English journalist Ambrose Evans Pritchard recently wrote an article for the Telegraph entitled “Rejoice: the Yellen Fed will print money forever to create jobs”. That article discussed the appointment of 67-year old Janet Yellen as the next Chairman of the Federal Reserve and the economic consequences that were likely to follow.
According to Evans Pritchard, under Yellen’s rule,
“The FOMC [Federal Open Market Committee] will continue to print money until the US economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way.”
Note the relationship between the currency supply and more jobs. It is presumed that by increasing the supply of currency (printing more fait/paper dollars), the Fed can “create enough jobs” to cause an economic recovery. But is that presumption true or false?
“No Fed chief in history has been better qualified. [Yellen] is a glaring contrast to Alan Greenspan, a political speech writer for Richard Nixon, who never earned a real PhD (it was honorary) or penned an economic paper of depth.
“Janet Yellen’s husband is Nobel laureate George Akerlof, the scourge of efficient markets theory. She co-authored “Market for Lemons,” the paper that won the prize.”
Fascinating. Ms. Yellen and President Obama should have a lot in common. Barack Obama won the Nobel Peace prize for being half-black. Janet Yellen helped her husband win the Nobel Prize for economics by being intelligent.
“Currently vice-chairman of the Fed, she was a junior governor from 1994 to 1997 under Greenspan, and then president of the San Francisco Fed from 2004 to 2010. She was head of Bill Clinton’s Council of Economic Advisers from 1997 to 1999, when she handled the Asian crisis. You could hardly find a safer pair of hands.”
Yellen’s previous experience within the Federal Reserve and government may be greater than any previous appointee to the office of Federal Reserve chairman.
“Note that she confronted Greenspan head-on in 1996, pushing for pre-emptive rate rises to choke inflation and wean the economy of cheap credit.
“Transcripts show that she clashed with New York Fed chief William Dudley in December 2007 over the risks of subprime mortgage defaults, which is telling since Dudley (ex Goldman Sachs) was supposed to be the official with his finger on the market pulse.”
Yellen is no pushover. She’ll even fight the “big boys” when she thinks she’s right.
Thus, it appears that Janet Yellen is superbly qualified by intelligence, experience, education and courage to assume the office of Fed chairman. She’s not a mere political appointee. She’s genuinely qualified to run the Federal Reserve.
Hmph. How bizarre.
When was the last time you can recall when someone occupied a position of real power in our national government who was truly qualified to hold that office? Yellen may quite probably become “the smartest guy in the room”. Her Fed chairmanship may become something fascinating to observe.
● According to Evans Pritchard, Ms. Yellen has “backed QE [Quantitative Easing—the printing of an almost endless stream of fiat dollars] to the hilt, fighting a chorus of amateur alarmists who claimed that inflation was poised to take off. She was again proved right. Core inflation in the US is currently hovering near a half century low. The greater danger is still deflation.”
We can therefore expect Fed Chairman Yellen to continue to support QE in the near future.
“She tracks jobs. Her lodestar is the ‘non-accelerating inflation rate of unemployment’ (NAIRU) . . . . the Fed is committed to tapering QE to zero once the jobless level reaches 7% (and raise [interest] rates once it hits to 6.5%).”
OK—Yellen will presumably continue to support QE until the unemployment rate falls to 7%. She’ll begin to raise interest rates when unemployment reaches 6.5%.
She is therefore expected to rely on the presumption that increasing the supply of currency in circulation the Fed can create jobs and cause unemployment to fall.
● Before we dissect that presumption, let’s first ask “On whose unemployment numbers will Yellon rely?” The Obama administration’s numbers (that claim unemployment is already down to 7.2%)? Alternative numbers provided by sources like Shadowstats.com (which claim that the true, current rate of unemployment may be over 20%)? Something in-between?
If Yellen’s “lodestar” is truly the unemployment rate, the answer to “On whose unemployment numbers will she rely?” may determine whether her tenure as Fed Chairman will be something effective or pathetic. If today’s 7.2%t “official” unemployment rate is a lie, and Yellen relies on that lie, her administration will necessarily fail to resolve the current economic crisis and she’ll become a laughingstock.
On the other hand, if the true unemployment rate is closer to 20%, and Yellen uses that rate of unemployment as her cornerstone, her tenure as Fed Chairman may be marked by great conflict (with the government and their “official” rate of unemployment but perhaps also by an honest contribution to solving our economic problems.
We know she’s highly intelligent. We know she’s experienced. We know she’s willing to fight.
What we don’t yet know is whether she’s honest.
Most observers agree that the official rate of unemployment (7.2%) is a lie. Virtually everyone agrees that the real rate of unemployment is much higher—perhaps 10%; perhaps even 23%. If Yellen accepts the 7.2% lie, there’s no way that her administration will be able to help the economy. If Yellen relies on higher unemployment numbers, there’ll be spectacular controversy but there might also be some degree of economic recovery.
Thus, the most important characteristic for the next Fed Chairman won’t be intelligence, experience, education or guts. It’ll be honesty.
● So far, it appears the Yellen is committed to the presumption that QE (increasing the currency supply) can cause job creation and reduced unemployment.
But can QE work? Or is QE a matter of the “tail” (currency supply) wagging the “dog” (unemployment rates)?
● Whenever unemployment rates rise, fewer people have jobs, fewer people are being paid and fewer people have access to credit. As a result, there’s less currency in circulation. Less currency causes a diminished demand for goods and services, lower prices and an economic recession or depression.
Note the causal relationship: High unemployment reduces the amount of currency in circulation which helps cause an economic recession. Thus, a falling currency supply can be an effect caused by rising unemployment.
On the other hand, falling unemployment (more jobs) will normally increase the supply of currency.
Note the causal relationship: falling rates of unemployment cause more jobs and more currency in circulation. Just as rising unemployment can decrease the currency supply, falling unemployment can increase the currency supply.
● Factors other than changes in the unemployment rate can also affect the currency supply. However, insofar as the Federal Reserve is required by law to maintain: 1) maximum employment; and 2) stable prices (the absence of inflation or deflation)—the Federal Reserve (and, soon, Janet Yellen) tend to focus on the relationship between unemployment rates and prices.
The Fed’s QE policy presumes that by increasing the currency supply, they can create jobs, cause unemployment to fall and thereby cause the economy to recover. In other words, by treating the effect (a currency supply shortage) they can cure the cause (rising unemployment).
So far, however, QE’s effect on the economy has seemed marginal. According to official statistics, unemployment has fallen from 10% to 7.2%.
But, again, according to alternative sources like Shadowstats.com, real unemployment remains over 20%. As measured by true unemployment rates, four years of QE hasn’t yet caused an economic recovery. Four years of QE may have postponed a “Greater Depression” but it hasn’t ended the Great Recession.
Therefore, there’s good reason to wonder if it’s even possible for QE (increasing the currency supply) to cause falling unemployment and thereby generate an economic recovery.
We know that rising unemployment can cause the effect of a reduced supply of currency in circulation. But does it necessarily follow that by increasing the supply of currency (printing more fiat dollars), the Fed can cause the effect falling unemployment rates?
Are the unemployment rate and currency supply caught in a one-way, cause-and-effect relationship where rising unemployment is always the cause and a falling currency supply is always the effect? If so, it shouldn’t be possible for increasing the currency supply to cause a significant fall in unemployment.
Alternatively, are unemployment rates and currency supplies caught in a inverse relationship wherein, if either one goes up, the other must go down? Are unemployment rates and prices like two ends of the same teeter-totter?
● These questions are important because their answers may tell us whether QE (printing more fiat currency) can really cause an economic recovery.
If the relationship between unemployment and currency supply is always a one-way, cause-and-effect, then QE can’t work. I.e., if unemployment is always the cause and falling currency supply is always the effect, then the Fed can’t precipitate an economic recovery (reduced unemployment) by increasing the currency supply.
In other words, the “tail”—the effect of increasing the supply of currency in circulation—can’t ever “wag the dog”—diminish the real cause: rising unemployment.
Instead, the “dog” (real unemployment rates) can wag the “tail” (currency supply). The real cause can precipitate the real effect. The effect, however, can’t alter the actual cause.
On the other hand, if the relationship between unemployment and the currency supply is inverse (like a teeter-totter), then by raising either, we could cause the other to fall. If unemployment rises, the supply of currency falls. If the supply of currency rises, unemployment falls. Therefore, by controlling the supply of currency, the Fed could control the unemployment rate. By increasing the currency supply, the Fed could reduce the rate of unemployment.
The Fed, and Janet Yellen, apparently presume that the relationship between unemployment and the currency supply is not an immutable, one-way, cause (unemployment rate) and effect (currency supply). Instead, the Fed’s QE is based on the presumption that the relationship between employment and currency supply is complex but fundamentally inverse.
If the relationship is inverse, then it follows that by merely controlling the supply of paper dollars (which are cheap to print and easily added or subtracted from circulation), the Fed can control something as massive, tangible and important as the rate of unemployment—and the tail can wag the dog.
● Determining the nature of the relationship between unemployment and currency supply is critical to both understanding the cause of the Great Recession and also to assigning blame for the Great Recession of A.D. 2008.
If the unemployment/currency-supply relationship is inverse (teeter-totter), the Great Recession was caused by an insufficient supply of currency in the economy prior to A.D. 2008. Thus, the Federal Reserve caused the Greater Recession by failing to print enough paper dollars.
If the unemployment/currency-supply relationship is a one-way, cause-and-effect, then the cause for Greater Recession of A.D. 2008 was the loss of jobs and wages caused by the national government’s commitment to global free trade, higher taxes, reduced tariffs, and willingness to ship American industries (and jobs) to foreign countries. In this case, the President and Congress can be blamed for the Greater Recession.
● Trying to decipher the nature of the fundamental relationship between unemployment and currency supply is difficult. That analysis is further confused by the possibility that under classical economics (where our money is gold or silver), it may well be that the relationship between the supply of gold in the economy and the rate of unemployment is direct (rather than inverse or even one-way, cause-and-effect). By “direct” I mean a two-way, cause-and-effect relationship. Either “end” of such a “direct” relationship could sometimes be a cause; either end could sometimes be an effect; but both ends would rise or fall together. I.e., increase the number of jobs and you’ll increase the amount of gold in circulation; increase the amount of gold in circulation and you’ll increase the number of jobs.
However, in “modern” (fiat, debt-based currency) economics, it’s unclear if the relationship between unemployment and currency supply is always inverse or always one-way, cause-and-effect. Sometimes, one explanation seems true; sometimes the other.
It’s even likely that the real answer in “modern” economics isn’t “either/or” so much as “both”. In other words, it may well be that the Greater Recession was caused by both: 1) the national government’s decision to send our jobs to third-world countries; and 2) the Federal Reserve’s failure to pump enough fiat dollars into the economy.
If so, the next questions are: Which cause and which actor was predominant? Was the Great Recession caused primarily by loss of jobs precipitated by the national government’s global free trade? Or was it caused primarily by the Fed’s failure to pump enough paper dollars into the economy?
But even if the national government and the Federal Reserve were both responsible for the Great Recession, can we escape the Great Recession by only increasing the currency supply?
If there are two causes for the Great Recession (sending jobs overseas and reducing the currency supply), but we only address one of those causes (currency supply), can we expect to end the Great Recession? Or, is that recession likely to drag on and on until we also bring our industries and jobs back to this country?
For me, the answer seems obvious: No matter how much currency the Fed injects into Wall Street, Main Street, or the economy, the Great Recession will drag on until the government restores our productive jobs.
More, if the Fed’s manipulation of the currency supply isn’t the complete answer to the Great Recession, then all attempts at “recovery” that don’t include higher tariffs and less global free trade will fail. The Great Recession will last as long as our government continues to support global free trade.
● Look around. What do you see?
The Fed has pumped trillions of fiat dollars into our economy over the past four years. A few percent of Americans who were already rich have grown richer. The majority of Americans have grown poorer. The middle class is disappearing. For most Americans, the Great Recession persists.
The real unemployment rate is almost certainly still in double-digits. The effects of Fed’s increase of the currency supply have seemed almost insignificant.
Doesn’t that suggest that the “tail” (increasing the currency supply) can’t really “wag the dog” (create jobs and reduce unemployment)? Doesn’t that tell us that the unemployment/currency-supply relationship is not inverse? Doesn’t that imply that the predominant cause of the Great Recession is not too few paper dollars, but rather too few productive jobs?
If so, the Fed’s fundamental premise (that it can control unemployment rates and thus the economy by controlling the currency supply) is false. The tail can’t wag the dog. If so, no amount of freshly-printed paper dollars can recreate our lost jobs and QE can’t cause an economic recovery.
If so, pumping $85 billion per month into the US economy and/or Wall Street banks is a colossal waste of time and currency. Instead, the solution to our economic malaise is to abandon global free trade, reestablish high tariffs and cause industries and real (productive) jobs to relocate back into the USA.
● It seems increasingly doubtful that the Fed’s “monetary tail” can effectively “wag” the real economy.
Nevertheless, Janet Yellen will try to do just that. Not because she’s brilliant, but because she has no other option. She can’t cause industries and jobs to return to the US. Only gov-co can do so. Her only real power is manipulate the currency supply—so that’s what she’ll do.
In fact, manipulating stock, commodity and gold prices on the US and global markets is another example of government’s “wag the dog” mentality and fundamental presumption that by manipulating the “tail” or economic symptoms, they can control the real economy.
The Powers That Be seem convinced that they can control the economy and the American people by merely controlling our economic indicators (effects). They seem to believe that the world runs entirely on subjective concepts like “public confidence” and appearance rather than tangible reality.
But does it?
Can reality be denied forever with nothing more than subjective “happy talk” and by printing more paper currency?
I can’t see how.
We’re caught in difficult times based on a reality (loss of productive jobs) that’s too tangible to be made to vanish with cheerleading, bedtime stories and the manipulation of economic effects. Reality will ultimately overcome subjectivity. The tail may seem to wag the dog for a while, but ultimately the dog will wag its own tail—and may even bite—good and hard.
I suspect that Janet Yellen has volunteered to take responsibility for the manipulating “tail” just before the “big dog” (reality) shows who’s really in control of the tail.
I respect Ms. Yellen’s credentials, but I doubt that anyone’s credentials could be sufficient to cope with current economic problems by merely manipulating the currency supply.
The differences between fundamental causes and fundamental effects will soon be seen and undeniable.