Jackson Hole — This town in Wyoming just hosted three economic events: The Federal Reserve Bank of Kansas City’s annual Jackson Hole retreat and two others to respond to the Fed’s mismanagement the economy: the Fed Up group, demonstrating against increasing interest rates, and the American Principles Project (APP).
The Fed Up demonstrations have a single focus: keep interest rates down, misguidedly to keep workers employed. The APP broader approach looked at the Fed’s performance over the past 100 years and suggested there are better ways to make the economy return to strength than trying to manipulate it.
Coming from different directions, however, the two efforts do hold common ground – the cost of labor should not be targeted so much as a method of hiking interest rates.
First though we look the Fed’s direction after last weeks minicrash: With Chairperson Janet Yellen not in the picture the Fed’s retreat was more inconsequential than usual. Senior Fed official Vice Chairman Stanley Fischer needed to speak to calm the markets nervous from China’s collapsing economy.
First he took the credit for low interest rates with little modesty and without referring to the damage it has created. “Longer-term inflation… appear(s) to have remained generally stable since the late 1990’s,” he said. “The source of that stability is open to debate, but the fact that the Fed has kept inflation relatively low and stable for three decades must be an important part of the explanation.”
Fischer also reiterated the Fed’s determination to resist rules based management and continue its seat of the pants policies that can’t be anticipated by business, and thus is detrimental to long term investment. He stated, “Of course, the FOMC’s monetary policy decision is not a mechanical one, based purely on the set of numbers….” Fischer also said the Fed “expects inflation to return to 2 percent,” and then immediately said he wasn’t sure how confident he was in this pronouncement.
The take away was more of the same redux: the Fed might or might not take away the punch bowl, and that it is concerned about China. The Fed is in the business of intentions and signals. Despite threatening to raise rates for a year, the Fed still is on the fence. Even the former Fed governors and now talking heads for CNBC were unable to be clear about this.
There were also many papers given at the Fed’s retreat.
As Dr. Marc Faber, renowned Swiss economist of the GBD Report has noted, Fed conferences like Jackson Hole enable the Fed to control much of the discourse regarding their policies and the world economy, as many economists must please the Fed in order to publish and rise in the university system, and even to get paid.
The same goes with foreign governments that must work with the big boy on the block. This conference was no different as representatives of the Central Banks from Switzerland, Chile, India, the Bank of England and the European Central Bank and professors from universities including Boston University, Stanford, Harvard, Wisconsin, MIT, Tsinghau, Johns Hopkins, Indiana, Columbia, Maryland, Penn, and the London Business School gave papers.
These papers are rarely if ever are discussed anywhere, but remain a good method to use academia to validate the Fed’s undependable policies. Since Ben Bernanke, the Fed has increasingly used academics with no real industry experience. They tend to make typical academic mistakes by not understanding the real world, so it is no surprise the Fed looks for academic feedback, not real world feedback.
With past as prologue the Fed won’t raise rates while the US economy is on the precipice and the world economy continues to worsen with the world’s second largest economy and largest exporter going into the economic tank. As the world economy worsens more, the US will be unable to stand alone, already with a poor, unbalanced economy and an overvalued frothy stock market. Thus the US market will crash before the Fed raises rates, and the Fed will have no more tools with which to fight a crash.
The first group to counter the Fed’s retreat was the Fed Up demonstration. As best can be determined, this get together of working class people and unions was solely a demonstration with lots of emotion and little substance. Yet it received good press. The main concern of Fed Up is to prevent the Fed from raising interest rates indefinitely. They feel hiking interest rates too early would kill the economy and employment.
What is surprising is that this group was not at all concerned about low rates are eating into their savings or pensions. This may be because they have none. Neither did they understand that low rates have caused mal-investment which leads to crashes and further layoffs. For lower and middle class worker, this mal-investment has also created an environment for companies to use profits for stock buybacks rather than employment generating investment.
Additionally, as David Stockman stated, the overall household sector is tapped out and can’t borrow anyway so low rates are irrelevant to this over borrowed sector. Finally in a class war which the left is so happy to engage in, zero interest benefits rich and provide no benefits to poor because they have no access to the capital whatever its cost.
But there is one part of their concern that is valid and was discussed at the APP Jackson Hole Summit, by Rich Lowrie of Put Growth First. That is that the measure of inflation the Fed uses to determine rate hikes is Personal Consumption Expenditures Index (PCE).
This is a watered down version of the Consumer Price Index (CPI), and it also does not accurately reflect the real world in the US. For example the PCE estimates that medical care is 5.0% of the index, when as a percent of the US GDP healthcare is over 18%.
Additionally, housing is estimated by rent despite the fact that 64% of Americans own their homes. Some consumer categories are increased and others are decreased to suit the bureaucratic and political whims. Most of these remaining politically correct categories include significant labor content, so indirectly the Fed is targeting labor costs, possibly more than it is in the real world. The Federal Reserve targets some commodities indirectly, but they don’t target asset prices. This is because the Fed likes to see asset prices inflate unfettered as it benefits the Fed’s financial class sponsors. Another example in the PCE is housing where the Fed uses rent, or owner’s equivalent rent and not housing prices which are asset prices.
So, in this respect the Fed Up demonstrators are right. A fairer way would be to target commodities or gold. The Gold Standard doesn’t target labor costs, but gold, and it is a natural system not a manipulated one that has worked through the ages successfully. It would also hold down inflation so the Fed Up group would not have to worry about increasing interest rates or inflation.
The last event was the APP event which is discussed further in the next two parts of this series. Like the Federal Reserve’s event this was an international one with two British Members of Parliament: (MP) Kwasi Kwarteng, born of Ghanaian parents and author of the most recent War and Gold and Steve Baker, an ex RAF officer who is also an expert on digital currencies; one ex New Zealand MP Maurice McTigue who helped create the “New Zealand Miracle” and is now at George Mason University; staff members from Congress, and other policy think tanks from around the world including English Aussie Philip Barton of the Gold Standard Institute in Vienna, Austria.