We had to get back home
And when we opened up the door
I had to be alone
Notes From Underground will be taking a short break. I will be relaxing unless something major breaks, in which I will chime in with commentary. I will also be reissuing previous blogs related to Greece and the IMF from these dates:
Every now and then I like to revisit the 1,200 or so blogs I have written since December 2009 and take a measure of their relevance in today’s world. WordPress has a high quality archive so my readers can scroll back and look to see where we have traveled since the inception of Notes From Underground.
Now, let’s look at Tuesday’s testimony from Fed Chair Janet Yellen before the Senate Banking Committee, as well as other news tidbits.
Many of the questions asked of Yellen were related to DODD-FRANK and the potential rollback from the Trump administration. The Democrats were trying to corner Yellen into openly saying that it was a mistake to repeal DODD-FRANK but Yellen was not taking the bait. She did admit under intense questioning that “COMMUNITY BANKS DID NOTHING WRONG.” Many senators on both sides of the aisle were angry that the small community banks were struggling under the heavy regulatory costs of Dodd-Frank even though it was not their banking actions that brought about the global financial crisis. Senator Lizzie Warren very worked hard to get Chair Yellen to admit that the U.S. banking sector was so healthy that there was no reason to repeal Dodd-Frank.
I think Senator Warren was “painting the tape” for a battle to reinstall Glass-Steagall. The rare moment of public support that Senator Warren offered Candidate Trump was when the Donald pushed to get the reinstatement of Glass-Steagall as one of the issues on the Republican platform at the convention. There is bipartisan support for relieving the community banks of the financial costs of meeting Dodd-Frank regulations. The large Wall Street banks can easily handle the costs of increased regulations. In fact, it provides a competitive advantage over some of the more aggressive regional banks.
The only thing from the Yellen prepared text of any real interest was this:
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
Bravo! Chair Yellen moved the needle of market expectations away from a 13% probability in March and made the stock market realize that it will not be a complete surprise, putting the onus on the equity buyers sending the U.S. stock indices to record highs everyday. Any negative market reaction will be borne by the investors and speculators adding heft on a daily basis. (Note: The same text will be delivered to the House Finance Committee tomorrow.)
***For the record: I believe a BORDER ADJUSTMENT TAX is a hhhhhhuuuuuuuuuuuuggggggggggggeeeeeeeeee MISTAKE. While on HIATUS I will think more about it. But I have pondered this. The models weighing this tax have not assumed the impact of the 20% import levy on the global financial system. The models do say that the TAX will result in a 20% rise in the DOLLAR, making imports cheaper based on the dollar’s rise, and offsetting the import price increase. Of course this is theoretical. BUT, if the DOLLAR, the world’s reserve currency rises 20% and the foreign producers who have borrowed in DOLLARS also incur a 20% border tax, they will undergo a massive hit to their bottom lines resulting in financial chaos. How will the DEBT be paid if foreign borrowers suffer such a massive hit to their bottom lines?
Again, things will in the real world never neatly replicate the output of models. Such a massive tax overhaul will create many unintended consequences. Some will be more impactful than others. This is a very complicated policy to rush into without measuring its global impact. The Trump team is in a hurry to roll back the economic burdens of Pax Americana but the world’s DOLLAR STANDARD cannot be replaced overnight.
***One for the road: There was a Wall Street Journal article Tuesday, titled, “U.S. Eyes New Tactic to Press China,” by Bob Davis. In an effort to curtail currency manipulation by non-direct confrontation “… the commerce secretary would designate the practice of currency manipulation as an unfair subsidy when employed by a country, instead of singling out China, said people briefed on or involved in formulating the policy. U.S. companies would then be in a position to bring antisubsidy actions themselves to the U.S. Commerce Department against China or other countries.”
This sets the table for the National Association of Manufacturers (NAM) to be the deep pocket for lawyers seeking to impose antisubsidy filings. If I were Japan, this would be a reason not to allow the YEN to depreciate too much. Think back to the statement from Ford CEO Mark Fields that currency manipulation is the “mother of all trade barriers.” This is the language of retaliation as it allows for the U.S. corporations to be the progenitors of action rather than the more diplomatic U.S. Treasury Department.
***Use caution tomorrow morning as we get a slew of economic reports before Chair Yellen’s House testimony. Also, if any readers enjoyed a previous blog that they found particularly enlightening feel free to link it on any blog post.