Money, Money, Money–Janet Yellen @ the Fed, QE on the rise but slower, and more!

Posted on January 10, 2014 by



We’ve had tons of economic news worth highlighting over the last month, but Christmas offered much more fun than writing blog posts.  So here is a quick review of several economic issues that will continue to be issues in 2014.

First up is the Senate confirmed Janet Yellen as the first female Federal Reserve Chair of the Board of Governors.  This blog has criticized Ms. Yellen before, last year predicting her nomination and decrying her approach to monetary policy.  Nothing new here; my concern is twofold and both are due to Ms. Yellen being a committed Keynesian economist.  First, has she ever met an inflation she didn’t like?  Most people reading this would assume that’s an unfair characterization, but only because they are not familiar with true Keynesian policies which are inflationist at root.  While Keynesians are not necessarily in favor of large inflations, for lower levels of inflation they consider the costs to be low (some even consider low inflation to be beneficial), while the potential benefits in terms of increased employment and output to outweigh the costs.  This assessment is primarily because of Keynesian aggregative methodology; they fail to consider the differential effects of monetary injection in the economy (called Cantillon effects) as inflation bids up some asset prices sooner than others.  Perversely, the current “easy money” policy is benefiting the weakest financial assets the most.  Yet no one should miss my concern with Ms. Yellen, it is not with Ms. Yellen per se, but rather that anyone  would have the hubris to think they know what the “correct” level of interest rates ought to be.  Bereans are against price fixing of all kinds, including interest rate fixing.

This leads to our second discussion item, the Fed has finally decided to taper.  What is a taper?  Well, it simply means we won’t inflate as much as before.  But many commentators suggest that even with the taper, there is on the order of $500B MORE QE in the pipeline!  When you realize the Fed started this novel experiment with a balance sheet of less than $900B, you see even the taper is a significantly increased amount of inflation.  While it hasn’t led to CPI inflation, there is continuing asset inflation–such that we don’t really understand what asset prices really ought to be.  Jim Grant has his particularly apropos way of describing it:

Further, QE has undeniably been of benefit to one group:  those who hold financial assets.  As QE works its inflationary magic on assets, those who hold financial assets reap large rewards.  The irony is that this largely benefits the “top 1%”; QE has led to increased inequality (since many of the very wealthy such as CEOs have their compensation tied to their company’s stock price).  So under the Obama administration and the Fed’s QE, median income is down (even since the so-called recovery) while income inequality is up.  Maybe its time to change policies?

But maybe we should have the rich pay higher taxes?  That would help with inequality, wouldn’t it?  Well, the latest CBO report on the distribution of taxes shows that the lowest quintile pays negative income taxes (9%, through federal programs such as the Earned Income Tax Credit) while the top quintile pays 68% of all federal taxes (income, social security, etc.).  We continue to have one of the most progressive tax systems in the world.  Its not clear more is better.

But enough negativity–there are a couple of huge stories over the last month that portend very well for the future.  First up, Mexico is getting with the program and opening up their country to the American “energy revolution” of shale oil extraction through fracking.  Foreign investors will be allowed to invest in PEMEX, which was formerly the “third rail” in Mexican politics.  North American energy IS the new world order, whether Mr. Obama approves Keystone Pipeline or not.  This is going to make Mexico an even bigger competitor to China in the low-wage manufacturing, and lead to further economic integration.  Don’t be surprised if this doesn’t lead to a great sucking sound (former presidential candidate Ross Perot’s line about NAFTA) in reverse, as opportunities open up in Mexico.

Finally, in a huge victory for Boeing and union workers (but not unions themselves), Boeing reached agreement with its union on expanding 777 production in Seattle, with pension reform.  Boeing’s ability to take production to right-to-work states changed the calculus.  Why do I think this is good?  The change from fixed benefit to defined contributions (401k type) gives workers more control and less dependence on company or union promises.  Further, the competitive pressures from non-unionized workers continues to pressure unions themselves to work more cooperatively with management.  And in this day of increased polarization politically, increased cooperation is an encouraging sign.

Posted in: Federal Reserve