Friday, February 10, 2012

Our Frustratingly Powerless Monetary Policy

Click to enlarge.

Theory #1: The intended consequence of ZIRP is to create wage inflation so that people can afford to drive to work, can afford to shop at this country's many shopping malls, and can afford to live in their homes.

Theory #2: The unintended consequence of ZIRP is to create oil inflation so that people cannot afford to drive to work, cannot afford to shop at this country's many shopping malls, and cannot afford to live in their homes.

What happens if we combine the two theories? You end up with frustratingly powerless monetary policy.

February 10, 2012
Fed chair: Housing market impedes economic recovery

The lousy housing market continues to be a "key impediment" to a faster economic recovery, Federal chairman Ben Bernanke told home builders Friday in Orlando, Fla.

In a speech streamed live on the Internet, Bernanke said while resurgent housing markets had stimulated recovery in the past, that's not the case this time.

It has been a frustratingly slow recovery, Bernanke said.

See Also:
We're Infected (Musical Tribute)

Source Data:
St. Louis Fed: Unemployment Rate
St. Louis Fed: Spot Oil Price: West Texas Intermediate
St. Louis Fed: CPI


Stagflationary Mark said...

Please note that the 2011 data point in purple on the chart is not a 5 year average.

It shows the values in December 2011 only. I put it on the chart so that you could see the direction in which we are currently being dragged (up and to the right on the chart).

Stagflationary Mark said...

In other words, we can expect the blue data point showing the most recent 5 year averages to meet the purple point.

How they meet is uncertain.

An optimist might suggest that unemployment would fall to 7.7% and oil would fall to $85 per barrel as the purple point moves to meet the blue point.

It could happen but I am not all that optimistic.

Stagflationary Mark said...

Bonus thought.

I would not rule out up and to the left (lower oil prices, higher unemployment), especially once the next recession hits.

That's assuming the frustratingly powerless Fed hasn't permanently removed all possibilities of a future recession, lol. Sigh.

Mr Slippery said...

Ben made a remark this very week that the 8.3% unemployment rate doesn't reflect the weakness in the labor market. I agree with him.

The way the UE is measured causes it to ignore a lot of unemployment people, especially long term unemployed. Given enough time, the unemployment rate would drop below 5% while the mean duration of unemployment went up to 100 weeks or more. The one metric doesn't capture the situation very well.

I've had so much side work lately that I haven't done much posting. My spike in work load is also not a good data point, because I am getting ready to lose either 5% or 10% of my income due to furloughs in my day job. Ouch.

Ralph Musgrave said...

I fully agree that monetary policy is a farce. Did a post on my own blog on this just recently:

Strange how economics bloggers can see this but so called “professional” economists apparently can’t.

dd said...

Theory #3: The intended consequence of ZIRP is to create consumer inflation that forces homeowners to refinance, students to take on debt, and everyone to use credit cards so they can afford to live.
Combine theory 3 with wage stagnation and it's a powerful monetary policy that forces citizens into increasing debt and pushes them into credit card fees and interest @ 17%.

Anonymous said...

Fed Plays Wall Street Favorites in Secret Bond Deals: Mortgages

Stagflationary Mark said...

Mr Slippery,

My spike in work load is also not a good data point, because I am getting ready to lose either 5% or 10% of my income due to furloughs in my day job. Ouch.

Ouch indeed. Sorry to hear that!

Stagflationary Mark said...

Ralph Musgrave,

As a saver (and this country does have many of us contrary to popular opinion), the lower interest rates go the less I can spend.

You covered this of course.

4. Low interest rates can have a DEFLATIONARY effect (pointed out by Warren Mosler). If rates are cut, the central bank will then pay out less by way of interest. That is, less new money will be injected into the private sector.

A 1% drop in long-term real interest rates extrapolated into the distant future means that I have to drop my spending by a considerably larger number than 1% (if there is to be any hope of my nest egg not running dry before I die).

It is the main reason I locked in a relatively good real rate (2%+ over inflation) back in February of last year. I did not take the advice of so called “professional” economists. Whew!!

Stagflationary Mark said...

dd (& Ralph Musgrave),

Ralph Musgrave's post also covered that in item #10.

10. As to the possibility that credit card spending is influenced by changes in a central bank’s base rate, there seems to be no link between those rates and credit card rates. See here.

You'd think that ultra low interest rates would feed into credit card rates. Mine hasn't. Fortunately, I pay mine off each month. The same cannot be said of everyone though. Sigh.

Stagflationary Mark said...


From your link...

“It seems odd that if you want to get the best possible price that it wouldn’t be open to anyone who wants to put in the most competitive bid.”

Yeah, you'd think that. Wouldn't you? Sigh.

Jazzbumpa said...

.513 isn't the greatest R^2, but the walk up and down the general vicinity of the trend line is enough to make you go, "Hmmmm . . ."

Most of the bad spread is in the $50 to $80 range, where oil prices are off the extremes, and other bad things can predominate.

I'm not convinced Fed policy is ever effective; at the ZIRB nothing good comes of it. We have almost all the QE $$$ sitting in excess reserves, along with highly leveragd commodity speculation, while U6 (looking distressingly like a dragon in profile) has scarcely budged in 4 years.

It's really a shame the U6 data only goes back to '94.

So just exactly how fucked are we?

Stagflationary Mark said...


Since I am the writer of the Illusion of Prosperity, I will assume that your question is rhetorical. Sigh.

Jazzbumpa said...

Mark -

Well, no.

I was hoping that in your exalted position as Illusion-meister, you'd be able to quantify to at least the 2nd decimal place, point out where we are now, and demonstrate the win/loss trajectory of the resulting exponential curve.

On second thought, I guess that is asking rather a lot.


Stagflationary Mark said...



The tool I use to determine how f**ked we are is currently on loan to Greece.

ATHENS - Historic cinemas, cafes and shops went up in flames in central Athens on Sunday as black-masked protesters fought Greek police outside parliament, while inside lawmakers looked set to defy the public rage by endorsing a new EU/IMF austerity deal.

Fritz_O said...

I have to wonder how motivated the Grecian policemen/women are.

Your holding back folks who don't want to see their wages/bennies cut and you're getting memo's from your boss telling you your wages/bennies are being cut.

How long before they begin hugging the protesters and take up the cause?

Wait a Greece outsourcing its police force? So many angles...

Stagflationary Mark said...


I have to wonder how motivated the Grecian policemen/women are.

It probably depends on what was being shown at the historic cinemas before they were burned.

For example, I find it hard to believe the police would stop a historic showing of Serpico.

The true story about an honest New York cop who blew the whistle on rampant corruption in the force only to have his comrades turn against him.