The 'Rising' 2015 Dollar Was Not That at All
In April, the Federal Reserve Bank of St. Louis published a study by Assistant VP Bill Dupor examining the effects, as much as one may be able to, of the American Recovery and Reinvestment Act. As Mr. Dupor notes, the "stimulus bill" was tagged at $840 billion and was given three distinct goals: create new jobs and save existing; spur economic activity and invest in long-term growth; and, "foster unprecedented levels of accountability and transparency." At least on the last count there is great success, as the word "stimulus" has taken the pejorative from how open the lack of fulfillment was.
Of greater concern now is why all that failed. Unfortunately, economics requires actual regressions in order to absorb what might fairly be called common sense, and Mr. Dupor provided just such an effort. His focus was on the grants made to public school districts, a non-trivial subset both in terms of quantity and focus; for all the bluster about the economics, there was and is little doubt this was intended in great part as a bailout of the states. By his count, Dupor calculates that public school systems received $64 billion.
In the end, after surveying 6,700 districts, the study found, "increased education employment by 1.5 persons relative to a no-stimulus baseline." That result was not statistically significant from zero, which means they couldn't really be sure there were any employment gains via the ARRA. And even of that 1.5 job improvement, all of it was non-teaching staff or administration. The reason for the lack of sustained employment was, as I wrote above, simple common sense:
"Moreover, districts that received relatively generous ARRA grants may have been less willing to hire new staff for risk that, once the short-lived grants were spent, the new staff would need to be let go."
That is the basis, essentially, of Milton Friedman's permanent income hypothesis as ported over to the public sector. School districts, in receipt of large federal grants, treated them as almost lottery proceeds, windfalls to be dispersed in special items and not as an increase in their baseline. There was more than a little prudence to that accumulated view, as schools were uniquely situated to appreciate the effects of the Great Recession upon revenue. Since they receive most of their income via real estate taxes, to increase spending on a permanent basis would have meant taking the view that the ARRA itself would cure the ongoing housing bust in addition to ending the recession and restoring full economic existence.
Orthodox economics spends a great deal of time and effort (almost all its effort) on psychology and even the psychology of a recovery. In this case, that was almost literal as school districts were in need of being convinced of the power of recovery before acting as if there was a recovery. As the St. Louis Fed study lays out, despite a sharp rise in the median expenditure per pupil from about $10,700 in 2007 to $11,300 in 2008, rising to a plateau of $11,900 in 2010 and the full ARRA, the recession still carried out recessionary pressure.
Economists will respond that at least there was some spending in all of it, as school districts may not have hired any more teachers (or anyone, for that matter, created or saved) but they at least built some buildings and engaged in some projects that would not have otherwise occurred. In short, it was better than nothing.
That sentiment dominates not just economics but apparently wider views on the subject. If there is any benefit in this respect for the ARRA it is that it may have at least softened that accepted "wisdom" considerably - as "stimulus" is no longer unquestioned. The theoretical basis for the approach contains enough logic as to be plausible, as the phrase "your spending is someone else's income" sounds more than respectable. Taken to its extreme, as it has during this "recovery", it becomes not just an economic issue but a moral imperative (Paul Krugman, among others, counts "austerity" in this broad sense as "heartless").
Even that moral appeal is a clue as to the lack of real basis behind the theory. In other words, if it was sound in observation there would be no need for any other justification. The question really is about that, as is all this "stimulus" really better than nothing?
Efficiency is the first rule of sustainability, and long-term economic growth depends almost completely on the dynamic nature of efficient utilization. An economy that is sublimely efficient will grow robustly while one that is not will shrink; recession itself is as much an organic attempt to restore efficiency by removing or reducing inefficient activity and/or businesses and processes. Orthodox economists accept this idea, as even Dr. Krugman has admitted that he would prefer not to incentivize "wasteful" activity, but that there is, in this condition, no choice.
This is where mainstream theory goes off into mathematical fancy, and almost purely so. You will hear the words "liquidity trap" and "zero lower bound" as if accessing those points changes the rules of human nature itself. In September 2011, Krugman suggested that in a "liquidity trap" the broken windows fallacy ceases to be a fallacy at all. In that specific rant, he lamented the lost economic activity that would have, in his view, resulted from new and harsher ozone regulation. This new fiscal interference would have been an agent of redistribution, again someone's spending is someone else's income, since many industrial firms would have been forced, not by true economic and profit considerations but by government fiat, to update equipment.
Easily recognizable in that "equation" is Bastiat's broken windows postulate; that those industrial companies will have to cut back in other areas in order to pay for the ordered upgrades. The gain from those that make these new ozone-compliant (actual compliant to regulations, but those may well have been intended as such for all it matters) machines will be netted out by cutbacks to other vendors. What results is not a net gain to the economy but rather, again, pure redistribution on an arbitrary basis.
In a "liquidity trap" situation, Krugman argued, that no longer matters as what really matters is that the redistribution creates some transactions just for the sake of transactions. Again psychology, as that "pump priming" will somehow become a visible signal to other businesses to begin their own restart of economic health - taking "cash" that is sitting "idle" and forcing it to be deployed and circulated no matter the reason. This is a highly mechanic view of the economy, as if it were a machine in need of motion rather than an organism in need of the right motion.
Even from that mechanicalistic perspective, it just doesn't hold. Once more, the assumption that doing something, anything, is better than doing nothing, or more specifically, allowing the economy to do nothing, isn't straightforward especially in the form of redistribution. Orthodoxists assume that forcing transactions will be a positive signal no matter how much is cut back elsewhere, but they fail to appreciate the negative offsets are not limited to the broken windows. In other words, other businesses appreciate very much the visibility of redistribution, picking winners and losers arbitrarily to economic consideration. If the government will force industrial businesses into costly transactions in the name of just ozone, they might also do that to me for which I will have to adjust (cutback) my own considerations just in case even though I have nothing to do with ozone. The true emphasis is taken not on the transactions but the reasons for them!
That has been actually accepted, though in the results if not yet orthodox acceptance as to why; economists call this hysteresis which attempts to incorporate all negative "recession" factors as if they are exclusive to an economy's reluctance toward recovery. This is a fancy, mathematical term that attempts to define the amount of "energy" with which an initial shock or force needs to be applied in order to overcome the accumulated inertia (for whatever reasons). Like attempting to start rolling a boulder down a hill, the orthodox view surrounding the Great Recession, but only after it was clear it was great, recall that none (NONE) of them were aware of it while it was happening let alone in anticipation, was that it would require a great deal of force to get it all started. When it didn't work, transparency wins, they went back and recalculated hysteresis - that it wasn't enough because the problem was bigger than they had initially calculated (again the measurement problem). With "stimulus" left in disgrace, repeated QE was all that remained with enough expected power.
But the goal was, again, simply to conjure transactions for the sake of transactions in order to overcome the initial though only assumed tendency of the economy in recessionary state to stand still. On this count there are now two problems, the first relating to the hole left by the Great Recession (hysteresis still) and the other what is being called secular stagnation. If hysteresis refers to the amount of force to get the boulder rolling down a hill, secular stagnation is the slope of that hill. In other words, after the $840 billion disgrace and four QE's chalking up $3 trillion in idle bank "reserves" only got a minimal start, and temporary stop-go at that, economists have now decided that economic potential has been impaired "somehow" so much that this is the best that can be done no matter what. The slope of the hill (potential) "must" be so shallow and flat that the calculations start to reach toward infinity (thus broken windows is no longer a fallacy to Krugman) on the hysteresis part.
This is, of course, looking backward upon the whole enterprise. Everything that was done "should" have worked, therefore the fact that none of it did needs to be explained in such a manner that preserves the "should." In this case, however, orthodox economics broaches perilously close to observation and empirical disproving. One of the great tenets of this mainstream view is that the economy is the economy, and recession is not a part of "potential." A recession is thus viewed a temporary "shock" that departs economic trajectory from its rightful path, but is not itself an permanent alteration of that path.
To accept that the Great Recession might be responsible for "secular stagnation" in existence rather than theory would be to dismiss a great deal of all this hysteresis and "stimulus" nonsense. That is the ultimate challenge for orthodox economics to stay orthodox economics, to admit how "potential" suddenly and very sharply drops right at the Great Recession but to deny that very obvious relationship. This ends up taking economists in very strange and often absurd directions, such as being unable to simply recognize that the labor participation problem that amplified, again, during the Great Recession is economic in nature; clinging instead to the idea that millions of Baby Boomers saw the Great Recession and its dire aftermath as the perfect opportunity to retire.
The grand obstruction of redistribution is that it is cumulative. If ozone regulations don't lead to the great recovery spark and instead more businesses cower in anticipation of the next round of forceful redistribution, a dynamic hysteresis of sorts does apply - you need to go bigger the next time. But if the next time is "inflation" in a broad sense, as QE is designed, then you should expect the same thing on a grander scale (as Japan is determined to demonstrate conclusively for all time). If businesses might worry about regulation as a deterrent, then QE as intrusive of expectations about price stability is contra-conducive to the very consumer behavior it seeks to foster. The more you do it, the less it happens (Japan, again, is the perfect example in the wake of QQE).
What is undone through all this experimentation is that it is decidedly not better than nothing; that monetary and fiscal stimulus may have some short, positive effects on forming random and ill-patterned and unrelated transactions but the cost of those is in greater disturbance of unseen productivity and inefficiency. Systemic inefficiency would, in plain English and common sense, erode potential. Should these go on long enough, it would not even be surprising to find re-recession on a wide scale.
To even suggest a recession at this point in 2015 is treated as almost laughable by economists, though not nearly as much as it was "impossible" just a few months ago. The speed with which the downside has suddenly come into the realm of probability is sensational, in the literal sense of the root word. I'm not speaking about the ongoing decimation in Japan or the repeated intransigence of Europe to "fix" Greece or the continental economy despite the ECB doing huge monetary experiments now into their sixth year, but rather here in the US.
Retail sales have dropped to flat, which actually makes it sound much better than that; flat retail sales are recession. For all of 2015, through June, retail sales (ex autos) averaged just 1.15% (year-over-year), the lowest 6-month pace, by far, since February 2010 (for comparison purposes, retail sales grew steadily at 6-10% in actual economic advances). That average is lower than all of the dot-com recession. Wholesale sales fell by 6.8% in May (the latest figures), a sizable contraction that just does not occur outside of recession. It was the fifth consecutive month of contraction, after declining nearly 4% in April. In other words, these are not one-month anomalies as they are dismissed or ignored in the mainstream.
Exports collapsed by 7.2%, also for May, which far exceeded the prior "cycle" low of -2.7% in March 2013. Unlike early 2013, at the foot of the 2012 slowdown, May 2015's contraction is, again, the fifth consecutive in a gathering accumulation of "negative growth." And where economists will be quick to blame the dollar for that trend, imports fell by an eerily similar 7.1% in May, after dropping 5.8% in April (port strike resolution be damned) obliterating that common misperception about trade and currency. Instead, imports are usually blamed on petroleum, as the parade of excuses grows "unexpectedly" long, more desperate and lingers far past the seasonal change toward spring and now even summer.
That absurdity was taken apart by the Bank of Canada, of all institutions, on Wednesday. The Canadian economy is, and has been especially of late, predicated on all sorts of crude oil production. It hasn't merited much attention here, but the Canadian economy has suddenly found itself very likely already mired in recession. GDP "unexpectedly" contracted in Q1, as the US, but is likely to be worse in Q2. The Bank of Canada's projections for Q2 GDP just three months ago were showing +1.8% and what was expected as the rebound from the somehow global "anomaly" (Q3 was forecast for +2.8% and perpetual happiness thereafter); the latest update cuts Q2 down to -0.5%!
In taking these new negative numbers, now lasting more than half a year, the Bank of Canada cut its main reference rate while also displaying unusual candor surrounding its confusion about all this. In its statement, the Canadian central bank admitted it was very troubled by a "puzzling" and serious "stall" in non-energy exports. With the US as its main customer, import declines here meet Canadian recession rather perfectly - so much for US "demand" which has been the subject of "aggregate demand" theories in uninterrupted harsh extensions since 2008.
China's struggles are much more well-known, but are still pretended as idiosyncratic to China's bubbles. There is some truth to that, but only insofar as it, like Canada, relates to US economic disassociation. In short, the Chinese built those bubbles on the premise that it would be a bridge out of the Great Recession in anticipation of global rebirth, especially in the US. The Chinese economy had been essentially built upon the glowing eurodollar standard as it had arisen out of the late 1990's, and exports to the US were its main engine. From May 2002 until July 2007, import growth from China averaged 23.5% monthly year-over-year gains, being in single digits only three times out of those 63 months. To say that US "demand" has not lived up to expectations is a historic understatement (the average since the 2012 slowdown is 5%, not even in the same ballpark as what would be needed to support such biblical financial imbalance).
Brazil has found itself already mired in both recession and +8% inflation (the same thing, but orthodox economics treats them as unrelated), which will see, if projections hold and don't actually deteriorate any more, GDP of -1.5% for all of 2015. That would be the worst growth rate in decades.
The Brazilian case, as with China, is as much about the "dollar" as anything else. When the "dollar" first started to "rise" in the middle of last year, it was ignored. By October 15, and 12 minutes of computer trading (sarcasm), the narrative shifted to a "strong dollar" indicating how great and good the US economy was and will be - not just the cleanest dirty shirt decoupling, but the grand hope of all global recoveries. You no longer hear much about the strong dollar anymore, which exemplifies more than anything the singular paradigm of the entire global economy and its inability to find recovery.
In other words, under the wholesale, eurodollar format (and its global "dollar" short), the rising dollar was not that at all, but rather almost its opposite. The sudden and sharp increase in the dollar "price" was instead indicative of tightening global financial conditions, which almost perfectly predicted the growing global economic chaos of 2015 so far. It was a marker of amplified financial instability as an expectation and relation of economic instability.
To my own view, economists using the term "strong dollar" to describe what was happening wasn't just a matter of correctness but almost visceral rejection and frustration. It was orthodox economics that intended to destroy hard money as a means of being able to impose just such controls (forcible redistribution especially in "money") as I have described here. The true strong dollar was one that meant convertibility (either converting deposit liabilities to currency, or further converting currency to gold or silver), or actually the lack of it. That meant that the economy was itself strong and stable, with a financial system working in concert and in favor of it so that convertibility kept to a minor degree. The key word in all of that is "stable."
The "rising dollar" of last year and earlier this year, again in anticipation of global economic upheaval, was simply another form of instability nearly the opposite of what passes for "inflation." The "dollar's" rise was, for example, directly Brazil's "inflation" and thus its sinking into deep recession. And that is what we are really talking about in all this recovery/non-recovery, hysteresis stuff. The various forms of "stimulus" are all different means of instability with which it is expected will just conjure stability. It does not matter the grandiose, sweeping academics that accompany all of it, as the true basis of any recovery is not the bland clustering of generic transactions but rather opportunity.
Instability is the enemy of opportunity in every case. Instability erodes honest trade, and, as I mentioned above, it is cumulative. If there is to be global recession this year, which even mainstream commentary has begun to at least stop laughing about, a major downgrade in economic assessment itself, it will come without any "shock" in violation of the basic pillars of how orthodox economics views the economy itself. That is as much owing to a (gravely) mistaken view of money as to how an economy actually functions. We just might see what repeated and intentional instability does when left open for so long; the accumulated downside of "stimulus" that shallows the economic potential. In other words, economists, who laughed at the possibility of recession in 2008, have learned nothing instead remaining quite committed to what is really monetary socialism (the economy as only an aggregate devoid of individual freedom to manage individual portions of stability). Maybe that is itself a type of inverted currency, as the inability of economics to progress back toward actual market-based views is immeasurably tied to the incapacity of the economy to do the same. In both cases, potential is diminished by the unstable effects.
