Ben Bernanke was talking up the economy yet again yesterday, and it appears Floyd Norris got the same memo.
I must digress a tad by giving The Daily Capitalist’s translation of Bernanke’s remarks:
Since August when we began to flood our primary dealers in Wall Street with newly printed money the market went up because they used the money to buy financial products, including stocks. We are trying to cause price inflation because the majority of the FOMC is concerned about price deflation. If we cause price inflation then we will fool everyone into thinking that because prices are going up, such as in the stock markets, that it is real growth even though it's just price inflation. Even better the national debt can be paid down with cheap dollars. Yields on Treasurys initially went up because the bond vigilantes aren't stupid: they know it will cause inflation so they wanted higher yields. But, ha, ha, the Euro went into the tank because of the PIIGS and money flooded back in to the US and drove Treasury yields back down, for the time being. Screw the vigilantes. The same thing happened when we tried QE1, but as we all know, that failed and we are desperately trying again because we don't have too many arrows left in our quiver. Hey, if it had worked, would we be doing QE2? We are desperate because if unemployment doesn't come down, the Obama Administration will be screwed and I'll lose my job. We are ready to do QE3 because we don't have a clue what else to do.
Now to Norris’ truly bizarre column, in which he argues that circumstances now are very much like those of 1983, when forecasters were not optimistic about the odds of unemployment falling quickly, when lo and behold, it did.
The problem is that there are some of us who are old enough to remember 1983, like yours truly. And 1983 has about as much resemblance to today as a merely badly out of shape athlete does to one who is in the hospital and is refusing surgery (or in our case, structural change). Even though I do have the bad habit of reacting strongly to nonsense in the MSM (it’s such a frequent occurrence that I should be used to it by now), I expect more from Norris, who has to know better. I sent a short set of comments to a jaded economist colleague who also remembers 1983 well (and has also analyzed that period), with my message starting, “This is complete horseshit and Norris should be embarrassed.” His reply, “Yup. Totally stupid.”
To the particulars of the Norris piece, “From 1983, Hope for Jobs in 2011“.
Norris makes a simple numerical comparison: In January 1983, unemployment fell from 10.8% to 10.4%. Most economists dismissed the change because unemployment had been stubbornly high for five years; this just looked like noise in the data. Oh, and the stock market had rallied sharply, but a lot of people also discounted that because they didn’t see a big change in the real economy. Norris suggests the fourth quarter GDP release, which showed strong spending growth but not much of a pickup in income, will be revised, as in 1983, to show better results. He also points to evidence that consumer pessimism is falling, which is better than them getting gloomier but a long way from optimistic results.
Now why do I find this so annoying, when on the surface it does not look all that objectionable? Let’s go back to the late 1970s and early 1980s. The country had been mired in persistent high inflation. The stock market had been in firm bear territory since 1973; the famed Business Week “Death of Equities” cover was August 1979.
And why was inflation so bad for the economy? First, it leads to high interest rates, which means high financing costs. That also means high discount rate, which make long-term investments of any sort (capital investments, equities, which in those days were long term investments) look terrible. Second, it means businesses really do not know where they stand on a real economic basis. That point cannot be stressed strongly enough. The US never developed good inflation accounting (I’m told they have in Brazil), and since line items in both the balance sheet and the income statement inflate at different rates, investors and the businesses themselves are a bit fuzzy on where the stand on a real economic basis, which also makes everyone a bit edgy. Worse, capital intensive businesses are punished, since their depreciation is based on historical cost, which means they are not getting a sufficiently high tax break and thus are being overtaxed.
Norris bizarrely completely ignores the big action in the real economy: the punishing wringing out of this inflation by Paul Volcker’s monetary tightening in 1980 to 1982. As a paper by Marvin Goodfriend and Robert King in 2004 observed,
The change in inflation that occurred during 1980 through 1984, when the Federal Reserve System was headed by Paul Volcker, is arguably the most widely discussed and visible macroeconomic event of the last 50 years of U.S. macroeconomic history.
I was on Wall Street during this period. Everything stopped when the weekly money supply numbers came out on Thursdays. It is hard to convey how bad the markets were then. High credit quality companies were paying 14% to 15% to sell bonds. Companies were trading at low prevailing PEs and there was no depth in the market, it was impossible to get companies to issue stock because they hated their stock price. Bank borrowing rates went to 22% and they were hemorrhaging cash, even on their credit card portfolios.
Even though the histories of this period show that the Fed fund peaked in June 1981, it was not at all clear that the drying out process was over. Volcker had wanted to inflict more pain but had been forced to pull back by the Latin American crisis. The Fed funds rate remained over 14% through October 1981, and fell to over 12% in December, but this was not taken seriously because liquidity demands tend to fall at year end. And indeed, the Fed funds rate was back above 14% in February and stayed high through June. It then fell to 10% by early August.
There was a specific day that August, it was the 12th or 13th, when word went out through Goldman that the tide really had turned, that the stock market bottom was in and the Volcker hair shirt days were over. This wasn’t client talk, although it was also conveyed to clients. It was a collective recognition that a big change was now official, much as a big break in a long term pattern of Treasury bond rises in June 2007 was seen as another sea change, that the disinflation that had started in the Volcker era was now over.
The employment gains that Norris points to in 1983 were due SOLELY to the fall in inflation and interest rates. Funding costs fell sharply, business confidence rose, and investment, which had been on hold for years due to economic uncertainty and high funding costs, took off.
The fact pattern could not be more different now. We don’t have massive disinflation under way. We don’t have pent up investment. Even if the economy were to mend a bit more, large corporations are now habitual net savers. And consumers are still under a lot of pressure. The job additions have an unprecedented proportion of temporary hires, hardly a strong sign of business confidence. Housing still has further to fall, and even if we have some short-term reversals, the trend of consumer deleveraging is likely to continue.
So it would be better if I were wrong, but the fact that Norris has to make such a barmy case for optimism does not exactly inspire confidence.
In days of yore, Goldman was not responsible for everything:
“However, Kaufman's prediction on August 17, 1982 that interest rates would fall sparked a stock market rally that can be dated as the beginning of the 1980s bull market.”
http://en.wikipedia.org/wiki/Henry_Kaufman
John,
You are reading something into my post that was not there. I made it very clear the feeling that the market turn was for real was internal to the firm and visceral. This was not a “get on the horn and pump clients” directive. I’ve seen those happen and the firm did not make a market call that week. This was word of mouth, both trader sense and confirmation by a strategist who was very good on fairly short term calls.
Now given that Kaufman was basically getting tips from the Fed (not to diminish him, I worked briefly at Salomon and he was extremely impressive, but I’ve later been told by students of the Fed that he also had special access), and had been spot on accurate during the bear market (he was at the very top of his game) he had far more pull than anyone at Goldman. But Goldman may have gotten the same memo as Kaufman (I am very clear on the dates, and it was before the 17th) and the word went from the desks directly through the firm. I was on the banking side, and the corporate bond trading keyed off the Treasury trading, I saw a great deal of the corp bond traders but not those on the other desks, so then and certainly now I’m not certain who was involved in making the determination, but it went through the firm like wildfire.
You have it very right.
I recall Mr Kaufman’s prescience and always assumed that he had a friend at the Fed.
I also recall the fellow that preceded Mr. Kaufman at Salomon, Sidney Homer, when it was called Salomon Bros. Hutzler. I have a copy of ‘A History of Interest Rates’ as well as a copy of Inside the Yield Book. I used a yield book and a Friden Calculating Machine, I called the back field in motion. I traded bonds and few other things.
What you describe is the understanding that a paper trail will not be made. There’s also a book ‘Fleecing the Lambs’ which provides a fair description of the ethos that permiates Wall Street. What it describes makes current events very understandable. Professor Black writes very well and does indeed follow the money and get to heart of matter. It’s a criminogenic environment. Now, the truly sad part of all of this is that what the BLS publishes does not do a very good job of measuring the true level of employment and unemployment. They publish 6 series and the sixth comes the closet to describing what is really in operation. Why MSM insists on focusing on the third series has always puzzled me. Can someone explain why it is that MSM truncates the story?
I’ve read a lot of Mr. Norris’s stuff. Occassionally its useful, mostly not. In fact, I find very few financial writers who consistently get the story right. For your part, you tend to get it right and thank you for that.
I think the term ’special access’ is somewhat objectionable, barring further details.
Henry Kaufman was at the core of the monetary policy establishment and worked at the Fed with Paul Volcker from the time they were both relatively junior. No different from (name any top financial economist on Wall Street). At the time, the community was even tinier and more incestuous than today.
Salomon was the axe in the Treasury market and broader bond market to an extent that has not been seen since (although the market was smaller). They had far better distribution and color on what people were doing and thinking.
There was a small group of people who understood what it meant when Volcker said the Fed was moving to a strict money growth band, and what it meant when he said they were going to diverge from it, since it seemed to be leading to permanently high unemployment even after the back of inflation had been broken. Kaufman was one of them, (also IIRC Al Wojnilower at First Boston, I forget which was Dr. Doom and which was Dr. Gloom), but Kaufman had a more powerful distribution platform in the Salomon sales force, so everybody reported on Kaufman.
Anyway, that’s how I remember it … I don’t think Kaufman had or needed special access. As head of research Kaufman was holier than the Pope about a strong independent department with a strict Chinese wall, and left Salomon after they started doing things he was openly skeptical of, like trying to compete with Drexel in junk bonds.
‘Ol Floyd the barber Norris is not the brightest tool in the shed but he is a still a tool. I have made so many comments making fun of this dim bulb capitalist tool at the NYT website that I think that I am banned from making any comments about Norris. Comments I leave at the NYT regarding Floyd don’t show up any more. I am very proud to have triggered their displeasure.
Everyone has been told to put their happy faces on.
1983 is the year the Reagan tax 1981 cuts took effect. I remember the economy sat on its hands for two years until they took effect.
Followed by the Tax reform act of 1986, which closed a lot of loop holes for the small independent investor to risk capital in local business opportunities. I’m referring to the “passive income rules” and “at risk” rules disallowing write-off of losses (granted there were a lot of tax abuses and dodges in this area).
It seems to me this is when globalism and the “age of the multi-national” really came into their own too. Exporting capital and intellectual property to cheap labor sources, cost accounting tricks to manipulate the reported source of income to the lowest tax jurisdiction, setting up off-shore financial HQ and finance centers to shelter taxable income, global strategies to avoid repatriation of earnings and the resulting taxes. Refining the art of playing local tax jurisdictions, as well global labor markets off against one another in a race to the bottom. A time when companies like G.M. and General Electric discovered it was more profitable to be a finance company than a manufacturer.
The age when the “steel belt” first showed real signs of the erosion and decay that eventually led to naming it the “rust belt”, and the factories and foundries in the north and small town mills in the south all closed their doors.
I could go on but I know it’s only perspective of a blue collar sort of guy. I know there is plenty of blame to go around. Hubris and arrogance on the part of the average American. Selfishness and greed of the labor unions and so on and so forth. But I am still amazed that we just sat back and let it all happen and especially disappointed that the so called “leadership” in Washington not only let it happen but aided and abetted it.
I might add the time when the temporary workforce industry began it’s explosive growth. Another pet peeve of mine.
test
Another linear economist? When will they ever learn.
http://www.calculatedriskblog.com/2011/02/norris-from-1983-hope-for-jobs-in-2011.html
In the early eighties,I remember going into the brokers lounge off the Comex floor with my buddy Ed Zack and waiting for the money supply numbers to print off the teletype. That was years before I realized the FED was a Paper Tiger. Or, maybe not….they DO have the power to cause harm, and make bad situations even worse.
Hi Ed.
Yves
Thank you for another illuminating comment. Sadly, I too remember the August 1982 turning point very well, being in my employers dealing room at the time.
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