Recession without Romance

[GRG55]

Re: Recession without Romance

I'd take all of these projections with a grain of salt, especially now. The following is instructive.

Federal Reserve Bank of Minneapolis Quarterly Review (pdf)
Vol. ol. 22, No. 4, Fall 1998, pp. 3–12
Revisionist History: How Data Revisions Distort Economic Policy Research
David E. Runkle, Research Officer, Research Department
Federal Reserve Bank of Minneapolis

The paper has the usual disclaimer:

However, our most successful forecasts of future Fed behavior is based on these papers. In spite of the disclaimers, you can assume that these research papers mostly reflect official policy.

Apparently worried that the BEA staff might be offended by his conclusions, the author offers the following note:

His conclusion:

After watching this process for over ten years, my advice is that as we go into a period of flux, the economic data are going to become increasingly volatile, unreliable, and irrelevant. As happened in the early 1930s, as the fundamental structure of the economy and financial markets had changed, the Fed will be looking at and reacting to the wrong data. This is why we have repeating the following since 1999, because it will apply to the future period of change which is now, eight years later, upon us:

For the foreseeable future, no data are going to be as reliable as what the community collectively pulls together by looking out the window and reporting what we see.

Thanks. The referenced paper was instructive as you said.

As for taking the Fed's forecasts with a grain of salt, here's someone of advanced years that apparently agrees with you...

Mrs. Moskowitz Has Some Input for Mr. Bernanke:

By Caroline Baum
Nov. 23 (Bloomberg) -- Dear Chairman Bernanke:
I read with interest your speech of Nov. 14 in which you outlined the Federal Reserve's steps toward greater openness. I was particularly interested in reason No. 4 on the ways in which transparency increases the effectiveness of monetary policy. ``Open discussion of the central bank's analyses and forecasts invites valuable input and feedback from the public,'' you said.

Chairman Bernanke, you don't know how good it makes me feel to know that you find my input valuable! Your predecessor, Alan Greenspan, wasn't interested in hearing from me. He wasn't much interested in hearing from his policy committee either, based on what I've read.
I wanted to wait until you and your colleagues released the new three-year economic forecasts before I wrote you with my ideas and questions. Now that I've digested the information, the numbers and the distribution of participants' projections (OK, I had some trouble with the last one), I'm ready to rock.

Let me start by saying I'm all for better communication. You can't imagine how frustrating it is straining to hear Mrs. Olson at our Friday bridge game here at the assisted-living center. If she talked more clearly -- she says it's my hearing -- we might actually end up in the right contract.

No Green Bananas
What I don't understand is why forecasting the economy's growth, inflation and unemployment rates in 2010 is going to help me, as you said in the minutes, or help me help you, as you said in your speech. As a senior citizen, I don't buy green bananas. I don't buy in bulk. I don't even buy next year's date book until I've got one foot in the new year.

I'm not going to change my behavior one iota based on the 2010 outlook.
At the same time -- and I mean no disrespect -- how can anyone know what's going to happen between now and 2010? Even the smartest, most highly trained economists can't predict the future with any degree of certainty, as you yourself have said. Sometimes they can't see what's coming one month out.

Back in August, you thought you might have to raise short- term interest rates to fight inflation. Ten days later, you started to lower them. In late 2000, the outlook underwent the same sort of sudden turnaround. I have to wonder if things change that quickly or you Fed folks are slow to notice.

If you don't know where your target interest rate is going to be one month from today, how can you possibly know how fast the economy will grow and what inflation will be in two to three years?

What's `Appropriate?'
I understand that these forecasts are goals, at least in the long run. What we don't know, and what you aren't telling us, is what it takes to get from point A to point B. You said projections are based on committee members' assessment of ``appropriate monetary policy.''

Could you be more specific?
To say that appropriate is the ``future policy'' most likely to achieve the Fed's dual mandates of maximum growth and price stability doesn't mean much to me. If you can't put an exact number on it, how about giving us the direction? ``Higher'' or ``lower'' would help.

I like the fact that you are making these changes with an eye toward those of us on Main Street, not just on Wall Street. Still, some of the discussion from the meeting goes over my head.

For example, why was the decision to cut rates on Oct. 31 a ``close call'' if monetary policy was ``somewhat restrictive'' and the economy is facing ``substantial downside risks?'' When I go to see Dr. Rosen and my blood pressure is up and he tells me I'm at substantial risk of a stroke, trust me, it's no ``close call.'' He puts me on meds right away.
Return Mail

I realize you're a busy man, what with real estate in the soup and folks losing their homes. But it would sure mean a lot if you could get back to me on a few of the points I brought up. The folks here didn't believe me when I told them you were interested in my feedback. I bet a personal letter on official Federal Reserve stationery would convince them otherwise.

I look forward to corresponding with you in the future.

Very truly yours,
Minnie Moskowitz Delray Beach, Florida

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

Link:
http://www.bloomberg.com/apps/news?p...d=aT4Q1mcUK9x4

[GRG55]

Re: Recession without Romance

GRG,

You have missed my point. The matter of the difference between the price of refined petroleum may be worrying my friend, but his concern about the price was not of interest to me. I looked over the top of his report to see something I believe to be much more significant.

Which is that, the difference between the Euro and Dollar price contains a signal that on the one hand the Euro price is stable and on the other the Dollar price is constantly moving. I say that that constant movement marks the slide away from using the dollar as THE currency with which to do business internationally.

Almost every currency in the world is rising compared to the US Dollar, not just the Euro. Is that really an indication of those currencies being preferred as a medium of exchange for international business? Or is it because they are preferred as a store of value over the US $?

I think the upward moves in the Euro and other currencies are much more a function of preference for store of value (that's what I have done by converting US $ to Yen, Swissie, Loonies...)

For global trade the Dollar is just a medium of exchange, as long as there are enough of them, and there appears no imminent shortage - I'm sure we agree on that.

As long as US Dollars remain freely exchangable for goods, services and other major currencies I can't see the world rushing to abandon it, or even reducing its usage as a medium of exchange. It will take a long, long time before the Euro is as widely accepted for commerce across the world as the US Dollar. Try taking a Euro note anywhere in Asia, India, Middle East, Africa or North America (other than perhaps Manhattan's luxury stores) and exchanging it for anything, other than for the local currency at the desk at your hotel or a bank.

If that continues, then everyone that had once wanted to trade in other than a dollar can now start to do so. And, once that happens, then for every barrel of oil, or whatever else the US wishes to purchase, the US will have to, in turn, purchase Euro's and cannot print more dollars to dig themselves out of the mess they are in.

If the dollar becomes unusable to trade, who will purchase it?

So then, the question becomes, what can the US sell to purchase Euro's if the dollar will not be accepted?

So another signal will be if you suddenly see the UK government deciding they want to become a part of the Euro. The UK pound might be stable now, but if the flight from the dollar continues, there will come a time when the old dream of the UK pound returning to its former glory, pre Breton Woods, and becoming the replacement currency will evaporate and the flight from the UK Pound will also start. Personally, I suspect that is already a point of discussion here.

I believe that we are watching the greatest seismic event in economics ever, all in nice slow motion. The dollar mountain is collapsing; and who knows where this will end?

Perhaps you are correct Chris. There's no doubt the US $ is becoming less valuable, but looking at Finster's charts it's been getting less valuable for decades and decades. All that's happening now is the pace has, temporarily, become a bit faster. Maybe there is a crisis that I am still not quite able to recognize for what it truly is. We'll see in due course I suppose...

Finster's charts (check these out if you haven't seen them before - superb!!):
FinsterFinancialForecast

P.S. I just remembered that a couple days ago I posted something about the Indian Tourist Authority no longer accepting US $ for admission to the Taj Mahal. Maybe you're on to something Chris!!! :eek:

[jk]

Re: Recession without Romance

- The price of crude has remained largely flat in Euros and Sterling for over a year.

if this is so, why does this chart look the way it does?

http://stockcharts.com/charts/performance/perf.html?FXE,$wtic

[EJ]

Re: Recession without Romance

Thanks. The referenced paper was instructive as you said.

As for taking the Fed's forecasts with a grain of salt, here's someone of advanced years that apparently agrees with you...

Mrs. Moskowitz Has Some Input for Mr. Bernanke:

By Caroline Baum
Nov. 23 (Bloomberg) -- Dear Chairman Bernanke:
I read with interest your speech of Nov. 14 in which you outlined the Federal Reserve's steps toward greater openness. I was particularly interested in reason No. 4 on the ways in which transparency increases the effectiveness of monetary policy. ``Open discussion of the central bank's analyses and forecasts invites valuable input and feedback from the public,'' you said.

Bloomberg generally, and Caroline especially, have done the best job of any mainstream business media organization at covering the housing market debacle, bank risk pollution, the Fed's contribution to the crisis, and related events. It's a quality outfit. I've communicated with Caroline on occasion and we set up an account for her here at her request, although I don't know if she has posted comments.

The whole idea of the Fed developing long term economic targets is absurd. It furthers the fiction that the Fed has "control" of the economy. The Fed nfluences the economy, sometimes that influence is strong and at other times weak, sometimes for good and other times ill. I believe we are entering a period where the Fed will be overwhelmed by events largely out of its control, and the one tool that it has–printing money–will either not help to address the problem or will make the symptoms of the problem worse. By setting an expectation of Fed control versus weak influence, the Fed is setting itself up for an even greater credibility hit in the future.

The Fed's greatest challenge is that it's role is simple. It has one and only one tool: printing money. The challenge is to make this appear more complex and mysterious than it is. The Fed can issue all manner of reports and attempt to be more "transparent" about its planned actions in various time frames but all the astute observer cares about is the see the relevant questions answered: Is the Fed going to print more or less? When? How much? Is the Fed printing now? How much? Everything else is cover, which the Fed needs to create in order for its money printing to have the intended result, which is why the idea of greater transparency by the Fed is at best an academic pursuit.

I will say about Bernanke that he is getting better at conducting himself at hearings. He used to explain himself in the face of attacks by members of Congress. That's weak. When recently grilled by Ron Paul his response was right out of Greenspan's unofficial rules of Fed public conduct: he sat expressionless in silence. He's learning.

[bart]

Re: Recession without Romance

...
After watching this process for over ten years, my advice is that as we go into a period of flux, the economic data are going to become increasingly volatile, unreliable, and irrelevant. As happened in the early 1930s, as the fundamental structure of the economy and financial markets had changed, the Fed will be looking at and reacting to the wrong data. This is why we have repeating the following since 1999, because it will apply to the future period of change which is now, eight years later, upon us:
...

Here's a real and recent (2005) example of how big BLS data revisions can be. The green line is pre-revision, the blue line is after for GDP:

[GRG55]

Re: Recession without Romance

...The whole idea of the Fed developing long term economic targets is absurd. It furthers the fiction that the Fed has "control" of the economy. The Fed nfluences the economy, sometimes that influence is strong and at other times weak, sometimes for good and other times ill. I believe we are entering a period where the Fed will be overwhelmed by events largely out of its control, and the one tool that it has–printing money–will either not help to address the problem or will make the symptoms of the problem worse. By setting an expectation of Fed control versus weak influence, the Fed is setting itself up for an even greater credibility hit in the future.

Agree. The Fed puts great stock in referencing growth against the economy's "potential", as though there is some knowable and reliable number for what GDP "should be". Factors such as capacity utilization and so forth probably go into the Fed model that spits out "potential"?

The original question was prompted as I was thinking about how the Fed might use/manipulate the longer range forecasts to shape, or justify, current policy. For example, if they cannot avoid criticism for cutting interest rates now, in the face of skyrocketing energy, food and gold, perhaps a forecasted structural downward shift in US GDP gives them the cover they want? Just a thought...

...The Fed's greatest challenge is that it's role is simple. It has one and only one tool: printing money. The challenge is to make this appear more complex and mysterious than it is. The Fed can issue all manner of reports and attempt to be more "transparent" about its planned actions in various time frames but all the astute observer cares about is the see the relevant questions answered: Is the Fed going to print more or less? When? How much? Is the Fed printing now? How much? Everything else is cover, which the Fed needs to create in order for its money printing to have the intended result, which is why the idea of greater transparency by the Fed is at best an academic pursuit...

Some things are timeless...

…“The regulation of economic activity is without doubt the most inelegant and unrewarding of public endeavours. Almost everyone is opposed to it in principle; its justification always relies on the unprepossessing case for the lesser evil. Regulation originates in raucous debate in Congress in which the naked interests of pressure groups may at times involve an exposure bordering on the obscene.”…

…“The great exception to this dreary story is the regulatory activity of the central bank – with us, the Federal Reserve System. Here is regulation of a seemly and becoming sort. No one apologizes for it; men of impeccable conservatism would rise to espouse such regulation were they called upon to do so, which they almost never are. This regulation…emerges in the measured and orderly discussion of men of quiet and dignified mien…around a handsome table in a richly panelled and draperied room. These men do not issue orders; at most they suggest. Chiefly they move interest rates, buy or sell securities and, in doing so, nudge the economy here and restrain it there. Because the meaning of their actions are not understood by the great majority of the people, they can reasonably be assumed to have superior wisdom. Their actions will on occasion be criticized. More often they will be scrutinized for hidden meaning."

-- From "The Great Crash 1929", J. K. Galbraith --

[Chris Coles]

Re: Recession without Romance

Almost every currency in the world is rising compared to the US Dollar, not just the Euro. Is that really an indication of those currencies being preferred as a medium of exchange for international business? Or is it because they are preferred as a store of value over the US $?

I think the upward moves in the Euro and other currencies are much more a function of preference for store of value (that's what I have done by converting US $ to Yen, Swissie, Loonies...)

For global trade the Dollar is just a medium of exchange, as long as there are enough of them, and there appears no imminent shortage - I'm sure we agree on that.

As long as US Dollars remain freely exchangable for goods, services and other major currencies I can't see the world rushing to abandon it, or even reducing its usage as a medium of exchange. It will take a long, long time before the Euro is as widely accepted for commerce across the world as the US Dollar. Try taking a Euro note anywhere in Asia, India, Middle East, Africa or North America (other than perhaps Manhattan's luxury stores) and exchanging it for anything, other than for the local currency at the desk at your hotel or a bank.



Perhaps you are correct Chris. There's no doubt the US $ is becoming less valuable, but looking at Finster's charts it's been getting less valuable for decades and decades. All that's happening now is the pace has, temporarily, become a bit faster. Maybe there is a crisis that I am still not quite able to recognize for what it truly is. We'll see in due course I suppose...

Finster's charts (check these out if you haven't seen them before - superb!!):
FinsterFinancialForecast

P.S. I just remembered that a couple days ago I posted something about the Indian Tourist Authority no longer accepting US $ for admission to the Taj Mahal. Maybe you're on to something Chris!!! :eek:

It is my understanding from here in Europe that one of the primary reasons for the White House pushing the idea of an attack on Iran is that Iran has hinted that it will move to only accept Euro's for payment for oil. Further, that a number of OPEC countries have also hinted they might follow through and set up a completely new exchange mechanism based upon the Euro for marketing oil on the international marketplace.

The Euro is founded upon the strongest currency; the old German Mark and remember Germany is always in export surplus through their strong INDUSTRIAL base. I think a lot of people are going to see that it is better to hold the strong currency during a prolonged downturn, rather than watch the weaker currency sift through their fingers with no immediate end in sight.

Finster's graph is great and makes my point. It is one thing to hold until tomorrow when the market might turn in my favour, it is another thing when there seems to be no end in sight.

[GRG55]

Re: Recession without Romance

It is my understanding from here in Europe that one of the primary reasons for the White House pushing the idea of an attack on Iran is that Iran has hinted that it will move to only accept Euro's for payment for oil. Further, that a number of OPEC countries have also hinted they might follow through and set up a completely new exchange mechanism based upon the Euro for marketing oil on the international marketplace.

The Euro is founded upon the strongest currency; the old German Mark and remember Germany is always in export surplus through their strong INDUSTRIAL base. I think a lot of people are going to see that it is better to hold the strong currency during a prolonged downturn, rather than watch the weaker currency sift through their fingers with no immediate end in sight.

Finster's graph is great and makes my point. It is one thing to hold until tomorrow when the market might turn in my favour, it is another thing when there seems to be no end in sight.

Chris: jk posted an interesting perspective on this topic of currencies from someone in your locale:
http://www.itulip.com/forums/showthread.php?t=2519

Excerpt:

Ambrose Evans-Pritchard on 23 Nov 2007

[Airbus CEO] Mr Enders said the company's business model is "no longer viable", and "massive losses" are on the horizon. So much for all those currency hedges that analysts like to cite. Have they ever tried to buy a currency hedge? They would discover how expensive these instruments are. Hedges cannot protect a company with $220bn in delivery contracts priced in dollars, when the euro/sterling cost-base is leaping into the stratosphere..."