The View From 1776

The Fed’s Latest Bubble Creation

The Wall Street Journal reports that the Fed’s continuing policy of artificially depressing interest rates is creating yet another asset bubble, this time in exploration and production (E&P) of petroleum and natural gas.

Posted by .(JavaScript must be enabled to view this email address) on 03/21 at 10:08 PM
  1. Thomas,

    If I can tease out the meaning of your post, it sounds like you believe the Fed is acting in line with a Keynesian philosophy, seeking to let the economy regain its footing by not raising interest rates too soon. Although all economic indicators are headed in the positive direction, you would like the Fed to jerk the chain of the recovery by boosting interest rates because of what?

    You think the oil business is doing too well? The recent price drop in oil has already curtailed drilling activities, so that can't be it.

    You don't like the stock market climbing because the "wrong" people are prospering?

    You think the drop in unimployment is not real so we should ask the Fed to raise interest rates so that more people would be out of work?

    Help us out here, Thomas. What policy do you recommend for the Fed.
    Posted by .(JavaScript must be enabled to view this email address)  on  03/23  at  04:41 PM
  2. Reading the posting would answer your question. "Teasing out" the meaning gets you to the following:

    "The Wall Street Journal reports that the Fed’s continuing policy of artificially depressing interest rates is creating yet another asset bubble, this time in exploration and production (E&P) of petroleum and natural gas."
    Posted by .(JavaScript must be enabled to view this email address)  on  03/23  at  05:07 PM
  3. Thomas,

    It is obvious J. Jay is playing one of his straw-argument games. This latest attempt is laughably transparent on at least two scores.

    First, He knows perfectly well there is a difference between natural and government-imposed interest rates (rates lenders charge for the use of their money v. what they are restricted to charging), that it is the latter as creates distortions, and that it is these distortions that result in bubbles and related problems. Indeed, the very definition of a bubble is a sustained, unnatural distortion as amplifies normal effects. He also knows you are not in favor of any of the negative outcomes he imputes to you, and is simply (and deliberating) conflating causes with effects. He is suggesting that because you pointed out some of the negative effects of such distortions (e.g., bubbles, oil volatility, wealth disparity, &c) that those observations somehow makes you their advocate; or, confusingly, their opposites (it doesn’t matter which to Jay, as either makes you a ‘Keynesian’ for his purposes). What he disingenuously ignores is that it is forcible distortions from the normal or ‘natural’ market ebb & flow you oppose, and not so much their direction. Anyone who has studied economics understands it is not the direction of these distortions as creates havoc so much as buy-sell signals are confused by them and forced out of synch; and grow increasingly out of synch over time. It is not even natural changes of direction as really matter, because those are self-correcting; whereas forced changes in direction or magnitude are not self-correcting. Indeed, it is in the very nature of a deliberately applied force to damp or reverse a trend that it invariably delays or prevents the correction until the applied force is relieved. The magnitude of a distortion is proportional to its force-magnitude, but there is also a resonance that occurs (similar to, but also different from, vibrational resonance that is force-time dependent and makes the signal confusion so great as leads to panics and crashes.

    Secondly, He also knows full well the official stats on unemployment are limited in applicability, and, therefore, bogus as a measure of unemployment. What U3 measures (which is what Jay here references in his claim) is how many of the unemployed are currently eligible for benefits so that Congress and the states can allocate funds to those, and only those. U6 adds some additional unemployed, but not all. Both metric ignore a large number who are unemployed but ineligible. At best, the U3 and U6 rates can be used as proxies for unemployment, but only if and when four conditions are met: a) actual and U3/U6 unemployment rise and fall together (i.e., proportionately – which currently they don’t), b) correct multipliers are used (never reported that way), c) actual unemployment is not more than a few percent higher than claim numbers (hasn’t happened in decades), and d) proper warnings are posted that real unemployment is substantially higher than U6 but unknowable with any great accuracy (almost never happens).

    By now he should also know (because we have told him often), that a much better (though still imperfect) metric to use is the ‘Labor Force Participation Rate’, which is currently at a 37 year low (see ) and still falling. That suggest real unemployment is at a 30 year high of about 27%. I caution however, this metric also does not tell the whole story because not everyone gainfully employed is counted, and there are inaccuracies in counting jobs just as there are in counting unemployed workers (i.e., shadow economy). But, what it does tell us (and, of this we can be certain), is that real unemployment rose even as BLS and Obama publicly reported it as falling. Overall, we know LFPR to be the more reliable statistic because, unlike U3/U6, it isn’t misreported as measuring something it doesn’t. Or, saying this, differently, both are roughly equally accurate measurements, but one is misreported; and it is the misreporting that makes it inaccurate. If I were to measure the number of apples in a bin containing both apples and oranges (but mostly apples), but then report the number of apples and oranges as representing the entire contents of, you would rightfully object; which is how J. Jay operates.

    Perhaps, a better measure of ‘how bad things remain’ is to stop reading rosy reports issued by political hacks, and just look around your own neighborhood for signs things are worse or better than at the nadir of the 2007-2009 recession. Ignore what the market and BLS are telling you and ask probative questions. Are there fewer/more/or about the same number of panhandlers accosting drivers at intersections? Is PETA back at that intersection collecting money for animals it has no intention of saving, or are they still driven off by professional beggars competing for scraps not syphoned off by the truly destitute? Is your local charity or soup-kitchen sending flyers claiming they are stretched, and need more from you? Is your thirty-something kid with an advanced degree still living at home because he can’t find a decent job? Are the raises you get still smaller than you got before the recession? Are there any new restaurants opening where you live, or are there still quite a few that are shuttered? How about shops at your local mall? Are there signs of struggling to remain open? Does it seem like there aren’t enough employees to assist customers? Are three quarters of the checkouts at your local Walmart unmanned despite long lines in the middle of the day? There are, of course, pockets of ‘renaissance’, but there usually are in borderline recessions like this one has become. The stock market is doing well, but that is only one facet of what comprises a robust economy; and, not the most important one in terms of how good or bad things are going for average Americans. I care about the market because I am a small investor in it, but I care a lot more about how I am going to pay my bills and keep my family housed, clothed and fed if this keeps up.

    As a statist, socialist, anti-capitalist, and fear-monger, Jay’s natural sympathies are for a market that a) does not fluctuate much (Danger! Danger! OMG! It leaps up, then down … where will it all end!), b) leads to flat wealth distribution, c) punishes greed (just too bad it also punishes creativity and risk-taking), and d) gives him the illusion somebody (doesn’t matter who or how competent) is in control of it all. We didn’t used to be like that, but the more we’ve had a nanny-state, the more we assume governance is essential to survival. We fear a life without comforts even more than one devoid of virtue, and fear disdainers of such controls because they (we) threaten to upset their painstakingly crafted safety-nets (0h no!).

    We are become gray men to whom it is less important the economy could do better than that there is someone in charge that we can feel assured this thing, this massive, largely uncontrollable/untraceable thing affecting every aspect of puny lives, is not simply blundering about on its own spoiling the illusion of a safety net; that unless there is someone or something as prevents, the economy must crash from time to time; and that just terrifies our gray fellows. Fear is the common denominator of statists because they cannot envision a life unshielded from happenstance. They are constitutionally unable or unwilling to look honestly and courageously at past market performance to see and admit we were better off under a market free of governance than it does under one imperfectly controlled, and perfect is just not something of which we are capable. They fail to note or admit the things we fear in a free-market occur oftener and more devastatingly in controlled ones. It has been tried many times and in varied guises, and it fails every time. If we could, at least, say that controlled markets had some advantages over free ones, then there would be some basis for them, but both empirically and theoretically there is no basis for supposing market controls do anything but suppress and distort performance. You can wish it were amenable to control, but the honest truth is we humans are not up to such a task, and when the thing controlling is the same as the thing controlled, the outcome is doubly awful.

    Statists have so little trust in themselves that they have even less in fellow citizens to act on our own free of their constraints. They believe that gives us an unfair advantage or power over them; and they are right about that, but only to the extent they fail to act in their own interest rather than expecting others to supply them with equal outcomes. And, so, they must belittle and scorn those who act freely. What can I say, except, statism really sucks the soul right out of some people.

    Posted by .(JavaScript must be enabled to view this email address)  on  03/28  at  08:53 PM
  4. Bob,

    Your first sentence appears to indicate a misunderstanding of banking regulations.

    What do you mean by "what they are restricted to charging"?

    Are you suggesting that banks cannot set whatever interest rate they please for a loan?

    What is this "natural" interest rate you refer to? Is there a publication somewhere that lists the "natural interest rate?" Please clarify.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/03  at  09:27 AM
  5. Mr. Jay, I shouldn't presume to answer for Bob Stapler, but states have usury laws prescribing maximum loan interest rates. And, until the 1970s, savings banks and S & Ls were subject to limitations on what they could pay as interest on deposits.

    The natural interest rate results from the balance of savings supply and demand for funds. I have to hope that you are just being sarcastic when you ask where the natural interest rate is published. That's akin to asking where the schedule of future weather conditions is published.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/03  at  06:05 PM
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