The ongoing debate surrounding the prospect of increasing the growth rate of nominal gross domestic product (NGDP) continues to engage commentators across the blogosphere. However, this discourse holds little weight unless the Federal Reserve Chairman Ben Bernanke supports the concept. Don’t expect a change in stance; just last month, he referred to the idea as “reckless.” In monetary terms, this translates to: Don’t entertain this thought. While some may view NGDP targeting as a radical approach, the historical data tells a different story.
The current economic landscape remains decidedly unpredictable. The recent drop in inflation expectations might be foreshadowing economic trouble yet again. Implied inflation, indicated by the yield spread between nominal and inflation-indexed 10-year Treasuries, appears closely intertwined with fluctuations in the stock market, which subsequently hints at broader economic movements. This connection is unusual in the context of financial and economic history, yet it has persisted in the aftermath of the Great Recession. Recently, this correlation seems to be suggesting an impending round of challenges for the economy. For the theoretical basis behind this observation, refer to David Glasner’s research paper on the so-called Fisher effect.
Investment opportunities are abundant, according to many speakers at a recent ETF conference I attended in Boston. From emerging markets to sector-specific strategies and alternative betas, there was a palpable sense of optimism among attendees.
The Most Important Economic Story Nobody Is Talking About
The Atlantic | May 3
The failure to appoint new members to the Federal Reserve by President Obama is a significant oversight for the economy. Behind every great central banker is a formidable central banking committee, or at the very least, a supportive one. Unfortunately, President Obama has yet to fully grasp this reality. This neglect of crucial monetary issues has added unnecessary challenges to the recovery process. As highlighted by Greg Ip from The Economist, many of Bernanke’s colleagues are now pushing for rate hikes before he is ready. He increasingly seems isolated in his stance. It’s essential to note that even the more conservative members project that inflation will remain below target and unemployment above target for the coming years. If the Fed truly believes its own predictions, more decisive action is required. Currently, there are two vacant seats on the FOMC. Obama’s nominations for these posts have been hindered by consistent Republican obstructionism in the Senate. A straightforward solution would be for him to bypass the Senate through recess appointments, a tactic he previously utilized for the Consumer Financial Protection Bureau (CFPB) and the National Labor Relations Board (NLRB). Why not apply the same approach with the Federal Reserve or the Federal Housing Finance Agency?
● The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy
By Laurence Kotlikoff and Scott Burns
Summary via publisher, MIT Press
The United States is in a dire financial situation, facing overwhelming debt. Due to accounting practices reminiscent of Enron’s, America’s insolvency is even more severe than currently reported. According to experts Laurence Kotlikoff and Scott Burns, in their book *The Clash of Generations*, this fiscal predicament stems from a six-decade-long unsustainable financing model. They argue that we have maintained our longer life spans at the expense of our relatively few children while indulging in excessive consumption and inadequate savings. Furthermore, the middle class is being eroded, and the financial system has lost trust. The authors propose grassroots strategies aimed at rescuing ourselves, particularly our youth, from a potentially disastrous financial collapse.
Economists anticipated a lackluster month for job growth in April. However, today’s payrolls report from the Labor Department has proven even more disappointing than expected. Private sector employment increased by only 130,000 on a seasonally adjusted basis, a decline from March’s modest 166,000 rise. This figure marks the lowest growth since last August. Surprisingly, the unemployment rate ticked down to 8.1%, but this statistic is misleading in light of the paltry increase in the workforce.
What stimulus? Government is holding us back
Rex Nutting (MarketWatch) | May 4
While there’s widespread concern regarding a potential “fiscal cliff” for the economy next year, it’s crucial to recognize that we’ve actually been descending a “fiscal hill” for the past two years. Following significant fiscal stimulus in 2009 and 2010, government policy has become more restrictive. With the private sector recovering, the lack of government spending has become the primary obstacle hindering economic growth—and this situation could deteriorate further.
In a sudden turn of events, new jobless claims fell dramatically by 27,000 last week, bringing the seasonally adjusted total to 365,000. This suggests that the downward trend in new claims may still be in place, despite previous concerns stemming from a modest uptick. While one must always exercise caution in interpreting individual data points in this volatile series, the overarching trend remains encouraging according to today’s update, as illustrated in the accompanying charts.
Edward Conard, a former executive at Bain Capital and significant contributor to Mitt Romney’s presidential campaign, highlights that the primary cause of the 2008 financial crisis was an enormous surge in demand for liquidity. This assertion is accurate, as the desire for safety escalated at the end of that pivotal year. While his perspective may be controversial in certain circles, it provides an opportunity to reflect on the progress made—or lack thereof—in understanding the business cycle during extreme downturns. It also serves as a reminder to explore practical policy responses.
The April update of the ADP Employment Report conveys a warning to temper expectations ahead of Friday’s pivotal payroll report from the U.S. Labor Department. According to ADP’s analysis, private sector employment expanded by just 119,000 last month. This represents a 41% decline in the pace of job growth compared to March’s 201,000 rise and is the slowest rate observed since last September.
In summary, the current economic climate is characterized by uncertainty and challenges. From discussions on monetary policy to job growth, it’s clear that the path ahead requires careful navigation. Though opportunities exist, critical evaluations of both government policy and economic indicators remain essential for informed decision-making.
