EconVue Spotlight: The End of Easy Money?

An extraordinary era of extreme monetary easing seems to be coming to an end with the Federal Reserve’s .25% interest rate hike and the announcement last week that it would begin unwinding its balance sheet. The jury is still out on whether the Fed’s actions helped reverse the Great Financial Crisis. Given languid growth and stubbornly low inflation, perhaps not.  EconVue expert Mike Lewis cites a new Princeton study that concludes that when global interest rates reach a boundary lower than 2% it actually stymies growth. How are the world’s central banks going to reverse course?

Exit strategies, especially for policies that are unprecedented such as quantitative easing, are bound to be difficult to execute. And now that the world’s economies are so interrelated, policy errors and poor timing by just one central bank-- the US, the ECB, the BOJ, or the PBOC--could result in global financial contagion. The Bank of Japan, which invented quantitative easing, is the only example we have of a central bank that was able to unwind its positions.  An IMF working paper describes how Japan was able to accomplish this in March of 2006.  BOJ Governor Kuroda however has said that this time might be different, because of the increased scale and duration of QE. 

The job of the Federal Reserve is to regulate inflation and employment.  In the face of stalling inflation I was surprised by Yellen’s statement that she is considering abandoning the 2% target for something higher. Maybe she is on boarding the Princeton study as well.

Here is deeper dive into US employment-related issues, and then a quick look at the ROW.

STORIES IN OUR SPOTLIGHT

U.S. Employment and Inflation  

Is the Fed repeating “The Mistake of 1937”?
Brian Maher 6/15/2017 Daily Reckoning

Exit strategies are very hard to execute.

Consumer Price Index summary 
Bureau of Labor Statistics 6/14/2017

CPI falls .1 % in May. Remind me why we raised rates?

New data: Inequality runs even deeper than previously thought
Howard R. Gold  5/23/2017 Chicago Booth Review

Piketty, Saez, and Gabriel Zucman of University of California at Berkeley combined tax, survey, and national-accounts data to create distributional accounts that they say capture 100 percent of US income since 1913. 

The role of unemployment in the rise of alternative work arrangements
Lawrence F. Katz and Alan B. Krueger 5/2017 American Economic Review

The share of U.S. workers in alternative work arrangements has increased substantially in recent decades.  Micro longitudinal analyses show that unemployed workers are much more likely to transition into alternative work arrangements than other workers.  Macro time-series evidence shows that weak labor market conditions lead to an increase in non-traditional work.  But the estimated magnitudes imply that the Great Recession and high unemployment in the 2000s can account for only a modest part of the rise in alternative work.  Secular factors associated with rising inequality and technological changes making it easier to contract out work appear to be the driving forces. 

The rise of alternative work arrangements  
US Department of the Treasury, Office of Tax Analysis Working Paper 114 1/2017

Looking at trends over time, we find that essentially all of the increase in self-employment is due to increases in sole proprietors who have little or no business-related deductions, and who therefore appear to almost exclusively provide labor services. In contrast, the share of filers that were small business owners was essentially unchanged.  Implications for a rising number of people, nearing 20% of the workforce, who have no health benefits or retirement plans.

The American Health Care Act: Economic and employment consequences for States 
Commonwealth Fund May 2017

First rate analysis of AHCA by state. If adopted, 864,000 jobs gained in 2018, but by 2026, 924,000 jobs will be lost, mostly in health care. Wide variations by state, there is an interactive map of employment effects here.

It’s not (just) the working class. It’s the service class
Richard Florida 6/17/2017 Evonomics

The real contested terrain of American politics is the Service Class and its locations.

Chart: US business loan growth continuing to slow, It is now below the rate in the Eurozone
The Daily Shot@SoberLook 6/12/2017

Bullish for the Eurozone. Looking at the previous article on alternative work, if some new businesses are really just sole proprietors leasing out their labor, they have no need for loans.

The age of the Microsoft and Amazon economy
Tim Harford 6/16/2017 Tim Harford Blog

Why hasn’t competition chipped away at the market position of the leading companies? The simplest explanation: they are very good at what they do. Competition isn’t a threat to them. It’s an opportunity. Will Amazon do to groceries what they’ve already done to retail? How will employment be affected when groceries are stored and distributed by robots?

World

IMF statement on completion of China mission
David Lipton, 6/14/2017 IMF

In order to boost consumption, China should invest more in social services such as education and health care, which are currently incentivizing savings. H/t Brad Setser

Trump—blundering into European truths
Graham E. Fuller 6/5/2017 Graham E. Fuller Blog 

"So, Trump has bluntly called upon the EU to shoulder a greater share of the burden in NATO. He is not wrong.” An alternative view. More than 70 years after the end of WW2, Is it not time for both Germany and Japan to control their own security?

Putin Peppered with Tough Questions During Annual Show
Daniel Schearf 6/15/2017 VOA News

Reality TV, Russian Style: This year’s questions shifted focus from foreign relations to worsening domestic social conditions. 

The amazing Arab scholar who beat Adam Smith by half a millennium
Dániel Oláh 6/10/2017 Evonomics

Thanks to this self-created gap the most outstanding islamic figure of the Middle Ages, the Andalusian scholar and politician Ibn Khaldun is neglected in mainstream textbooks.

Africa: Malawi Just Like the rest of Africa is not poor - Mutharika
Kondwani Munthali 6/9/2017 Allafrica.com

Sub-Saharan Africa receives $134 B in loans & development aid. But $192 B flows back to developed countries to gain better returns on investment. The president of Malawi speaks to the Oxford Union.

Japan and India challenging China in Africa
Purnendra Jain 6/16/207 East Asia Forum

Japan has not joined the China-led Asian Infrastructure Investment Bank, just as India did not send official representatives to the Belt and Road Forum in Beijing in May 2017... Japan and India’s absence in these leading initiatives and events, which have attracted otherwise global attention and participation, confirm their deep misgivings about China.

Experts believe the next WannaCry may go up for sale this summer    
Dan Swinhoe 6/15/2017 IDG Connect

Businesses in the UK are willing to pay an average of $136,000 to regain control of their IP.  And no one really knows if Wannacry is a state actor or two guys in a basement. (Their branding was heinous but pure genius.) 

ECONVUE RESEARCH

Extreme Fed stimulus has not helped; new study argues it may hurt economy
Michael Lewis 

Evidence is mounting that prolonged ultra-accommodative policy has actually been a drag on the economy. The lesson seems to be that short rates below 2% and certainly below 1% are too low to affect investment decisions meaningfully; they provide little or no net stimulus. And since the early 1990s, prolonged easy policy has been followed by financial/economic disaster. What are the odds that this is a coincidence? 

The Ikon: the best world money
Robert Pringle

I argue that the best numeraire would be a new currency standard that I have called the “Ikon”. This refers to a basket of world equities. Everybody holding money would then have a personal stake in the future prosperity of the world and be induced, as if by an invisible hand, to work towards it.  

Robert Pringle was formerly the head of the World Gold Council.

How to escape the vicious circle of declining potential output
Karim Pakravan 

The financial crisis and the ensuing global recession only exacerbated trends that had been developing over the previous decade.  In order to understand this discontinuity in economic trends, I propose to focus on a simple concept, potential economic growth.  

What does a housing slump actually look like?
Saul Eslake 6/6/2017 ABC News

I’m not forecasting a ‘housing bust’, but in this interview with Jessica Haynes of ABC Online, published on 6th June 2017, I look at what might happen if there were to be one.

If you’d like to help support EconVue, subscribe to our experts, or engage them in further research or discussion, by contacting Ms Ying Zhan ying@econvue.com. 

I’ll end this week’s Spotlight with another Princeton reference, a quote from from economist Alan Blinder. He says politicians use economists the way that drunks use lampposts--for support, not illumination. You can register for the live webcast of his always enlightening remarks at Brookings on Tuesday here.