Avoiding the “New Mediocre” – Christine Lagarde
Today the IMF published a short video with Christine Lagarde about avoiding the “New Mediocre”.
My view is that carefully raising interest rates in the US will help raise the standard for productivity getting us eventually out of this “New Mediocre”. What do the readers of Angry Bear suggest is the answer? Leave ideas in comments below.
Lambert
the problem is not productivity. the problem is distribution. the problem is that the government is in the hands of the predators.
i am not a fan of “equality” in it’s dumbed down form. there are better ways to get a better deal for the workers and the poor than marching around with signs and chanting “equality.” but i can’t see either that raising interest rates will improve productivity or ensure that that productivity goes in some reasonable proportion to the workers and the poor.
Edward,
She says: “New mediocre, low growth, for a long time”
I assume that as the Managing Director of the IMF, she is speaking of low growth globally.
We have low growth globally because the the ‘do-gooders’ decided to indulge in Global Free Trade. That religion is not unlike Communism in that they both are long on promises and short on delivery. Utopia is in short supply.
The North American Free Trade Agreement (NAFTA) stripped well paying jobs from the American middle class working in manufacturing, as production was moved to Mexico and Canada. It was not the “rising tide that would lift all boats” which was promised in the 1990s.
At about the same time, southeast Asia rapidly increased exports to the developed world including the US, while minimally increasing their imports.
In those processes, the developing world created their share of new millionaires and a larger middle class but left the peasants and peons far behind.
At the same time the developed world including the the US was reducing the size of the middle class to supplement the lower economic classes because higher paying jobs were eliminated first, as production continued to be moved offshore.
China and the rest of the developing world have not been raising domestic consumption in proportion to their trade surpluses.
China has used their new found wealth to increase the size of their military and their territorial claims. The rest of Asia is only a little better, since they at least, do not threaten their neighbors.
The developing world is still dependent on consumers in the developed world and those consumers have been made poorer by Global Free Trade.
So we have lower growth globally. And I don’t see any new source of droves of well heeled consumers now. American consumers are up to the necks in debt and I doubt that consumers in the rest of the developed world are much better off.
She doesn’t mention productivity but you do. Some may believe that if productivity increases then workers will be paid more and thus consume more. But productivity increases have not been shared with workers in our recent past and I see no reason to believe that will change. So productivity seems unlikely to factor into near term growth.
I am developing a new personal motto, “Depressed wages deserve depressed prices.” Thus I advocate depriving speculators of cheap funding.
“Thus I advocate depriving speculators of cheap funding.”
So you believe in taking back TARP bank status from AE, GS, JP, etc.?
What i wonder is why you believe that the Fed actually has the power to ipush market interest rates.up?
By what mechanism do all investors who are bidding on bonds suddenly lower their bid price because of a declaration by the Fed?
I can understand that if interest rates are high the fed can enter the market and bid prices up and thus drive down rates, but how does it make interest rates go up?
JimH,
She is speaking globally.
You make good points. Also, domestic consumptions have not kept pace with capacity development globally.
But the trick to productivity is that in order for it to increase, there will need to be a slowdown of the economy where cleaning out takes place of unproductive processes. That is where I see raising interest rates as key to that. Higher interest rates will guide the economy into the next higher attractor state of productive capacity.
Remember when I wrote this…?
“The economy is not dying. It is just sluggish because labor share has fallen. In the moment that labor share starts to rise, we will see life return to the economy.”
http://effectivedemand.typepad.com/ed/2014/06/projecting-the-path-of-the-next-business-cycle.html
Keeping interests lower than optimum just makes for more cleaning out of the economy later.
Jim
they sell bonds, of which they have an adequate supply. buy buying the bond, the buyer reduces the amount of cash he has on hand or in the bank as demand deposits. this reduces the banks reserve below required forcing them to call in loans further reducing the amount of money in circulation.
this means that people will have less money on hand than they would like, leading them to sell a few of their own bonds. this lowers the price of bonds which is the same as increasing the interest rate.
Jim wrote “What i wonder is why you believe that the Fed actually has the power to ipush market interest rates.up?”
Paul Volcker was chairman of the FED from August 1979 to August 1987. He proved beyond any shadow of a doubt that the FED could force interest rates very very high.
See: https://research.stlouisfed.org/fred2/series/FEDFUNDS/
I bought a home in October 1979 and my home mortgage rate was 10.5%. Later those home mortgage rates went much higher.
It serves no useful purpose to argue over whether the FED can raise interest rates.
JimH
actually friend Jim could argue that the Volker rates were caused by “the market.” He’d be wrong, but that’s why i went through the mechanism with him, which you seem to have missed.
I’m have not argued anything. I ask where this belief that the Fed can indeed determine the rates for corporate bonds comes from.
So the Fed sells off its security holding and interest rates still collapse. Then what does the Fed do?
The simple fact is the global capacity to buy safe securities dwarfs the Fed’s capacity to sell them.
I looks to me that there are a lot of people at the Fed who think that higher interest rates would be a good idea but they don’t see any clear path to get their from here.
And required reserves don’t have anything to do with a bank’s loan position. Required reserves are calculated based on how much money the bank has in transaction accounts (which is not related to the amount of loans the bank has). Banks can discourage people from holding money in transaction accounts by increasing fees and
making interest structure that encourage moving money from checking to saving accounts. Of course that works against all the goals that you and the Fed claim to support. so that would be an unintended/undesirable consequence.
“required reserves don’t have anything to do with a bank’s loan position.” This used to be a method for reigning in banks. I believe it has changed a bit since 2000 and has become less of a restraint; but, it should still have a slowing impact based upon reserves to loans. Of course, it would have to be a tie which you say does not exist.
Coberly,
Apparently your reply to him came in as I was typing mine. I did not see your reply to him or I would have let it go at that.
But as you can see, he is back.
Good luck with him.
Edward,
As you know, I have characterized the problem in the US as, ‘Consumers can not spend what they do not have, and producers will not produce what they can not sell’.
Workers are also consumers and thus raising labor share would fund more consumption. So I agree with you completely that labor share should be raised. Unfortunately I do not see any way to force employers to do that on a large scale.
The FED seems ready to begin to raise interest rates. Then we will know.
JimH
thanks. i think he doesn’t know what he is talking about.
but i don’t know very much myself.
Coberly,
As my father used to say…
I know you believe you understand what you think I said but I am not sure you realize that what you heard is not what I meant.
What makes me different from the rest? It is my view of effective demand. It tells me that there is less slack eventually available then many think.
I agree with Edward Harrison that unless wage growth starts rising, this business cycle is becoming more and more fragile as the year goes on.
Edward:
With your ideas, you are walking on the wild side which no traditional educational based economist is going to agree with you. in another area, not knowing the process to manufacture parts or product certainly places them at a disadvantage in understanding the costs and creating a macro model properly allocating those costs. LABOR is not the issue today and has not been so for decades and yet tradition keeps whacking it expecting an economic surge.
Have not listened to the clip as I have to maintain some degree of silence here to let the hospital roomies sleep. I will try today. Internet is over powered during the day by users too. Higher dose of the “roids” today (it worked 30 years ago and another chemo-like IV on Monday. still perking along and wandering the halls here.
Jim asks how will the Fed will raise interest rates. Coberly says they will sell bonds.
Actually, no bond sales are contemplated. When/if the Fed does choose to increase % rates they will do it by increasing the rate that the Fed pays for the reserves that it borrows.
As of today the Fed is borrowing $2.4T, and it is paying 0.25% for those deposits. When the time comes to raise rates the Fed will increase the interest paid on reserves. This will set a new floor for % rates at the desired level.
This has come up before at AB, there are some readers who don’t believe that the Fed will act as I have described (Webb). The following link is from the Fed, this is what they have to say:
“During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.”
The Fed link:
http://www.federalreserve.gov/monetarypolicy/policy-normalization.htm
I wasn’t asking about bank interest rates. I understand how the Fed can do that. The question was by what mechanism is this going to affect the bond market rates.
If we look back for the last 2 years, we can see numerous Fed actions that were supposed to raise rates. When the Fed first started talking about tapering that was supposed to raise rates and it did for a little while and then they fell. Then when tapering actually started it was supposed to raise rates but again it didn’t last. Then when QE ended that was supposed to raise rates and again they went up briefly but not for long. So why does anyone think the same thing won’t happen if the Fed raises bank rates?
Jim – This is not about “bank interest rates” as you say. It is about market rates for all short term debt including the rate that the Fed pays on excess reserves.
When the Fed adjusts the rate on reserves it will flow through all of the interest rates on ST paper. Federal Funds, Commercial paper, bank CDs, Libor, money market funds and Prime will all go up.
The Taper was not designed to cause rates to rise, it was a sign that the Fed would end QE. The ending of QE does not mean that bond yields have to adjust, it just meant that that this form of monetary stimulus came to an end.
Bond market rates are set by the market. There is a yield curve where generally rates are are higher the farther out on the maturity spectrum. The Fed controls the short term rates. The short term rates affect the price/yield of longer term securities.
So the Fed will target the IOER/Fed Funds rate to a higher level. That WILL change all ST rates and it probably will influence rates all the way out to 30 years.
Krasting
i defer to you on knowledge about Bonds. My comment was drawn out of a 2006 textbook which said the the process described was themain way the Fed affected interest rates.
Coberly – Throw out the 2006 textbook you rely on. The rules changed in October of 2008 when congress passed a new law that allowed the Fed to pay interest on excess reserves.
A discussion on this from the Atlanta Fed:
http://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves
Run75441: “So you believe in taking back TARP bank status from AE, GS, JP, etc.?”
Yes. In 2008 I thought that TARP was a terrible idea.
But the bankers convinced the US Congress that the sky would fall if all the banks were not bailed out. So the US Congress saved the banks from the results of their own recklessness. And in the process encouraged recklessness in the future.
Quoting Bloomberg on 8 April 2015:
“The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September, according to data compiled by Bloomberg.”
See: http://www.bloomberg.com/news/articles/2015-04-08/drillers-26-billion-in-hedges-spreads-price-plunge-pain
Makes me wonder if those banks lost money on oil futures too.
We live in interesting times.
Hey Jim:
Much to thank Geithner for on what was paid for taking over the CDOs, CDS, etc. We paid too much and banksters didn’t take a haircut for their gambling. There was supposed to be a clearing house in the beginning put together by Wall Street. Never happened. There was supposed to be a maturity on Wall Street which secured the market from blowups. It was taken advantage of by the hucksters. Greenspan’s Randian ideas the market would operate in the best interest of the economy was a lie or perhaps a wet dream on his part.
TARP was needed and not just for Wall Street. It could have been put in place for Main Street as well and Mortgagees. It was too small or to constricted. Take your choice. The recklessness can be resolved even now if we do not have a Congress and Schumer beholden to banksters, the 1 tenth of 1%, and the associated Corporacy.
JimH – You can be sure that the banks did not lose money in oil futures. They made money. They also lost money on the other side of the trade with the hedges they provided their clients. In the end, the net gain/loss to the banks will be minimal. By law, they can’t have big open books in commodities.
Financial institutions (big banks) play a role in the economy. They are intermediaries between different types of risk profiles. Airlines (and other big users) were buying oil futures as US oil producers were hedging their production inventory. Most of the banks have a “matched book” of risks to commodities.
Bkrasting: “You can be sure that the banks did not lose money in oil futures. They made money.”
I am reassured. After all, you are the guy who spent 25 years on Wall Street.
My curiosity has faded to gray. (Smiling here)
Krasting
thanks.
as i said i defer to your knowledge about bonds.
but that 2006 text was at least understandable. today, not so much.
Hey Run75441,
I know that there have been arguments on both sides of the bank bailouts.
David Stockman seems to be anti bailout which means that the political lines are not clearly drawn on this subject.
I was against the bank bailouts then and I am against them now.
But they were done. The precedent has been set. There will be bank bailouts in our future, probably out of the public view if at all possible.
And if Warren Buffet had been making those loans, he would have demanded a much much higher premium to assume the risk that tax payers took. Take a look at his deal with Goldman Sachs in September 2008. Sweet!
See: http://www.wsj.com/articles/SB122256922970483051
Jim H
I don’t know if the bailouts were “necessary” or not.
I do know they rewarded the banks for fraudulent business behavior. And no one bailed out the victims who lost their homes and their jobs.
I don’t think a country can prosper when the dominant business model is fraud.
If bkrasting is correct, the Fed is planning to print more money so it can increase welfare payments to the big banks, and that this will raise interest rates overall. I assume this will work by making lending to the Fed more attractive and other types of lending less attractive.
Kaleberg
i don’t know anything about this, so maybe BK will teach us.
according to the 2006 text i mentioned, the Fed goes out and buys bonds to lower interest rates. where does it get the money. i assumed it just printed it, because as the economy grows it needs more money to lubricate the economy. note, this does not create “wealth.” it just puts more money into circulation to handle the increasing exchanges of wealth. (remember: i don’t know what I am talking about).
of course this money is now “out there” and it becomes new bank reserves, which means the banks can now loan more money… to people who will create more wealth and pay interest on the loans.
this interest is new wealth and the banks get it as income for their service of lending money.
its not clear to me that there is anything “wrong” with this. but remember, i don’t know what i am talking about.
meanwhile, according to the old 2006 theory buying the bonds (by the fed) tends to raise the price of all bonds, which is the same as reducing the interest rate. this and the new lending by the bank tend to encourage investment and grow the economy (in theory?)
Krasting says the Fed has a new way of increasing interest rates (note, i have been talking about reducing them). i don’t know how that works. but the old way was by selling bonds, taking money out of circulation, reducing bank reserves and therefore reducing the banks ability to make loans. people now have less cash than they want to hold, so they cash some bonds further lowering bond prices and that is the same as raising the interest rate. higher interest and reduced lending tend to slow the growth of the economy… or just slow the rate of inflation.
not clear to me what other factors determine the difference between slowing the economy and slowing inflation, but those two things tend to go together. one good and one bad?
so how do we drive this thing?
on the other hand, let us note there is “no” inflation, so what we have is the Lambert plan of slowing the economy to weed out “inefficient”companies (and inefficient workers?) sp we are going to make hard times in order to make ourselves stronger. i have heard this song before. but as Lambert says, i don’t realize that what i think he said is not what he meant.
Coberly – Treasury issues Bills, Notes and Bonds. Bill are one year, but 10 years.
So when you say “bonds” you are referring to instruments that have a maturity of 10 years or greater.
The Fed has never sold “Bonds” to influence interest rates, nor will they do that in the future.
The Fed has always relied on very short term debt instruments to influence interest rates up or down. Prior to 2008 the Fed relied on changes to the Federal Funds rate (these are one day loans).
The same will hold true in 2015-2017 when the Fed increases % rates. It will increase the Federal Funds rate. By raising the Fed Funds rate (over night borrowing) it will influence all % rates across the maturity spectrum. When this happens the Fed will increase the rate it pays on excess reserves (IOER). This will raise the market rate to the desired Federal Funds target.
So no bond selling in the past or the future. The Fed will continue to manage interest rates by targeting Federal Funds.
Coberly – In the just posted comment I used the signs for ‘less than” and “greater than” in the fist sentence. But the comment got distorted because I used these symbos. So let me re do the first sentence:
“Treasury issues Bill, Notes and Bonds. Bills are maturities of less than one year. Notes are maturities greater than one year, but less than 10 years and Bonds are maturities greater than 10 years.”
So when you say “bonds” you are referring to instruments that have a maturity of 10 years or greater.
Sorry for that confusion………..
Krasting
thanks and i hope you keep trying to educate me. but i have a problem.
the 2006 text book very clearly says the Fed buys and sells bonds to affect the interest rate. this may no longer be true, but it’s not “never.”
my problem is that faced with an understandable “theory” it is hard for me to let go of the theory and learn new “facts.” this doesn’t mean the theory is right. god know, the world is plagued by people who can’t let go of good theories in order to face facts.
i am ready to try to understand your facts, but that “never” is getting in the way. not even before 2006?
krasting
i do not at all understand the article at the link you provided.
one thing that strikes me is that paying interest on excess reserves gives the banks incentive NOT to lend money. banks not lending money has been the problem.
moreover my peasant suspicion about the banker-politician axis doesn’t like the idea of the banks making money for free… money that comes from taxpayers and not from borrowers. looks like another boondoggle.
i can’t say it IS a boondoggle of course. i just don’t know enough.
but the whole point of not paying interest on excess reserves was to leave banks with an incentive to lend. an incentive that could be adjusted by manipulating the money supply.
i think banks are important to managing the economy by making good loans. and it doesn’t bother me that they do this to some extent with “free” new money. (because they lend that money (not yet wealth) and make real money (wealth) by the interest they charge legitimately for the work they do in making “good” loans. but it does bother me that they can continue to profit simply by letting the money sit in the vault.
again, i know nothing.
“But the trick to productivity is that in order for it to increase, there will need to be a slowdown of the economy where cleaning out takes place of unproductive processes. ”
You keep saying that, but I don’t believe you.
It seems to me that you don’t understand the process of “creative destruction”. It is not the destruction that is creative, it is the creation (of new products and processes) that is destructive. You don’t have to clean out to get new growth. It is the new growth that cleans out the old.
reason
just so you know you are not unheard. i appreciate the work you have been doing here and on other threads for the last few days.
krasting and Jim
seem to have lost interest.
i still defer to Krasting re Bonds, but here is a link to a recent article that supports the 2006 textbook re how the Fed raises interest rates.
in any case it seems that the Fed can, does, and has raised interest rates, so Jim might need to think about that.
http://learnbonds.com/how-the-federal-reserve-works/14576/
Coberly, You are ignoring the question I asked.
I asked by what mechanism are bond buyers going to lower their bid price on bonds because the Fed pushes bank overnight lending rates upward.
I think the Fed is well aware that if it prematurely tries to push
interest rates up it may well backfire. Bond prices may briefly drop but are more than likely to rebound. And that is why they have waited so long and probably will continue to wait.
jim
probably i misunderstood your original question. but walk me through this…
the fed raises the overnight rate: my understanding (i know nothing) is that the fed does not raise the rate directly… that’s the rate that banks charge each other for overnight borrowing to maintain their reserve requirement. the fed targets that rate by buying and selling bonds on the open market (krasting notwithstanding, for now). selling more bonds lowers the price of bonds (supply and demand) a lower price for a bond is the same as a higher interest rate. if banks are paying higher interest they will charge higher interest even on the overnight loans.
what i read assures me this has been going on for a long, long time and it works. i always believe there are countervailing forces which may sometimes produce unexpected results. but i watched the fed raise interest rates in the early 80’s long after inflation was defeated until the recession it caused actually started causing banks to fail, so i have no doubt that the fed hand on the tiller might become counter productive.
i just don’t know that your “theory” of what will happen is backed by any actual experience.
but like i said, i know nothing.
Coberly,
thanks for the feedback I appreciate it.
It is just that I am horrified that Edward seems to want to repeat the disastrous mistakes that the ECB and the Swedish Riksbank made for the sake of some half baked idea. Why he thinks we have a supply side problem (now of all times) is beyond me. I agree with him that a lack of effective demand can provide a ceiling on growth, but his “remedies” all seem to me to mistake symptoms for causes. If he wants to increase effective demand he needs to get more money into the hands of poorer people. It is not difficult.
Coberly, There is nothing particularly complicated about the question. The Fed has influence on the interest paid out and in by and to depository institutions . I want to know why people think it has similar control over other interest bearing instruments.
Back in the 70’s loans from commercial banks were about 1/4 of all credit market instruments. Today that has dropped down to about 1/8 (and still likely to fall more). That is because bank liabilities have stayed in proportion to the size of the economy while all other debt has grown out of proportion. The question I asked is how does the Fed use its power to control short term bank rates to control other rates. I don’t think the Fed has an answer and I don’t think they will raise rates until they come up with a good answer.
Jim – You doubt the Fed’s powers?? That would be a mistake. I assure you that the Fed has all of the ammo it needs to adjust short term rates, and by doing so it has huge influence over longer term rates.
If short term rates are set at 2% do you really think the ten-year bond would yield 1.9%? It does not work like that.
At this point the Fed is not concerned with inflation, and the Fed is very concerned that the economy is still not running at full potential. The Fed is, however, worried about bubbles. There are bubbles all over the place. Look at stock prices in the US, Europe, Japan and China – all records. You also have to look at other credit instruments. The Junk Bond market is priced to perfection – meaning it too is in bubble territory.
If the Fed moved short term rates to 2%, those bubbles would either pop, of (hopefully) just adjust in in an orderly fashion.
bkrasting wrote: “If short term rates are set at 2% do you really think the ten-year bond would yield 1.9%? It does not work like that.”
Of course the fed won’t let that happen.
Which is why the Fed won’t raise rates any time soon.
Jim
I think the question may be more complicated than you think. The Fed influences bond prices directly by buying and selling huge amounts of bonds. the price change affects (IS) a change in interest rates. The Fed has lots of power to affect that and has done so for many decades.
I think Krasting may be wrong that long rates are never less than short rates, or that the Fed always gets what it aims for… or always aims for the right thing.
But the question is certainly too complicated for me to say anything useful about at this time.
and Krasting: much more recent articles on google seem to be saying that the way the Fed influences interest rates is still by buying and selling bonds. So i’d need more to go on to understand how discount rate has become more powerful influence. not saying it hasn’t. just that i don’t understand it yet.
Reason
i agree. it doesn’t make a lot of sense to me to say the problem is not enough money in the hands of labor and then to propose killing off “inefficient” firms.
Look Edward, you may like to believe otherwise, but we didn’t have to get rid of horses in order for automobiles to make most of them redundant. The process went the other way around. It seems to me you don’t think enough in terms of dynamics at the margin and worry too much about equilibrium. Equilibrium is a fading mirage. Forget it – economists should have learnt to ignore it ages ago.
Coberly wrote “I think the question may be more complicated than you think. The Fed influences bond prices directly by buying and selling huge amounts of bonds. the price change affects (IS) a change in interest rates. The Fed has lots of power to affect that and has done so for many decades.”
Ben Bernanke thinks you’re wrong.:
“A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again.”
http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low