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America’s Most Important Economic Storyteller Is Confused

By Derek ThompsonThe Atlantic

As somebody who’s paid to tell stories about the economy, I always find it satisfying to assemble data points to produce a compelling pointillist picture about the state of the world. But these are rough times for economic pointillism. The data are all over the place, and the big picture is a big mess.

I look at the stock market, where valuations have collapsed. Okay, so markets are trying to tell us that future growth will be slower. Then, I see that consumers expect persistent inflation over the next five years. A growth slowdown with sticky inflation? Unusual, but not unprecedented. Consumers are glum about economic conditions but optimistic about their own finances, and they’re spending money on services and leisure and travel as if they’re eager participants in a booming economy. So everything is terrible, but I’m doing fine? Okay, that’s psychologically rich. Nominal gas prices are at record highs, but unemployment is near multi-decade lows; mortgage interest rates are rising quickly, but they’re at historically normal levels. So, things are bad, but also good, but also crummy, and maybe fine?

Regrettably, there’s another, significantly more important economic storyteller that also seems deeply confused about the economy. That would be the Federal Reserve.

Just six months ago, the Fed said it expected that prices would normalize in 2022, and it forecast that a key inflation index would average 2.6 percent growth this year. But now it projects that 2022 inflation will be twice as high, at 5.2 percent. Three months ago, the Fed signaled that it would raise a key interest rate by 0.5 percentage points in June. But this week, the Fed changed its mind after getting spooked by a few inflation reports and suddenly decided to jack up the federal-funds rate by 0.75 points, its most significant increase in 28 years.

Fed Chair Jerome Powell’s explanation for the rate change was baffling. He claimed that the number of job openings in the economy pointed to “a real imbalance in wage negotiating” but also said that the labor market had practically nothing to do with inflation. He explained that headline inflation has soared largely because of supply-side issues, such as the war in Ukraine’s impact on the gas market, that the Fed can’t really do anything about. But he also insisted that the Fed had to up the ante on interest-rate hikes to bring down inflation by reducing demand. He insisted that he didn’t want to send the economy into a recession, but the Fed’s own economic forecasts project several consecutive years of rising unemployment—something that generally happens only in a recession.

The full story only barely holds together. In the Fed’s view, inflation is partially caused by the labor market, but also not caused by the labor market; it’s largely a supply-side issue that the Fed can’t fix, but the Fed is going to try desperately to fix it anyway; and we’re hopefully not getting a recession, but we’re probably getting a recession. Like I said: baffling.

What the Fed is actually trying to do here—as opposed to the story it’s telling about what’s happening in the economy—is clear, yet extremely difficult: It is trying to destroy demand just enough to reduce excess inflation but not so much that the economy crashes. This a little bit like trying to tranquilize a raging grizzly bear with experimental drugs: Maybe you bring down its core temperature but also maybe you leave the big guy in a coma. The Fed could succeed. It could get Americans to spend a little less, borrow a little less, and loan a little less, and this synchronized decrescendo in economic activity would almost certainly reduce inflation. But here’s the problem: If global energy prices don’t come down and global supply chains remain tangled by Omicron variants and other natural disasters, we might end up with the worst of both worlds: destroyed domestic demand and constricted global supply. Slow growth and high energy prices could mean the return of the dreaded stagflation.

In the next few months, you should be prepared for the economic situation to get even stranger. Markets might be on the lookout for signs that the Fed is successfully crushing domestic demand. In other words, some investors will be hoping that the housing market stalls and retail spending slows, because these are signs that the Fed’s policy is working. We will be in an upside-down world where bad news (the economy is slowing down) is interpreted as good news (the Fed’s policy is working), and good news (consumer spending is still red hot) is interpreted as bad news (the Fed’s policy isn’t working).

For much of this century, the Fed has been an island of relative competency in a sea of institutional failure. But the Fed is neither an all-knowing artificial intelligence nor a band of wizard oracles sent from the future to stabilize price levels. The people who work there are fundamentally pundits with an interest-rate lever. They’re folks like you and me, telling stories about an economy that they’ve recently gotten wrong, wrong, wrong, and then kinda right, and then wrong again. I don’t know if this is comforting or terrifying to you, but it’s the full truth: Right now, we are truly all confused together.


Survival or Depression: A False Choice

We have to ignore the alarmists and get back to work

By Dr. Larry FedewaDrLarryOnline.com

One of the ongoing controversies in recent days is the dispute over which should be the nation’s top priority: economic recovery or pandemic precautions? Both positions are framed in the same terms: no recovery will be successful if everybody is afraid of catching the virus; likewise, drastic prevention measures, if continued, will bring on the worst economic disaster since the Great Depression of the 1930’s. The answer is that both positions are essentially correct.

We cannot afford either of these alternatives. Common sense tells us that we must resume full economic recovery as soon as possible, but we ignore the frightful prospect of an unchecked pandemic at our own peril. Each consideration has its own imperative: we must resume economic activity at its fullest capacity as soon as possible and we take all reasonable precautions at the same time.

So, the key question is: what are reasonable measures for protecting ourselves as a society?

The first answer to this question is what we should not do. We should not trust the public health officials’ solution to this problem. They speak from a very limited perspective, namely, the optimal methods for avoiding the disease altogether.  Obviously, the surest way to avoid the disease is to cease all human contact entirely — “shelter in place”.   There are several economic activities which can be executed alone, thanks to the internet and the telephone, such as, writing, meeting, accounting, record-keeping, reporting, selling (some items), etc. The surge of some sectors of the economy, such as mail-orders and delivery services, show the enhanced value of such activities.

Starting from avoiding all human contact as the best protection for individuals — which even public health experts realize is not doable for most people — the next step is simulating “personal quarantine”.   Thus “social distancing” and masks. This practice is marginally practical, meaning it can be done successfully by people engaged in some economic activities, such as counseling and lecturing.

Most economic activities, however, require closer contact. Therein lies the problem. Since most manufacturing and service industries are not compatible with “social distancing”, and since the nation cannot survive economically without these major sources of income, and, further, since the pandemic is not going away any time soon – in view of all these factors, another solution has to be forthcoming.

What is that solution? It seems clear that the solution is to carry on our economic life, using as many precautions as are feasible but not to the extent of continuing to suspend any significant activities which do not lend themselves to such precautions. For example, the practice of taking the temperature of all entrants to a building and requiring masks to be worn while inside – as being practiced in more and more venues already – can be adopted by far more businesses. Perhaps even on a mass scale such as ball games. Yes, it increases the cost of doing business, but that is better than no business at all. Imagination and creativity will be needed to cope with these issues. But those are characteristic attributes of Americans. The new question needs to be “How?” not “If”.

And how do we regain the confidence of the American public? How do we answer the inevitable charge that we are putting money ahead of saving lives?

The first thing we do is to stop measuring the success or failure of our efforts to contain the virus by the number of cases identified. This number is bound to increase as more and more people are tested every day. The proper metric is the death rate due to the virus. Even with the sloppy counting being used, the rate of COVID-19 deaths is actually going down. For example, the percent of deaths to cases reported for July 11 was 1.3%. (Source: Johns Hopkins CSSE) Longer term reports are equally encouraging.

What accounts for this statistic? In general, there are several reasons for this progress:

1) therapeutics are increasingly effective – both human competence, which has improved with experience, and new medicines which have been developed specifically to treat this COVID-19 illness. Treatment can be expected only to improve with more of both human and pharmaceutical development. Also, vaccines are due to start becoming available by the end of 2020.

2) Hospitals are getting more efficient in their protocols and procedures. The metric for the early preparatory efforts by the Administration was the fear of overcrowding the hospital capacity of the United States. While this is still a possibility on a local level, the occupancy is currently under control.

3) As younger people start to constitute a larger percentage of the total test population, mortality rates are expected to continue to decline because the virus appears to be less lethal for youths. In fact, many youngsters who have been infected never suffer any symptoms at all. In fact, their primary danger as a group seems to be their unwitting role as carriers of the disease to older contacts.

In general, America is learning to live with COVID-19 and to survive. It is now time to begin to flourish as we were before we were so rudely interrupted.


The Global Slowdown Hits the U.S.

America dodged the Asian financial crisis of 1997-98, but much has changed. Today’s world economic slide is starting to hurt us.

by Ruchir Sharma     •     Wall Street Journal

globe-handsPlunging stock prices and slowing economic growth in China have raised anew the question of how much events abroad really matter to the U.S. Many of the answers are quite placid, drawing on the precedents of the 1997-98 Asian financial crisis, when there was similar concern about impacts at home, which never came. The U.S. grew at a 4.5% annual pace during those two years. For much of 2015, when U.S. growth remained steady despite volatile and weak growth in the rest of the world, the optimists said it was like 1997-98 all over again.

That may be, but the world has changed a lot in two decades. After 1998, the U.S. share of global GDP topped out at 32% but has since fallen to 24%, based on my analysis of raw data from the International Monetary Fund, while the emerging-world share bottomed out at 20% but has since doubled to nearly 40%. In that time, China has supplanted the U.S. as the largest contributor to global growth. Continue reading


A recession worse than 2008 is coming

by Michael Pento     •     CNBC

2852.EconomicRecessionThe S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008. Nor do they want investors to believe this environment is commensurate with the dot-com bubble bursting. They claim the current turmoil in China is not even comparable to the 1997 Asian debt crisis.

Indeed, the unscrupulous individuals that dominate financial institutions and governments seldom predict a down-tick on Wall Street, so don’t expect them to warn of the impending global recession and market mayhem.

But a recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue.
Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37 percent. That would take the S&P 500 down to 1,300; if this next recession were to be just of the average variety. Continue reading


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