Quit worrying: The truth about the US economy


February 15, 2016

After months of intensifying attacks on its policies, and steadily tanking equity markets, the best the Fed found to say last week was "don't blame us, blame China and the weakening energy prices."

Needlessly on the defensive, the Fed apparently could not find anything to reassure the markets with facts about the true state of the U.S. economy. So, here are some ideas.

February 15, 2016

After months of intensifying attacks on its policies, and steadily tanking equity markets, the best the Fed found to say last week was "don't blame us, blame China and the weakening energy prices."

Needlessly on the defensive, the Fed apparently could not find anything to reassure the markets with facts about the true state of the U.S. economy. So, here are some ideas.

How about telling the world that, with a growth rate of 2.4 percent for the second consecutive year, the U.S. economy is currently operating almost an entire percentage point above its long-term potential, delineated by the available labor and (physical) capital resources?

And how about a reminder that, thanks to this nicely growing economy, Uncle Sam cut a check to the rest of the world last year for $758.9 billion, after a $741.5 billion contribution he sent out in 2014? You can think of these checks as being literally written by the Fed's support to the economy, and endorsed by the international trade policy conducted by the White House and the Congress, which is now becoming a big bone of contention in presidential primaries.

How does that strike you, compared with $1 trillion sucked out of the global economy by countries ballyhooed as the "future of the world," and those developed economies seeking growth by living off their trade partners? Out of that number, what is called the "dynamic Asia" got a cool $585 billion hongbao for its Spring Festival. But the Uncle did not even get a "thank you" note.

Say it ain't so, Fed

The Fed's bad-news arguments are exactly those used by "head-for-the-hills" doomsayers masquerading as sophisticated investment analysts.

That is unfortunate. It is a great pity indeed that the Fed could not get itself to use solid underpinnings to the U.S. economic growth to tell frightened investors that the economy was not lying down and waiting to die.

Jobs, incomes and credit costs – the variables that directly drive three-quarters of the U.S. economy – have rarely been more supportive of demand and output.

An unemployment rate of 4.9 percent indicates a nearly fully-employed economy. That is entirely a result of the Fed-driven cyclical activity that created 2.4 million new jobs in the year to February.

Yes, we still have large segments of idled or underutilized labor resources, such as involuntary part-time workers, long-term unemployed and discouraged workers leaving the labor force. But these are the issues that have to be addressed by structural policies – an exclusive domain of the Congress and the White House.

The household's income picture is the best we have had in the last four years: The real personal disposable income grew 3.6 percent last year, almost a whole percentage point faster than in 2014.

Household savings also remain high; at 5.2 percent of personal disposable income they are now at the highest level since 2012. By historical standards, that is a very high personal savings rate, which will support consumer spending in the months ahead.

These are by far some of the strongest readings in the industrialized world. All false modesty aside, the Fed could take all the credit for that, because, with the fiscal policy frozen in a restrictive mode, it was the monetary policy that guided the U.S. economy on a steady growth path.

Why can't we talk about that, instead on harping on China's problems – they take only 7.7 percent of our exports – and excess oil supplies as some low-cost producers apparently want to kill their competitors?

Oh, but I hear doomsayers screaming that all these good U.S. numbers mean nothing because our whole financial system – and indeed that in the rest of the world – is allegedly crumbling under an advancing avalanche of unmanageable debt.

The Fed – a lender of last resort – should speak to that because that is a vicious attack on its core responsibility: The systemic safety and soundness of the American financial services industry.

Titanic orchestra: "German violins and adding machines"

The ECB's task is much more difficult, because it is operating in a chaotic political environment poisoned by dangerous rumors that some of the euro area's largest banks are on a "death watch."

In spite of that, the Europeans continue to dilly-dally because they cannot agree on anything.

That's what the Italian Prime Minister's Matteo Renzi calls the "Titanic orchestra" – a metaphor for confusion and an inept Brussels bureaucracy. Mr. Renzi is unfair, though, because the problem is elsewhere. Any EU Commission's decision is the lowest common denominator of 28 disparate nation states, where Germany cajoles and threatens to get a compromise suiting, as Mr. Renzi observes, Berlin's own national interests.

Germany is at the center of this turmoil because more than 80 percent of German people don't approve of the government's immigration policies.

These were recently described as sounds of "violins and adding machines" by the French philosopher Alain Finkielkraut, who became an "immortal" when he was voted in on January 28, 2016, as the latest member of the 380-year-old French Academy. The allusion to that strange sound was meant to sum up Germany's open-ended invitation to all comers from the Middle East to relieve the country's labor shortages and boost the economy's competitiveness.

France's Prime Minister Manuel Valls was much blunter in his assessment of the way Germany handled its migrant/refugee problem. He told the German media last Friday that Berlin's call to Middle East people was plain wrong, signaling opposition to Germany's attempt to have the rest of Europe pay for its mistakes. France, he said, will take only 30,000 refugees this year.

And here is Mr. Renzi's Titanic orchestra again: German coalition leaders are suing each other, the growing xenophobic rightwing forces are now the country's third-largest party, and three federal state elections next month are expected to throw Germany into the most unstable political situation since the end of WWII.

That's the environment where the ECB is steering one-fifth of the world economy. And that is still where the ECB continues to fight devastating sequels of mean, German-imposed fiscal austerity at the time when the euro area economies were mired in a deepening recession.

The good news is that the ECB is winning. This past Friday we got numbers showing that the euro area's growth last year accelerated to 1.5 percent, nearly double the 0.9 percent growth rate in 2014.

Low energy prices were part of this story, but this remarkable feat was mainly the result of the ECB's strongly supportive monetary policies.

So, these numbers are speaking for themselves. But, just like the Fed, the ECB has to reassure the markets concerning the rumors about the euro area's faltering financial system.

And then there is the People's Bank of China (PBOC). It, too, needs to speak up because it is directly challenged about its exchange-rate policy, its general credit stance and an allegedly crushing debt burden in private and public sectors of the Chinese economy.

The yuan's 5 percent depreciation against the dollar over the last twelve months should not be such a big deal, but markets, and China's trade partners, suspect that more is on the way to support the country's large export-oriented industry. A more serious charge is that China had lost control of its exchange rate. Beijing needs to speak to that while it strives to promote the yuan as an international reserve and transactions currency.

An equally important issue is China's ability to manage its private sector debt and its consolidated public sector balance sheet.

For example, the Fitch rating agency issued a report last Thursday saying that the decline of land sales, representing nearly one-third of local government revenues, will put additional pressures on heavily indebted local authorities. That is a matter of great consequence because these governments play a key role in growth-supporting infrastructure investments.

A word of clarification from PBOC on all this would go a long way toward calming down market jitters on the expected pace of China's economic growth.

Investment thoughts

Tumbling equity prices could be regarded as markets' typical overreactions in an otherwise normal asset re-pricing process to reflect a subdued growth of the world economy.

The Fed, the ECB and the PBOC may not need any particular response to that. But they do have to speak up about the current growth trends and reassure the markets that their economies are not – as some market-movers claim – in an irretrievable tailspin. They also have to explain to investors that they have all the instruments they need to support demand, output and employment.

There, however, is one issue where there can be no equivocation: These central banks must speak up forcefully when challenged on the safety and the integrity of the financial systems they manage. That is the key part of their public policy mandate. The safety and the soundness of the financial system should be like the proverbial Caesar's wife – beyond any suspicion.

And here is a question: Do you have the stomach to follow that famous American banker who reportedly pocketed $2.2 million last Friday by buying back his bank's stocks dumped by frightened investors?

Courtesy: CNBC