Notes From Underground: Too Little Is Worse Than Too Much

Following Federal Reserve Chairman Jerome Powell’s speech Tuesday at the National Association for Business Economics, the media (financial and mainstream) ran with the idea that Powell would rather have the government err on the side of TOO MUCH STIMULUS instead of failing to provide the needed boost to an economy that’s beginning to stall after a robust third quarter.

Again, the chairman also wore the hate of Minister of Social Justice when he remarked the following (NOTE: any emphasis is mine):

“After rising to 14.7 percent in April, the unemployment rate is back to 7.9 percent, clearly a significant and rapid rebound. A broader measure that better captures current labor market conditions–by adjusting for mistaken characterizations of job status, and for the decline in labor force participation since February–is running AROUND 11 PERCENT. The burdens of the downturn have not been evenly shared. The initial job losses fell most heavily on lower-wage workers in service industries facing the public–job categories in which minorities and women are over-represented. In August, employment of those in the bottom quartile of the wage distribution was still below its February level, while it was only 4 percent lower for other workers. Combined with the disproportionate effects of COVID on communities of color and the overwhelming burden of childcare during quarantine and distance learning, which has fallen mainly on women, the PANDEMIC IS FURTHER WIDENING DIVIDES IN WEALTH AND ECONOMIC MOBILITY.”

Morally, Powell’s stance is admirable but how do you set policy if these are the goals you are pursuing? In the Q&A, the chairman stressed that the FED can put away its emergency tools when the current emergency is well behind the nation. But if the central bank is setting a social justice agenda that targets minority employment and wage levels when does the economy actually recover?

Also, as we have seen for the past decade, the longer you keep the emergency tools in place the greater the divergence in wealth levels as it is the top income earners who can best avail the opportunities associated with asset price increases.

The markets–stocks, metals and currencies–were all in rally mode in response to Powell’s LOWER FOR LONGER call in an effort impact the fiscal stimulus being discussed in Congress. Last week there was a rumor that Powell had held discussions with Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi in an attempt to ensure FED support for any increase in debt. It all came to NAUGHT when President Trump on Tuesday announced that he was ending negotiations with Congress, dashing any hope for a COVID stimulus package until after the election.

As the president tweeted his orders to Secretary Mnuchin, the stock markets dropped 2 percent, the DOLLAR rallied and precious metals dramatically dropped. The MARKET interpreted this lack of additional fiscal stimulus as deflationary since MAIN STREET would be harmed by the lack of increased fiscal stimulus. The U.S. 5/30 yield curve, which had been steepening in the anticipation of a DEAL flattened as the 30 -year bond futures rallied.

Since the beginning of his tenure, the president has made a positive correlation between stock valuations and job creation. If that’s the case, how many jobs will be lost if equity prices declined more than 10 percent in response to a failure to reach a new spending plan?

Also, will the central bank have to fill the breach by increasing its purchases of longer duration assets to pump more liquidity into the system, especially after Chair Powell stressed that the more fiscal stimulus the better? If the main sticking point between Trump, Mnuchin and Pelosi is the size of direct benefits to states and cities suffering revenue shortfalls due to the pandemic the solution is relatively simple:

Let the FOMC PURCHASE MASSIVE AMOUNTS OF MUNICIPAL DEBT IN THE SECONDARY MARKET (no 13[3] violation) AND DECLARE A MORATORIUM ON INTEREST PAYMENTS ON FED-HELD DEBT RESULTING IN AN INDIRECT STIMULUS TO DEBT STRESSED MUNI BORROWERS. THE FED HAS ITS ROLE AS BOND MARKET REPOSITORY AND PRICE SETTER. This compromise, combined with a direct fiscal stimulus OUGHT TO JOLT THE ASSET MARKETS. It’s time for all to come in off the balcony. Come inside (but keep the masks on and stay six feet apart). America is waiting.

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15 Responses to “Notes From Underground: Too Little Is Worse Than Too Much”

  1. Asherz Says:

    One of the key points in The Art of the Deal is that in any negotiations, if talks are not going your way, you walk away from the table.
    That’s what Trump just did. He will then follow up by blaming Pelosi for never having been serious about negotiating. This while thousands more lose their jobs and restaurants and small businesses close for good.
    It’s a risky strategy but one he has used successfully in the past. The pressure on Pelosi will increase while the polls suggest Trump needs to take some extreme measures to close the gap that is running against him.
    Meanwhile the markets are once again demonstrating that without their regular shot of fiscal heroin, the junkie becomes comatose.

    • yraharris Says:

      Asherz–you may be correct in that Trumpian analysis and certainly in the markets need for just one more fix—amazing how the deflation algorithms take center stage with just one tweet.And as you point out—a risky strategy

  2. The Bigman Says:

    Wow. I can’t believe my eyes. Where does the Fed get the funds to buy massive municipal debt? Oh that’s right it has a printing press. And who are the distressed muni debt holders that will get relief- oh yeah wealthy investors who are avoiding taxes. If the Fed is going to print let’s send it directly to those in need before the sales of torches and pitch forks go through the roof. Like it or not a universal basic income is coming to a neighborhood near you and Harris’- oops Biden’s- election will only accelerate the arrival.

    • yraharris Says:

      Bigman—you can believe your eyes because this has gone way past the ability to exit so get on with it and your points are well taken,especialy as the FED minutes came out and as my compadres noted :forward guidance not unconditional—was in the minutes.Really ,sorry you still have to note the Bernanke taper tantrum and Powell pivot to make me stop laughing

  3. KJM Says:

    Yra,
    You’ve posed a really important question: “but if the central bank is setting a social justice agenda that targets minority employment and wage levels when does the economy actually recover”? If disparities in minority employment and wage levels reflect structural rather cyclical inequality, it would seem that the Fed has embarked on a new era and the notion of “recovery” becomes fuzzier than ever. Surely, these matters would be best addressed through a more overt political process and institutionally speaking through Congress. But this begs another question: why has Powell seemingly expanded his mandate by articulating an agenda of “social justice”, as you put it?

  4. Peter Harris Says:

    Interesting points. Albeit reductionist.
    Having said that, what’s the solution to this current economic malaise?
    Austrian economics?
    If so, can you explain “Praxeology” within the untried economic model of Austrian economics?

    • yraharris Says:

      Peter—no relation.I cannot explain it unless you do it by critiqueing as some do that it is void of the scientific method.Being that my business was named PRAXIS I respect the concept of theory and action as I learned it out from the Marxist Humanists—-I am not at a high enough academic level to get into the theoretical concepts of this–the proof you seek I believe will be in an exit strategy which there appears to be NONE as the FED is cowed by tantrums and results in expedited pivots.

  5. Arthur Says:

    Clean energy group NextEra surpasses ExxonMobil in market cap
    https://www.ft.com/content/39a70458-d4d1-4a6e-aca6-1d5670bade11

    • yraharris Says:

      Arthur–saw this so what is one to do in terms of investments—-much of this can probably be discerned as a result of ESG

  6. The Bigman Says:

    Hi Yra I listened to your interview with Marc Faber on FRA I also listened to an interview with Lacy Hunt from May. Now I am totally confused. He says deflation you say inflation. What’s a plebian like me to do? Seems the tipping point is if the Fed starts to buy directly from the Treasury, ie money printing. You point out the BOE has just started down this road and as some have observed the US often follows the BoE but 6 months later. Dr Hunt thinks that the Fed (and Congress who would need to change the Fed act) would not go down that road as the results would be painful for all. I do not have the same faith in the wisdom of the Fed and certainly not in the next Congress. On another note you brought up a historian Fernando____ but I could not discern his last name and both you and Dr Faber spoke highly of his works Can you provide his full name and those of his works Thx much Perplexed in SoCal

  7. Asherz Says:

    “The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.” — Friedrich Hayek

  8. The Bigman Says:

    Just read Campbell”s description of possible CBDC system. this would be ideal to implement UBI. Digital dollars deposited into my Fed account each month What could be better than that- Beer in cans? Brilliant

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