Embargoed until 5 PM
CST, December 23, 2014
The 2014 Festivus Airing of
Grievances
Well, it’s that time of the year again for the airing of
grievances. And I’ve got a lot of
problems with you people! First of which are those of you (PK, NYT?) who insist
that the Fed’s QE did not result in any inflation. It all depends on your
definition of inflation. If your definition is restricted to the prices of
goods and services, you are right. No matter how you slice it or dice it, there
has been no discernible upward trend in the price changes of consumer goods and
services since the start late 2012 start of QE III, as shown in Chart 1.
Chart 1
If, however, you expand the definition of inflation to
include the prices of assets, then there has been a discernible pick-up in
inflation since late 2012. For households, their holding gains on assets
(stocks, bonds, houses, e.g.,) scaled against the market value of their total
assets have moved up noticeably since the onset of QE III in late 2012, as
shown in Chart 2. In fact, asset inflation in 2013, according to this measure,
was approaching the housing-bubble highs of 2005-06.
Chart 2
You don’t think that QE had anything to do with asset
inflation starting in late 2012? Check out Chart 3, which shows the behavior of
credit granted for the purchase and carrying of securities and thin-air credit,
i.e., the sum of credit created by depository institutions and credit created
by the Fed in the form of depository institution reserves held at the Fed and
their vault cash. Perhaps asset-price inflation will moderate in 2015 as growth
in thin-air credit does.
Chart 3
My next grievance with you people is your dark-cloud
reaction to the recent decline in petroleum prices. When these prices rise, the
talking heads warn of dire economic consequences. When they fall, the talking
heads also warn of dire consequences. My approach to ascertaining whether the
recent decline in energy prices is a “good” economic development for the U.S.
economy, in particular, and the global economy, in general, is to keep in mind
that more is better than less. That is, if more energy is available, then more
of the final goods and services we consume can be produced. Think of an
agriculturally-based economy. Which will contribute to higher standard of
living for the residents of this economy – a bumper crop or a lost crop? The
bumper crop, obviously. Similarly, more energy production is better than less energy
production with regard to our standard of living. Chart 4 shows that U.S.
energy production has been soaring in recent years. That’s a “good” thing,
economically speaking.
Chart 4
Another grievance I have with you people is your
Keynesian (probably not Keynes, himself, rather his subsequent interpreters)
view of saving. How many times have you heard that if extra income goes to the
rich, they will just save it, which won’t stimulate total spending in the
economy? But if income goes to the less
rich, they will spend it, which will
stimulate total spending in the economy. This popular view is that when people
save, funds somehow disappear from the total spending stream of the economy.
This popular view of saving is often advanced as an economic argument to buttress a moral
argument for government-mandated income redistribution. But except in one case,
this popular view of saving is fallacious.
What does it mean to increase your saving? It means you
cut back on your current spending on goods and services relative to your
income. When you cut back on your goods/services spending, what do you do with
that saved income? You typically, directly or indirectly, purchase equities or
bonds. In other words, you transfer
some of your income, which you have voluntarily chosen currently not to spend
on goods and services, to another entity, perhaps a business, a government or
even another household, that currently wants to increase its spending relative
to its income. So, in this case of increased saving by you, total spending on goods and services in
the economy does not decline. Rather
your decrease in current spending on
goods and services is offset by an increase
in spending by the entity that ultimately received the funds with which you
purchased the stocks or bonds. So, if rich people are earning relatively more
income than less rich people, total spending in the economy need not go down if
the rich people save relatively more of their income. Rich people’s increased
saving enables other entities to
increase their current spending. The saved income does not vanish from the
spending stream, as today’s Keynesian talking heads would have you believe.
Rather, it gets transferred to others
who are eager to increase their current spending. As an aside, if the increased
saving by rich people funds spending on capital goods, all else the same, the
economy’s future potential to produce goods and services is enhanced. In sum,
increased saving is not a “bad” economic thing in the short run and is
potentially a “good” economic thing in the long run.
Income
redistribution generally will not stimulate total spending in the economy. If
income is taken from the rich and given to the less rich, the rich will react
by either cutting back on their current spending and/or cutting back on their
saving, which implies less spending by some other entity. Either way, the increased spending by the less rich will
be offset by the decreased spending
and/or saving by the rich. Thus, income redistribution will not result in a net increase in total
spending in the economy. Again, there may be a moral argument for income
redistribution, but there is not a
macroeconomic reason for it.
Now, there is one case in which an increase in saving can lead to a decrease in total spending in the economy. If you increase your
saving and choose to use your extra unspent income to increase your balances at
depository institutions, total spending in the economy will decline, all else
the same. But wait, doesn’t the bank lend the increase in funds it received
from you? Probably. But the income you received but chose not to spend now came
to you from the bank of some other entity. That bank has lost funds and, thus,
has to reduce its loans. So, the result of you using increased saving to build
up your deposits is net decline in goods/services spending in the economy. In
the 1930s, when Keynes was advancing Keynesianism, this type of saving was
referred to as hoarding “money”. Back
in the Great Depression, when many businesses and depository institutions were
failing, people preferred to save in the form of currency and/or in deposits at
super-liquid banks because of the safety of principal of these types of assets.
This saving in the form of cash, or hoarding, is what motivated Keynes to have
a dim view of saving in his Keynesian macroeconomic theory. Although I suspect
that Keynes understood the different implications regarding total spending in
the economy between an increase in saving that took the form of stocks and
bonds and an increase in saving that took the form of currency and deposits, it
is not clear that current adherents to Keynesian macroeconomic theory
understand this difference. For whatever reason, the term “hoarding” has gone
out of fashion. We now refer to saving in the form of cash (either currency or
bank deposits) as a decrease in the “velocity” of money. If a decrease in the
velocity of currency and deposits is not countered with an increase in the supply of currency and deposits, then
nominal spending in the economy will decrease.
I have one last grievance to air. This one, however, is
not with you people. Rather it is with me,
people! Throughout 2014, I had been telling you people to steer clear of bonds,
especially investment-grade bonds, because I had thought that bond yields would
rise. The reason I had thought bond yields would rise is that I also thought
that 2014 growth in domestic nominal spending on goods and services would be
stronger than the Fed and the consensus expected as a result of increased
growth in thin-air credit. I figured that the Fed would be reluctant to
pre-emptively raise the federal funds rate in 2014, but that market
participants would anticipate more
aggressive funds rate increases in 2015, which would result in higher bond
yields in 2014. Well, growth in domestic nominal demand did turn out to be
relatively robust in 2014, save for a weather-depressed first quarter. And the
Fed did not raise its policy interest rates in 2014 nor even seriously threaten
to do so. But Treasury bond yields did not
rise during 2014. As Chart 5 shows, Treasury bond yields actually fell. The yields that did rise were
those on shorter maturity Treasury coupon securities, as represented by the
yield on the 2-year Treasury security in Chart 5. Perhaps market participants
believe that the Fed will raise its policy interest rates in 2015 sufficiently
to slow growth in economic activity in 2015 and 2016 such that goods/services
price inflation will stay in check. And given the pronounced slowdown in the
growth of thin-air credit in the closing months of 2014, this market “bet”
might be right.
Chart 5
But I was dead wrong on the direction of bond yields in
2014. So, I’ve been pinned. That means that the airing of grievances is over
for 2014 and the Festivus celebrations can now begin in earnest. Gather around
your Festivus poles, preferably made of aluminum because of its high
strength-to-weight ratio, and join me in singing the Festivus Carol.
A Festivus Carol
(Lyrics by Katy Kasriel to the melody of O’ Tannenbaum)
O’ Festivus, O’ Festivus,
This one’s for all the rest of us.
The worst of us, the best of us,
The shabby and well-dressed of us.
We gather ‘round the ‘luminum pole,
Air grievances that bare the soul.
No slights too small to be expressed,
It’s good to get things off our chest.
It’s time now for the wrestling tests,
Feel free to pin both kin and guests,
Festivus, O’ Festivus,
The holiday for the rest of us.
Paul L. Kasriel
Econtrarian, LLC
Senior Economic and Investment Adviser
Legacy Private Trust Co., Neenah, WI
1-920-818-0236
