MacroScope

New film takes a whack at warped Fed policies in the land of never-ending bubbles

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“Money for Nothing: Inside the Federal Reserve” is a slick, thoughtful and alternately infuriating-and-funny documentary that premiered in New York’s Florence Gould Hall last night. It gives the U.S. central bank a pretty thorough lashing, especially Alan Greenspan. The former Fed Chairman is strung up like a piñata and smacked around as the culmination of long-misguided U.S. monetary policy that, crisis after crisis, lacks the creativity and courage to remove the proverbial punch bowl when the time is right.

The film, by writer and director Jim Bruce, is narrated by Liev Schreiber but almost doesn’t need him given the series of interviews that drive an account of the Fed over the 100 years of its existence. Paul Volcker, Alice Rivlin, Charles Plosser, Jeffrey Lacker, Allan Meltzer, Raghuram Rajan, Alan Blinder and Jim Grant are among those who weigh in. Oh and Janet Yellen, but not Lawrence Summers.

The midtown Manhattan audience of economists and investors hooted and howled at decade-old footage of Greenspan telling a congressional committee that bank regulators have no clue how derivatives work so should simply let Wall Street police itself in the years to come; Timothy Geithner is seated just off the Maestro’s right shoulder, and the film shines a wry spotlight on the man who would run the New York Fed as Wall Street collapsed into crisis a few years later.

The thesis – adorned with steep economic graphics and never-ending images of money-printing presses – seems to be this: The Fed’s full employment mandate warps its decision-making, tempting it to inflate consumer prices (’60s/’70s) then stocks (’90s) then housing (2000s) and possibly now, thank you very much Chairman Ben Bernanke, government debt. Essentially, there just aren’t enough Volckers to go around. (Before that, when inflation was the sole mandate, the Great Depression was the result of Fed policymakers’ close-minded desire to protect U.S. stockpiles under the global gold standard, the film argues.) All the while, this warped monetary policy-making encourages an American obsession with consumption that is unsustainable and will inevitably lead to more booms and even more severe busts.

The solutions are a bit vague and you’ve heard them all before: innovation, education, bold politics focused on the longer term, etc. Oh and don’t saddle our children (or grandchildren) with any more debt than they will already, inevitably, carry.

Norway shifts tack

Norway’s centre-right swept to power last night, ousting a centre-left government that couldn’t capitalize on a solidly performing economy which escaped the world financial crisis largely unscathed (uncanny echoes of Australia’s weekend election here). The popular feeling seems to have been that a decade of strong growth was wasted and is now slowing.

Erna Solberg, Norway’s second woman premier, will have to govern with the anti-immigration, anti-tax Progress party which could be problematic. But they seem at one on the need for lower taxes at least.

Solberg also wants to revamp the $750 billion oil fund, the world’s biggest sovereign wealth fund. Changes could include breaking it up and requiring it to start investing in Norway, forbidden until now.

Italy’s High Noon

Silvio Berlusconi’s political future – upon which both Italian and euro zone stability rest to varying degrees – is up for debate when a Senate committee meets on Monday to begin discussions that could end with formal procedures to expel him from the Senate. Talks could last for days.

Members of Berlusconi’s centre-right PDL have threatened to walk out of Prime Minister Enrico Letta’s coalition government if a final vote – due in the Senate in October or maybe November – bars him from political life, following the upholding of his conviction for tax fraud.

One of Berlusconi’s key allies says he has already prepared a video message that could announce a decision to bring down the coalition government.

If at first you don’t succeed… Fed’s Evans sticks to strong forecast despite misses

It’s nice to know Federal Reserve officials have a sense of humor about their own forecasting errors. Chicago Fed President Charles Evans was certainly humble enough to admit to some recent misses in a speech on Friday .

Still, he’s sticking to his guns, arguing that U.S. economic growth will finally break above 3 percent next year, allowing the Fed to gradually pull back on its bond-buying stimulus.

In 2009, I predicted that growth would pick up. I did the same in 2010, 2011 and 2012. And I was not alone – most FOMC participants and many outside analysts shared this overly optimistic view. Undaunted, I make my intrepid forecast: I anticipate growth to average about 2-1/2 percent in the second half of the year and to be in the neighborhood of 3 percent next year. I expect the unemployment rate to be somewhat below 7 percent by the end of 2014.

For markets, non-farms eclipse G20

The G20 will wrap up with entrenched positions on Syria and a little more entente over the emerging market turmoil prompted by the Federal Reserve’s impending move to slow the pace of its dollar creation programme.

The BRICS are plugging away with their plan for a $100 billion currency reserve pool to help calm forex volatility but officials admitted this is still a work in progress and won’t be deployable soon.

So, as China and Russia told India – and Washington said more broadly – it’s still incumbent upon countries to put their own houses in order.
The unsurprising rule of thumb is that countries with profound domestic problems have been the ones hit hardest since Ben Bernanke first put up his tapering plan in May. So, while the Fed may have caused the ripples, the fact the rupee is drowning is more due to India’s gaping current account deficit and general economic malaise.

ECB’s Draghi walks the line

After today’s news conference we would happily endorse a new skill on Mario Draghi’s LinkedIn profile: Tightrope walking.

Draghi – having just returned from a summer holiday and looking a lot more relaxed than a month ago – tried to convince markets that the euro zone economy was recovering as expected, yet not sounding too upbeat to warrant higher market rates.

And so he did. Recent confidence indicators confirmed the expected gradual improvement in the economy, he told a smaller than usual crowd of journalists – whether the low attendence was down to the blue sky and 30 degrees outside or the brighter economic climate remains unclear.

Say it with confidence: Consumer surveys as a leading indicator of jobs

It turns out people are better employment forecasters than economists. A report from New York Fed economists finds that confidence measures gleaned from consumer surveys are very tightly correlated with the path of U.S. employment.

The paper offers some illustrative charts that make a rather convincing case.

The chart below plots the Present Situation Index against the unemployment rate, whose scale is inverted so that high levels represent strong labor market conditions (low unemployment) and vice versa. One readily apparent feature is that the two series move together very closely throughout the period and, most notably, during all five of the recessions since 1977. It’s hard to tell from inspecting the chart, but the highest correlation (0.89) occurs at a two-month lead; that is, the Present Situation Index is even more strongly correlated with the unemployment rate two months into the future than it is with the concurrent rate.

The next chart looks at the relationship between changes in this index and payroll job growth – both over twelve-month intervals. This measure of employment is based on a different survey than the survey for the unemployment rate, but payroll employment is typically growing when unemployment is declining and vice versa. Once again, it’s very apparent that the two measures move closely together, and again formal analysis reveals that the Present Situation Index tends to foreshadow movements in employment by a couple of months. In particular, twelve-month changes in the index are most highly correlated with twelve-month job growth four months into the future – the correlation is 0.83.

History suggests rocketing British growth won’t last long

Britain’s economy is steaming ahead – by one measure faster than any other large developed or emerging economy – but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.

Data this week showed British businesses were at the forefront of Europe’s nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.

British services companies enjoyed their fastest growth since December 2006 in August, according to purchasing managers’ surveys, while housing market activity is gaining, and consumer sentiment is at its highest in almost four years.

‘The President’s Man’: Why a Summers Fed might be a more politicized Fed

Much, far too much, has been said and written about the circus that is the unofficial ‘race’ for the Federal Reserve’s chairmanship. Without rehashing the curious battle between former Obama adviser Larry Summers and Fed Vice Chair Janet Yellen, Oppenheimer Funds chief economist Jerry Webman makes a good point about why a Summers appointment could create the appearance of partisanship in the conduct of monetary policy:

Historically, U.S. presidents have had mixed results from putting ‘their man’ at the head of the Fed table. President Truman thought he had an accommodative chairman in William McChesney Martin and got the man who famously took away the punch bowl. President Nixon also looked for a more accommodative chairman and unfortunately got one. I’m more impressed with Presidents Reagan, Clinton and Obama, who reappointed their predecessor’s man and got independent and (mostly) sound monetary policy. Sure Bernanke moved to the Fed chair from the chair of President Bush’s council of economic advisors, but even to his critics he’s never appeared to be a partisan figure – certainly not a GOP operative.

Ironically, many expect Summers, who has expressed doubts about the effectiveness on quantitative easing, to be more hawkish than Yellen, long seen as among the most dovish of Fed officials on interest rate policy. But that doesn’t really matter in terms of the message that it would send to the public and financial markets, argues Webman.

China at a crossroads on yuan internationalization project

As China marks the third anniversary of the first ever bond sale by a foreign company denominated in renminbi, questions are rife on what lies next for the offshore yuan market.

Since hamburger chain McDonalds sold $29 million of bonds on a summer evening just over three years ago, China’s yuan internationalization project has notched up impressive milestones.More than 12 percent of China’s trade is now denominated in yuan from less than 1 percent three years ago, Hong Kong – the vanguard of the offshore yuan movement – has more than one trillion yuan of assets in bank deposits and bonds and central banks from Nigeria to Australia have added a slice of yuan to their foreign exchange reserves.

China’s aim to internationalize the yuan has two major objectives: One, to ensure that its companies do not have to shoulder the foreign exchange risk of swapping yuan into dollars in global trade. The second is that as China gradually makes the transition from a current account surplus nation to a deficit country, it would, like the United States, want its debt to be denominated in its own currency.