you're Mr. Fischer, et al., those distortions are being generated by the very facilities you're representing.
We actually went and read Fischer's speech to confirm our suspicions. It's a long speech full of complex verbiage that describes what's going on. But nowhere does he explain fundamental causation, from what we could tell. Only Austrians do that.
Here's an excerpt from his speech:
Today I will discuss three key aspects of the challenges policymakers face as they seek to move ahead. These are: (1) The impact of the Great Recession and the associated Global Financial Crisis on the growth of output, both in the short term and over the longer term. (2 The reform of the financial sector – in other words, how much progress have we made in creating a safer and more stable post-crisis financial environment? (3) The impact of the crisis on the conduct of monetary policy – in particular, how to balance the goals of achieving stable inflation and full employment while also taking into account the need to maintain financial stability. I will leave it to others to address the important challenges facing fiscal policymakers as they determine the appropriate roles and paths for fiscal policy at both the macro- and micro-levels.
To keep the focus sharp, I will deal primarily with the economy of the United States. But policymakers around the world confront related challenges and I will draw also on the post-crisis experiences of other economies. And I should make it clear that my comments today are mine alone and do not necessarily represent the views of other members of the Board of Governors of the Federal Reserve System or the Federal Open Market Committee.
I begin by reviewing recent global economic developments and the questions they raise about where we are likely to go from here. There has been a steady, if unspectacular, climb in global growth since the financial crisis. For example, based on recent IMF data from the World Economic Outlook, which uses purchasing power parity weights, world growth averaged 3 percent during the first four years of the recovery and as of July was expected to be 3.4 percent this year. The IMF expects global growth to reach 4 percent next year – a rate about equal to its estimate for long-run growth. This global average reflects a forecast of steady improvement in the performance of output in the advanced economies where growth averaged less than 1percent during the initial phase of the recovery to an expected 2-1/2 percent by 2015. In contrast, the recovery in the emerging market economies started strong but has since fallen off, in part, as fiscal policy stimulus has been pared back.
But – and this is no small "but" – the global recovery has been disappointing. With few exceptions, growth in the advanced economies has underperformed expectations of growth as economies exited from recession. Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. Indeed, research done by my colleagues at the Federal Reserve comparing previous cases of severe recessions suggests that, even conditional on the depth and duration of the Great Recession and its association with a banking and financial crisis, the recoveries in the advanced economies have been well below average. In the emerging market economies, the initial recovery was more in line with historical experience, but recently the pace of growth has been disappointing in those economies as well. This slowing is broad based – with performance in Emerging Asia, importantly China, stepping down sharply from the post-crisis surge, to rates significantly below the average pace in the decade before the crisis. A similar stepdown has been seen recently for other regions including Latin America.
… How much of this weakness on the supply side will turn out to be structural – perhaps contributing to a secular slowdown – and how much is temporary but longer-than-usual-lasting remains a crucial and open question.
Indeed, an "open question." So many questions, so few answers. On he goes, and on. We quoted him to give you a flavor of his comments. But don't take our word for it. Go see for yourself. We couldn't find any element of causation in what he presented. Maybe someone else will, but we're fairly positive it's not there.
The entire speech and all the articles in the media analyzing it deal with the slowdown itself and Fischer's notion that the slowdown may be structural in nature. But even here he doesn't explain WHAT the structure is. His speech is devoid of any mention of monetary policy as a cause.
Lacking such causation, the speech collapses in on itself. It becomes a windy jumble of words. Of course, none of the mainstream analysis will explain this. And most laypeople reading the speech will simply be confused by it and some will conclude Fischer is simply too intelligent – and that they can't understand him because they are not bright enough.
But this will be the wrong conclusion. The speech is incomprehensible because it obfuscates and is intended to do so. Fischer hopes you will come away impressed by his erudition. But the primary intention is to explain the endless slowdown without examining the fundamental causes, which he wants to avoid.
In fact, the slowdown is a direct result of central bank money printing, which caused first a horrible asset bubble and then a terrible bust from which we've still not recovered from in the US and the West generally. To counteract the asset implosion, central banks went into Keynesian emergency mode and printed something like US$50 trillion to liquefy bankrupt financial firms around the world.
Since this is a Keynesian solution, it didn't work. Government cannot undo what government has done. Or to put it another way, force, ameliorating force is still force. Government price-fixing of this magnitude only compounded the problem. Now businesspeople were generally afraid, for it wasn't clear who was a bankrupt and who was solvent. Business lagged and continues to lag. Animal spirits have not recovered.
And thus, despite this massive, impossible-to-comprehend injection of cash and credit, the larger economy still hasn't "recovered." That's because, as free-market economists know, the only way to recover from an asset implosion is to let the larger economy work its way free of the rubble on its own.
Bankrupts actually have to go bankrupt. Once the economy is purged, a fresh start can occur. The "structural" difficulties that Fischer alludes to are self-inflicted. They are a result of central bank determination that their crony institutions are not to fail. They will be propped up at any cost, and the cost is significant indeed.
There is one thing that central bankers could have done to ameliorate the situation in the short term, and that would have been to have printed cash and dropped it "by helicopter" (as Ben Bernanke once suggested) into middle class neighborhoods. But this the top money men will never do because if they print money and give it away, people will surely recognize the reality of what money is in the modern day – a digital monopoly that has no business existing in its current form.
Instead, what the top men have decided to do is to force feed incomprehensible amounts of cash into the current governmental-oriented system, using the quasi-state institution of commercial banking as the distribution channel. Some of this money, too much, has found its way into centralized bourses and has begun to bid up prices dramatically, especially equity prices.
We call this the Wall Street Party. It is inevitable that the prices of various securities will go up – and up some more. It is the only kind of manipulation left for the bankers to use unless they want to disperse their super money directly to "consumers." And this they will not do.
And thus, the bankers' dilemma as voiced by Fischer: He and the others know that employment is not going to rebound soon because the only entities that are making money are the largest corporations – and their feeder facilities, larger and small. House prices may be rising, but that's probably mostly on the high end because the rich are afloat in an endless sea of electronic digits.
Real estate and equities are likely to continue to rise in this environment, at least for the near term. But it's an entirely artificial environment. There's no "there" there. The modern economy is not the product of the Invisible Hand but the visible and hidden activities of central banking. This is what Fischer surely knows but cannot say. Instead, he talks about structural difficulties and how the 21st century's economies may have changed in a profound manner.
But it's not so profound. The marketplace is based on competition and when you remove competition and substitute price fixing and mercantilism – playing favorites with some institutions – you end up with "structural imbalances." You end up with a paralyzed economy, in other words.
Fischer could have explained that in a paragraph or two. But that wasn't really his intention. He and the others are practiced obfuscators. They don't want people to understand.
But more and more people do anyway. And that's an encouraging trend, unlike current economic ones …