quote:
So the idea of low rates suppressing economic activity from the point where we are now is moot simply because there are greater forces at work in the market.

I wouldn't be so sure of this.

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98% of net job creation comes from small business, and almost all innovation.

I'm wary of statistics, but yeah, in general net job growth and technological progress comes from relatively new small businesses that are in the process of becoming larger. (I prefer phrasing it this way just to avoid the political trap of having people somehow think that mom & pop small businesses are the true engines of economic growth.)

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People ask me what the fastest growing job in finance today is and my answer is always compliance, and it's really not even close.

Interesting. A guy I know who teaches an equity derivatives trading class, and who used to work at Credit Suisse, echoed these same thoughts for traders in the post-2008 world. Risk and legal compliance is about half of what they do now, apparently.

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If small businesses become strangled from tax hikes from going over the cliff, then readjusting to new deals that get done over time it really strains them and in turn the economy.

I agree, but in some sense, I think this is already baked in. No amount of successful negotiations in Washington in coming weeks can offset the fiscal cliff effect that is already set in stone to occur in 2013. In some sense, that makes the timing of this thread unfortunate, but it is what it is. I have no doubt that a lot of economic growth from the last 2 quarters has been artificially "pulled forward" by corporations in order to avoid higher tax rates in 2013. Whether or not taxes are higher in 2013 or not is immaterial, at least as it relates to the question of whether the effect will occur or not. It will. The regulatory uncertainty/madness is another issue that still lingers and poisons everything. I admit this.

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You have to understand we're growing at 1-2% real growth in a leveraged economy, the leverage portion is what makes this idea of "stall speed" for an economy very important. Nobody really knows what stall speed is, but if prices drop 2% in 2013 I can almost guarantee you we will be under stall speed...

Now we're getting somewhere. I'm going to try to respond to this in another post below.

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So you're telling me as a Fed chairman, Bernanke should speed up a serious funding crisis?

No, I wouldn't put it that way, as popular as that kind of crazy argument has been around here in years past. What I'm saying is that he should not go so far to mask the existence of a crisis that already exists, because doing so is helping it become even worse.

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However, I fully disagree that private sector growth is also delayed from ZIRP for reasons I have outlined so far.

This is why I think that perhaps a new thread might be warranted.

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Asset prices have hit a bottom because the foundation is monetary policy (less so for housing). If you take away current easing policies then we are nowhere near where risk assets should be priced. There is a chance a mild recession (not deflation) is going to take hold in 2013 regardless of ZIRP, but if you took away the easing programs I doubt there would be anything mild about it.

But home prices dominate nominal wealth in the U.S., and I think looking toward Flow of Funds statistics might be helpful here.

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I can't even come close to agreeing with this. What evidence are you referring to because I don't see anything anywhere that would suggest this.

But didn't you just write the following?

"The difference in '08 and now is that in '08 we actually had policy tools that had not been exhausted, which is not the case now. Think of it as trying to defend an outpost, right now the threat of an attack isn't as strong as it was four years ago but our ammo is much more drained now."

Raising rates not only improves business optimism and allocative efficiency, but it also "loads the spring" of the Fed's arsenal, so to speak.

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After all this, you want to point at ZIRP as the reason we are experiencing slower growth?

No. I am in no way saying that Fed policy--even going back 20 or 30 years--is at the root of what ails us. I'm just saying that all the signs are pointing to the conclusion that we would be better off with the Fed at least beginning to implement an exit from ZIRP, rather than trying to stay burrowed within its false cove of safety for years upon end. The longer this goes on, the more I think the Fed might be fanning the flames of a huge, upcoming long term crisis.

This post was edited on 12/27/12 at 8:46 am

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Posted by Doc Fenton

New York, NY

Member since Feb 2007

52698 posts

Posted on 12/27/12 at 6:44 am to Doc Fenton

So I'm just getting back to this thread after Christmas Day and Boxing Day, and screwing around on the OT, and all that.

To answer my original subject line question, the answer would appear to be a resounding yes. That being the case, I think I'm going to create a new thread (maybe not for another few weeks, but at some point) collecting and discussing all the different viewpoints out there about how ZIRP might actually be having a depressing effect on private sector economic expansion.

Like I said above, the timing of this thread with respect to the current fiscal cliff negotiations is somewhat unfortunate, because I don't want to focus on that too much. And really, if the Fed maintained ZIRP through 2011 & 2012 up until this point, how could you expect it to begin an exit right when all this is going on? Fair enough, but there are still larger arguments to be put forth.

Nobody has any idea how well the feds are going to go about implementing ObamaCare & Dodd-Frank, or how big of a disaster it might be. (It depends a lot on how flexible or obstinate certain groups of people decide they really want to be.)

Ten years later, we are still suffering mightily from Sarbanes-Oxley. ICE is buying the NYSE, venture capital investment has been almost terminally flatlined for years, other countries are becoming more competitive for startup firms relative to the U.S. Things look bad in a lot of ways.

Putting all that aside for a moment, however, we can agree that there are both (A) short term beneficial effects from ZIRP, and (B) long term detrimental results from ZIRP. Moreover, there are no reliable methods available to accurately quantify the magnitude of these effects pulling in each direction. In fact, there are countervailing effects going in both directions just in the short term now, and it’s no longer certain that even the short term effects of ZIRP are stimulative.

So then it seems as though we have three separate topics up for debate:

#1. Just how meager are the short term benefits from ZIRP, and just how corrosive and damaging are the long term detriments of ZIRP? This question would mostly hinge on just how much long run damage is being done.

#2. Focusing just on the short term part, there appear to be net benefits and drawbacks here as well, not even looking at the longer term detriments. I'm not going so far as to say definitively that ZIRP is dampening even short term growth, but at this point, it certainly wouldn't surprise me if this were true.

#3. How resilient is the current macroeconomy to a mild drop in consumer prices? This is where nominal net wealth figures and charge-off rates and outstanding loan figures and Shiller 10-year P/E ratios and stuff would be highly informative. Unlike many around here in 2008, I was adamant about the overriding need to maintain price stability in the midst of an asset bubble collapse. But looking at a lot of Federal Reserve historical data, I think I can lay out a very good case for why we're no longer in that type of situation, and why the economy--miserable as it may be--is not as fragile with respect to mild deflation as you seem to believe. This is in no way meant to discount the severity of the actuarial entitlement problems that will arrive in coming decades, which is one of the main reasons to oppose ZIRP now.

This post was edited on 12/27/12 at 9:00 am

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Posted by BennyAndTheInkJets

Middle of a layover

Member since Nov 2010

5606 posts

Posted on 12/28/12 at 10:57 am to Doc Fenton

quote:
I have no doubt that a lot of economic growth from the last 2 quarters has been artificially "pulled forward" by corporations in order to avoid higher tax rates in 2013.

It's also easy to make the case for the opposite too, as corporations had uncertainty about the cliff for a while which made them not invest in labor or projects, pulling economic weakness forward.

quote:
But home prices dominate nominal wealth in the U.S., and I think looking toward Flow of Funds statistics might be helpful here.

I've been thinking about this one for a day now in regards to what I recently wrote about housing being a little more insulated than other asset prices. If the Fed stopped buying $85B in mortgages a month, how much would mortgage rates rise? The mortgage market is crazy stupid rich right now, especially in lower coupons. Premium coupons are so disjointed based on models its ridiculous. There is no conclusion to this but rather a stream of conciousness. I don't think even the most seasoned mortgage traders on the street could answer that question with any degree of certainty.

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Raising rates not only improves business optimism and allocative efficiency, but it also "loads the spring" of the Fed's arsenal, so to speak.

The problem with this becomes a chicken and the egg debate. Do you think rising rates creates optimism or optimsim creates rising rates? I'm a lot more inclined to the latter. Also in regards to the "loads the spring" relative to my quote, staying with my analogy it's kind of like leaving the outpost to go find ammo. Only to come back and there is nothing to defend. I don't think having tools to use is justified if the damage caused by procuring these tools is too great. I think we've pretty much determined we disagree on the damage portion.

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we can agree that there are both (A) short term beneficial effects from ZIRP,

Agreed.

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(B) long term detrimental results from ZIRP

I disagree with you on this but not in the way you think. If ZIRP was just that, zero interest rates for an extended period, I would agree with you. But I believe that ZIRP is not what it appears on the surface at all, at least not anymore. ZIRP is the beginning of the Fed adding another tool to their arsenal, so now not only do they have Open Market Operations but they also have Open Mouth Operations. They can control volatility and risk in the markets simply by how they communicate to the public. Now they have extended language, threshold language, releasing the Fed Funds and inflation target votes, and Ben's press conferences. It's brilliant actually, and a lot easier than buying and selling securities from Brian Sack's 7th floor office.

quote:
But looking at a lot of Federal Reserve historical data, I think I can lay out a very good case for why we're no longer in that type of situation, and why the economy--miserable as it may be--is not as fragile with respect to mild deflation as you seem to believe. This is in no way meant to discount the severity of the actuarial entitlement problems that will arrive in coming decades, which is one of the main reasons to oppose ZIRP now.

Are we less fragile than we were in 2009? Yes. However, one chart you should look at is the 5-year 5-year forward breakeven rates. If you notice, there have only been 3 times in the past 20ish years that this figure either broke or touched the 2% line. In September of '08, October of '10, and September of '11. I think you know what followed all of these, and why I say the recent easing is not defensive. The reason this figure is so important is that this can be looked at as what expectations are for future growth in the economy, and if we have mild deflation and that number drops significantly people will get very scared and more weakness will come.

Everything in economics is a self-fulfilling prophecy. If everyone expects Italy to default, their bond prices drop, yields sky-rocket, they refinance at higher coupons, they can't pay interest, then default. If everyone expects Italy to grow, their bond prices rise, yields fall, they refinance at lower coupons, and interest expenses can be taken care of so taxes don't have to be raised, and they grow. This is why I'm saying we can't handle it right now, because it would tell everyone that 2008 is coming back again, and the market still remembers that very well. The same goes for the fiscal cliff negotiations, it just creates the mindset that fiscal policy will never get things together and we'll keep having uncertainty. The key is to find where these correlations exist with psychology, and one correlation that I don't believe is really that relevant is optimism and the Fed Funds rate.

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