What if There were No More Recessions?*

What if There were No More Recessions?

What if Central Bankers have figured out how to successfully manage the global economy? What if they are in the process of engineering a soft economic landing for the world’s major economies …, a landing so soft that global GDP in in the process of gently falling …, only to gently rise again …, and to gently fall thereafter …, and then rise, etc…, to the end of time? Should economics no longer be thought of as the “dismal science”? Has technology reached a level where economists are able to successfully crunch massive amounts of data to uncover the Rosetta Stone of economic understanding? Have we reached an age in human development where Central Bankers are now capable of successfully managing the world’s largest economies?

This is not a new subject. The April 19th TLR focused on the “The Fabulous Federal Reserve,” the Central Bank responsible for the exemplary performance of the world’s economy since the Great Recession of 2008-09. For the past 10+ years, America’s GDP has been on a steady, positive growth path with average annual increases in excess of 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. The fact is that the U.S. hasn’t recorded a single negative quarter in those years – the current expansion set a post-WWII record in June! Moreover, job creation has exceeded projections in every one of the past ten years with the unemployment rate recently setting new multi-decade lows. Both GDP growth and the favorable employment trend followed the worst economic collapse since the Great Depression. Moreover, the stock market has been setting new highs and appears ready to continue to do so, multiplying over four times since its March 2009 bottom. In short, the American economy is motoring along at an excellent, measured, sustainable pace – all in all, an extraordinary economic performance!

Were the Obama administration’s economic policies responsible for this unprecedented period of economic growth? Perhaps the continuation of growth can be attributed to the election of President Trump in 2016 and the tax measures enacted in 2017? To both … no, not really, although the Obama administration and the Trump administration each added fuel to the economic fire. However, neither deserves the credit for the country’s extraordinary economic success. Each both added to and subtracted from growth, materially subtracting by their failures to work together with Congress to enact what in the future may be seen as necessary fiscal stimuli (whether on infrastructure, capital-intensive defense projects, or strategic R&D). The reality is that the lions’ share of the credit belongs to the Fabulous Federal Reserve. Its Chairmen – Ben Bernanke (appointed by President Bush), Janet Yellin (appointed by President Obama), and Jerome Powell (appointed by President Trump) – have used creative kit of market-manipulative tools to fine-tune growth, inflation, deflation, interest rates, and employment.

How have they done so?

At the very beginning of the 2008-09 Financial Crisis, the Federal Reserve eased credit and printed gobs of US Dollars in an overt effort to head-off a downward economic spiral – the fear at the time was that the Financial Crisis might lead to a Second Great Depression – by micromanaging an intricate web of economic levers intended to bring about a gradual American and global recovery. That effort was a smashing success! … a success due in large part to a program of money-printing coordinated with other countries’ Central Bankers who acquiesced in the Fed’s leadership and in the harmonization of money-printing efforts. Those efforts have inflated the world’s money supply far beyond anything anyone previously might have imagined – through a program known as Quantitative Easing (QE has been the Central Bankers’ means of creating money out of thin air). The Fed’s policy-prescription was followed in Europe by the European Central Bank, in England by the Bank of England, in Japan by the Bank of Japan, in China by the People’s Bank of China, in Canada by the Bank of Canada, and in Australia by the Reserve Bank of Australia – and as a result trillions of fiat currency dollars have flowed into the global economy and spurred consumer spending, stock market values and GDP growth. Trillions of new US Dollars, Euros, Pounds, Yen, Yuan, Canadian Dollars, and Aussie Dollars. And that was all done without triggering inflation or deflation or leading over those ten years to economic Armageddon (but see, “Is this Time the Same?” in the August 21st TLR).

Pretty remarkable, no?

Every time the global economy appeared to be sputtering, the Fed came to the rescue and led a consortium of Central Bankers in coordinated money-printing action. Among a variety of never-before- used seen, innovative financial tools, it combined QE – QE1 began in 2008, QE2 in 2010, QE3 in 2012, and, most recently, QE4 in 2019 (mentioned in “Expiring Canaries” in the November 13th TLR) – with open market operations (moving money into and out of banks), adjustments to the discount rate (raising and lowering short-term interest rates), and Forward Guidance (telling the world what it would do). Its success owes a great deal to the data revolution that has provided Central Bankers with the hopefully necessary knowledge and information to correctly fine-tune the economic markets …, although the Fed deserves great credit for sifting that data and so far making the correct adjustments, and readjustments, time-after-time. In short, the Fabulous Fed – together with its Creative Colleagues – has done “whatever it takes” to assure continued growth. In addition to successfully managing GDP growth and reducing unemployment, the Fed’s policies also have lit a fire under the stock market. That fire also continues to burn (see “A Perpetual Bull March” in the March 3rd TLR).

How long can this continue?

Stein’s LawÔÇönamed for the late economist Herbert Stein, chairman of the Council of Economic Advisers under President Nixon ÔÇö states that “If something cannot go on forever, it will stop.” Stein’s Law is both tautological – by definition, if something cannot go no forever, it will stop – and illogical – nothing can go on forever. The April 10th TLR addressed Stein’s Law in discussing “Will Modern Monetary Theory Work?” The combination of massive QE and massive deficit spending, pursued by the U.S. for the past 10 years (the U.S. has debt of more than $23 trillion!), is an application of Modern Monetary Theory.

MMT posits that, because the U.S. government owns the printing press, the U.S. can spend as much money as it would like simply by printing Dollars. No matter how much debt the U.S. runs up, and no matter how high a price it has to pay in interest, it can always pay-off its obligations simply by printing more Dollars. Therefore, unlike an individual borrower, the U.S. can’t spend too much money and can’t have too much debt. This perpetual motion printing press works, say MMT fans, not only because the U.S. government owns the printing press, but also because the Dollar is the world’s accepted medium-of-exchange – its fiat currency (see “What is Money?” in the June 12th TLR). That too is not going to change, they say (although some question that assertion – see “A Weaker US Dollar?” in the August 26th TLR). They add that the U.S. has the world’s largest and most durable economy and the Dollar is backed by the largest quantity of gold held by any nation. It therefore has the capacity to spend far more than it historically has spent.

The MMT-ers may or may not have a point. Is there a limit on how much more the U.S. can print and spend? To paraphrase Herb Stein, MMT will work – it is working, and it will continue to work – until at some point it will stop working. Which brings to mind Winston Churchill’s comment on America and Americans …, and how that comment might be applied to the Fed: “You can always count on the Federal Reserve to try to do the right thing by always trying to do everything.” However, is there a point at which the Fed will run out of economic bullets … and, if so, how close are we to that point?

The Trump Administration believes that there remain economic bullets aplenty. It therefore favors ever-lower interest rates and more-and-more money-printing. “If the Fed had done its job properly, which it has not,” the President Tweeted earlier this year, “the Stock Market would have been up 5000 to 10,000 additional points and GDP would have been over 4{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} instead of 3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} … with almost no inflation. Quantitative tightening [the Fed raised interest rates four times in 2018] was a killer, should have done the exact opposite!” He added, “China is not our problem, the Federal Reserve is.” Contrary to traditional conservative economic thinking, Trump is a follower of John Maynard Keynes. As described in “They’re All Keynsians Now” in the March 27th TLR, Keynsianism has been embraced by both parties, Democrats and Republicans. QE and deficit spending are “in”! neither believing in fiscal prudence.

The Fed is walking a difficult economic line. If it allows the economy to overheat by acquiescing to the President’s demands suggestions, the Fed at some point will be required to raise interest rates …, and if it were to do so too far or too fast, its actions likely would lead to a recession (see “A Recession?” in the March 18th TLR and “The Coming Recession” in the July 17th TLR). As then-Fed Chairman William McChesney Martin said in 1955, the Federal Reserve “is in the position of the chaperone who ordered the punch bowl removed just when the party was really warming up” because “[failure] to apply the brakes sufficiently, and in time, [will propel us] over the cliff.” Conversely, if the economy were to slow down too much or too fast, the Fed would be compelled to lower interest rates even more than it has already done, and also would be required to accelerate QE (which it restarted in September), either of which might wreak havoc with the Dollar (see “A Weaker US Dollar?” in the August 26th TLR). Too much QE or unnecessarily low interest rates can do a great deal of damage (see, for example, “Whither Inflation” in the March 13th TLR and “Deflation?” in the June 17th TLR). For these reasons, the Fed is continuing to walk a tightrope in trying to achieve a Goldilocks economy.

How long this can continue is anyone’s everyone’s guess. Perhaps forever is not too long?

Finally (from a good friend)

*┬® Copyright 2019 by William Natbony. All rights reserved.

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