(David Stockman) You can’t blame Janet Yellen entirely for the growing prospect that the Fed will take a powder on Wednesday and opt for the 81st straight month of ZIRP. After all, she’s basically a fuddy duddy school marm caught in a 1970s labor economics time warp—–a branch of the “home” economics taught by John Maynard Keynes after he turned protectionist in 1930.
Accordingly, she does apparently believe that the US economy resembles a giant bathtub, and that it is the Fed’s job to see that employment and output rise full to the brim. Nor does that mission take much special doing——-at least according to the primitive macroeconomic plumbing theories of Keynes’ disciples like her PhD supervisor, Professor James Tobin of Yale. Just crank the interest rate valve lower until the economic ether thereby released——–called aggregate demand——works its magic.
Indeed, the good professor did help ignite a rip-roaring inflationary boom in one country during the Kennedy-Johnson years. Back then the world economy was still segmented and unmonetized enough to at last partially encompass a closed economy model of state managed pump-priming. That was especially possible because more than a billion potential workers were trapped in the economic Gulag of Mao’s China and the post-Stalinist Soviet bloc.
Never mind that today the US GDP bathtub leaks like a sieve and that massive trade, capital and financial flows transmit economic and financial impulses from around the globe.Accordingly, the marginal price of labor is set in the rice paddies of China, the call centers of Bangalore, the temp agency body shops of America and on the “bid for gigs” sites of the worldwide web.
The Bureau of Labor Statistics, which is apparently the Keynesian chapel where Yellen worships, captures none of this; it ought to be put in the Francis Perkins memorial museum along with souvenirs from the WPA and FDR’s Fair Labor Standards Act of 1938.
In fact, as misguided as Labor Secretary Francis Perkins’ wages and hours law was, it at least had the purpose of limiting a “job” to 40 hours per week in the absence of overtime pay. So, yes, if Washington wished to waste taxpayer money counting those kind of standardized 40 hour/week “jobs”, it wasn’t necessarily the worse thing.
Nor did the essentially political project of computing an “unemployment rate” based on a monthly census of such job holders versus the adult population (except those millions employed in un-monetized homemaking) lack plausibility.
Sure, there wasn’t anything that Washington could constructively do about the resulting “unemployment rate” and its monthly trend, but it did give the Democrats initially, and eventually politicians of all stripes, something tangible to campaign about; in 1960, in fact, it gave Richard Nixon something to get even about eight years later, and to America’s everlasting harm.
But as irony would have it a flag-in-the-label entrepreneur from Arkansas put a decisive end to the pointless statistical work of the BLS. In one fell swoop he hit the traditional 40 hour/week “job” with a triple whammy.
First, millions of “jobs” were unmonetized and eliminated from the reach of the BLS surveys when he turned giant stores into self-service discount emporiums where shoppers roamed the endless aisles and supplied their own uncompensated clerical labor.
Secondly, he kept the stores open around the clock seven days per week, and divided the work of cash register operators, greeters and inventory replenishment clerks into 15 minute scheduling intervals based on customer traffic patterns, not the hour hands of the clock. “Jobs” became “hours” that fluctuated by the week and season and almost never added up to 40 hours per week, or even 30 hours.
Finally, he and his successors eventually outsourced almost all of the goods on Wal-Marts shelves to the cheapest labor precincts of the planet, especially the massive new export factories of Mr. Deng’s red capitalism. Those “jobs”, of course, went MIA in the BLS survey permanently.
So the 40-hour/week job has gone nearly as extinct as the dodo bird, having been sliced, diced, out-sourced and gigged by the modern internet driven global economy. Indeed, e-commerce has taken Sam Walton one step further; it is massively demonetizing labor as people shop with their iPhones and tablets, and profess to enjoy getting compensated in cheaper stuff, not taxable paychecks.
Government bureaucracies never die of course—-even when their mission becomes pointless, impossible or obsolete. The monthly jobs report exhibits all three of those conditions, but that has not stopped its publication or its utilization by fossils like Yellen and her posse.
Instead, the BLS has decided to count any gainful employment of even a few hours per week as a “job” in the establishment survey; and then to lather it with statistical voodoo called trend cycle projections, seasonal adjustment or mal-adjustments, as the case may be, birth and death jobs, whether warranted or not, and double and triple gigs held by the same social security number, even though these moonlighters could be readily consolidated by modern technology.
As to the household survey, the BLS went in the opposite direction—-deleting from the labor force pool any survey respondent professing to not having worked or looked for work during the survey period, whether able-bodied or not, thereby permitting the unemployment rate to fall, even as the share of the adult population counted as employed went in the opposite, adverse direction.
In short, the BLS produces noise and junk. Its own numbers prove that handily.
Since the first quarter of 1999, for example, the establishment survey job count has risen by 11% while the number of labor hours utilized by the nonfarm business sector has climbed by only 3%. In other words, the denizens of the Eccles building are happily splitting the unemployment rate to hairs on the back of the second decimal place, but the difference in two of the BLS’ aggregate measures of employment amounts to the equivalent of 16 million workers in an adult population (16 years and over) of 250 million.
Preposterously enough, Yellen has this junk pasted all over her so-called macroeconomic dashboard, including a bunch of equally flawed measures called jobs openings, quits, fires and hires from the so-called JOLTS report.
But really now. What kind of JOLTS metrics do you get when a clerk in a full service retail store losses a job to E-commerce; the impacted home shoppers find their own sizes, colors and styles on the internet; a student delivers the resulting packages 10 hours per week from the back of a Vespa; and a suddenly busier hamburger shack near the originating, recently expanded Amazon distribution center advertises for a fry cook?
These BLS metrics are like the creation story in the book of Genesis. Unless you take that particular tall tale literally, its just a bunch of noise from a more primitive age.
The fact is, even if pegging interest rates in the money markets could release some magic ether called aggregate demand, and even if it would stay within the bathtub walls of the US economy, the BLS publishes absolutely nothing that measures labor “slack” in a modern, open, dynamic economy. That is, an economy which is at once demonetizing, outsourcing and gigging its labor inputs.
At length, even Yellen might have figured this out—-perhaps based on nothing more than the observation that its about the price of labor, not the BLS’ rickety quantity count of jobs. That wages are stuck at 2% growth in an economy afflicted with at least a 2% creep in living costs proves that the pool of hours available in the global economy is beyond measure, and beyond the reach of the Fed.
But now comes a strain of economics that is far more insidious than Yellen’s labor focussed version of Keynesian home economics. Yesterday, the chief economist of the Vampire Squid itself opined that the“market’s have already done the Fed’s dirty work” based on the chart below. This gem puts the BLS noise emissions to shame and then some.
As I said a few days ago, you can’t make this stuff up. And you don’t have to mince any words, either. The mantra that free money is actually tight money is the product of a tiny circle of academic scribblers and Wall Street hirelings who have invented what amounts to an alternate vocabulary of economic newspeak, as embodied in the Goldman Sachs Financial Conditions Index (GSFCI).
As is self-evident, the “tightness” of what GSFCI measures——financial market conditions embedded in interest rates, credit spreads, equity prices and the dollars exchange rate—–has absolutely nothing to do with Yellen’s stale brand of Keynesian home economics; it is utterly unrelated to whether the bathtub of domestic steel, auto, teamster and hard hat construction workers has been filled to the full-employment brim.
Indeed, it’s a blatant case of misappropriation or de facto copyright infringement on long settled macroeconomic lingo. At least old fashioned Keynesians could profess the possibility—however remote—–that the bathtub might someday be filled, thereby necessitating the need for closing the cheap money valve. In his crypto-Keynesian days, notably in 1988-1989 and again in 1994, Greenspan did half-heartedly pursue this conventional tightening course.
But as I noted last week, the Goldmanite simulacrum of the BLS’ tightening indicators is anti-bathtub and denies Keynesian home economics entirely.
It turns out that this purportedly scientific measuring rod is just a goal-seeked data concoction put together by none other than the B-Dud. Back when Bill Dudley was Goldman’s chief economist, he needed a convenient metric to signal whether or not Greenspan was pleasuring the Wall Street gamblers with “moar” money at any given point in time.
Accordingly, the GSFCI doesn’t purport to measure the price of labor or goods and services transacted between the USA borders, but, instead, tracks the movement of financial asset prices transmitted instantly through the seamless arteries of the global financial system.
That is to say, the Goldman index consists of financial variables that are so powerfully influenced by Fed policy that they comprise the next closest thing to an auto loop. And a perverse one at that.
To wit, when the Fed is heavily pumping monetary juice into Wall Street and the gamblers are in a full throttle “risk on” stampede, what happens to the components of this purportedly scientific index?
Why the dollar weakens, as it is sold short into the offshore and EM carry trades; credit spreads between risk-free treasuries and junk bonds tighten, since its risk-on time and money managers are desperate for yield; equity prices rise because the casino is rocking; and interest rates are pegged at zero because the FOMC has essentially expropriated/nationalized the money market.
But when the resulting financial bubble finally reaches its apogee, as it did in the spring of 2000 and during the fall of 2008, the gamblers eventually succumb to a spat of “risk-off”, causing three of the four indicators to beat a panicked retreat.
Accordingly, credit spreads blow-out, as junk and other risky credits are dumped; the dollar soars, as off-shore markets scramble to cover the immense dollar short; and equity markets fall, as leveraged trading in the casino is unwound.
So wouldn’t you know it. The inevitable collapse of the Fed’s bubble cycle causes the Goldman Sachs Financial Conditions Index to go vertical in the direction of “tightening”!
In a word, the Goldman gamblers have constructed a junk economics index that tells the Fed not to tighten because the arrival a modicum of sanity in the casino is evidence that it has already tightened.
The chart above from Goldman’s weekend ukase goes one step further and appropriates another relic of a bygone age. Namely, the Taylor Rule by which a clever, self-promoting crypto-Keynesian academic, who claimed to be a follower of Milton Friedman and a Republican staffer in the Reagan-Bush White House, named a rule of Fed policy conduct after himself.
The “Taylor Rule” claimed to be a multi-point measure of the home economics bathtub, capturing in one equation the gap between the “potential” or full-to-the-rim level of employment, inflation and output and the actual state of these metrics.
Then, through tortured leaps of econometric modeling, the said Taylor Rule contraption purported to compute the precise Federal funds rate appropriate at any given time; and which was to be pegged by the monetary politburo at its very next meeting.
Needless to say, this was about as anti-free market as you can get. Rather than allowing millions of savers and borrowers to clear the money market at the efficient price, it consigned the task not even to the discretion of the 12 member FOMC, but to the arrogant, formulaic scriblings of an insufferably conceited academic who, like Janet Yellen, thinks the US economy is a giant bathtub to be plumbed and filled by manipulating the interest rate dials in the Eccles Building.
It turns out that professor Taylor was a piker, however. Through econometric modeling even more obscurantist than Taylor’s, the Goldman economics department has now confected a “FCI Taylor Rule”. That is, a computation that purports to tell where the GSFCI should be at any given moment compared to its actually read-out.
Not surprisingly, on the eve of the Fed’s now or never rate increase meeting, the Goldman Taylor Rule says the GSFCI is way too tight! This means that even those Fed members who may have run out of patience with Yellen’s school marm economics, have a purportedly more sophisticated reason to defer.
But its not much of a fig leaf. It means that tens of millions of liquid savers and retirees will continue to be crushed and expropriated by the monetary central planners in order that the Wall Street gamblers can enjoy still another month of free table stakes.
In the next installment we will show why all the Fed’s money printing and ZIRPing never reaches the main street economy, but is multiplexed and packeted in the canyons of Wall Street and instantly transmitted through the financial cyber-sphere of the global economy.
Pulsating outwards, the resulting waves of dollar liabilities push the other central banks into a reciprocating process of money printing. Eventually the process inflates credit and financial bubbles of gargantuan, unstable aspect.
At length, these bubbles also crash and those bloated waves of dollars come hightailing back to the US macro-bathtub, plunging it into another panicked round of inventory and labor liquidation as the C-suites watch their inflated stock option packages ionize.
One of these days, the people of main street will rediscover their torches and pitchforks. But until they do, Goldman has apparently invented still another ruse to keep the Fed doing Wall Street’s bidding, and to thereby keep its wretched jihad against savers fully in force.