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Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020

• chollida1 8y ago
  This is one area where I think the US system shows the power of separation of concerns. Trump would love lower interest rates but the Fed, tends to run itself without much political influence. These people are all "adults" and very accomplished and knowledgeable. They set the FED rate and everyone else falls along. They have been actively raising rates, with more rate hikes expected in this year to cool inflation, and the economy by extension. At the very least the US will have some wiggle room to lower rates when the economy slows down again.
  • __derek__ 8y ago
    > At the very least the US will have some wiggle room to lower rates when the economy slows down again. While true, one of the lessons from 2008-9, and part of Bernanke's point, is that monetary policy alone can't always accomplish the task. If we use up all the extra fuel in the run-up to a rough patch, we risk not having enough to get us out of the rut ahead.
    • nickik 8y ago
      Yeah and he is wrong and telling a false history. Go back to 2008 and look at their policy and meeting. The fact is that they were talking about HIGH INFLATION in the meeting in late 2008. They did not lower interest rates to zero and had a policy of sterilization (selling bonds to buy troubled housing assets, instead of buying the troubled with new money). The did not even deliberately end this policy, the market forced them because they were running out of T-Bonds. Later the called this 'QE1' but it was not really QE, it was them preserving a minim of T-Bonds (and that's their own account). While they did go on to do QE1/QE2 they also payed interest on reserves to prevent that money from creating more inflation. And this was very deliberate policy, they explicitly said 'We are doing this to prevent the money from going out'. The fact is that while nominal income collapsed in 2008 the Fed did nothing while the economy collapsed, like Nero in Rome. How can you claim that a bank that can print infinite amounts of money could not do anything against this: https://oregoneconomicanalysis.files.wordpress.com/2011/10/ngdp_trend1.jpg https://oregoneconomicanalysis.files.wordpress.com/2011/10/n... Friedman, Bernanke and many others have written about how the central bank could do much at the zero bound and other countries like Switzerland showed that this is true. The Fed failed as a institutional because they didn't plan for 0% interest, not because its impossible to do anything.
• wjn0 8y ago
  When I read articles like this I wish I had a better grounding in economics, I guess specifically macroeconomics? Is there a well-known, digestible textbook?
  • mindcrime 8y ago
    Basic Economics - Thomas Sowell https://www.amazon.com/Basic-Economics-Common-Sense-Economy/dp/0465002609 https://www.amazon.com/Basic-Economics-Common-Sense-Economy/...
    • frgtpsswrdlame 8y ago
      ^ Not this one. Mankiw is already ideological enough, Sowell and Hazlitt should be stayed far away from. The real answer to the above commenter is that you can't, not really. You can put a lot of work into understanding Mankiw and then you go to econ grad school and learn all the caveats and how much of it is basically wrong. Economists themselves barely understand the economy and they spent years and decades getting to 'barely.' A layman is basically incapable. In that sense maybe I'm wrong and maybe Sowell is the good choice, just decide your ideological viewpoint on the economy now, read enough to defend your viewpoints to other laymen and let that be that.
  • bovermyer 8y ago
    Macroeconomics by Paul Krugman and Robin Wells is a good one.
    • joshuaheard 8y ago
      Please don't read anything by Paul Krugman, unless you believe we are in the global recession he predicted after Trump's election.
      • jihadjihad 8y ago
        While this particular prediction didn't (yet) come true, Krugman is at least one of the few name-brand economists who will admit when he is wrong. He's also got a Nobel in the field, so to write off his textbook as unreadable for a failed prediction seems like a little much.
• smallnamespace 8y ago
  The combination of tax repatriation, tax cuts, and large-scale deficit spending (fiscal expansion) late in the economic cycle (recessions typically happen every 8 years or so, and the current expansion has been going on for ~10 yrs now) while the Federal reserve is raising interest rates (monetary 'contraction') is more or less unprecedented (we've never seen it happen in modern times in the US or any other large developed economy). The risk is that fiscal policy is pouring more fuel on the fire at the precise time when the economy typically starts slowing, further inflating asset bubbles and making the Fed's job (to avoid inflation and keep employment high) much potentially harder and making it more likely a misstep will happen. Popping bubbles or slowing their formation is inherently a tricky proposition (just look at the run-up in stocks from early 2017 until now); move too aggressively and you risk sparking a liquidity crisis and plunging your economy directly into recession; move too slowly and you end up with an even larger bubble later on to deal with. This is tricky in normal times, but doing so while the other wing of government is actively stimulating the economy makes it much harder to gauge the impact of monetary policy and withdraw Fed support in a prudent and measured way.
  • ianai 8y ago
    Just to clarify. There is no inherent business cycle. The Great Depression proved that the lows can continue on indefinitely without abatement. Laissez faire economics are dead.
    • Retric 8y ago
      The buisness cycle is closer to the truth than calling economic growth a random walk. You get feedback loops which prevent a steady state.
      • ianai 8y ago
        You’re probably basing that on data benefiting from a supervisory political institution. If that data exist.
        • 8y ago
• matte_black 8y ago
  This is consistent with what I’ve heard. Seems no one expects a recession until at least 2020 or 2021. Be ready.
  • komali2 8y ago
    Conveniently, my finances should be in order for a house purchase around then.
    • Clubber 8y ago
      Don't downvote. The best time to invest is during a recession. Everyone should be saving money today for the next one, then buy.
      • matte_black 8y ago
        Indeed, for some buying during a recession is the only shot they have at home ownership. Prices are only going up now.
  • jeffreyrogers 8y ago
    Well before that a "market correction" was imminent from about 2013 to mid-to-late 2017 at least, so who knows what'll really happen. But valuations do seem high across the board and we're pretty late in the business cycle, so it seems like we should at least expect lower returns for the foreseeable future.
• Bucephalus355 8y ago
  Ben Bernanke’s point in his recent memoir is that central banks can only do so much. At the end of the day, monetary policy is not social change, moral evolution, or political coalition building. These things happen outside the Central Banking system and are just as important for a functioning economy. I know this sounds controversial, but at this point quite frankly the deficit does not matter. There is so much debt in the world, we are likely heading towards a global debt write-off. It doesn’t help that China has essentially been spewing entirely fictitious accounting numbers for the last 20 years. It’s not even about padding an extra 10-15% anymore. There are journal articles out there claiming that Alibaba, a company as big as Oracle, is making up whole cloth 95% of it’s accounting statements. Ridiculous...
  • cobbzilla 8y ago
    Writing off sovereign debt always comes with strings attached for the creditors - the terms will by definition be anti-democratic and could be incredibly dangerous. An improvement in global inequality is not a likely outcome.
    • RobertoG 8y ago
      That's only true if the debt is in a foreign currency. Not sure you can call that "sovereign debt".
  • the_watcher 8y ago
    > There are journal articles out there claiming that Alibaba, a company as big as Oracle, is making up whole cloth 95% of it’s accounting statements. Do you have a source for this? I'm not doubting you, but I've never heard this and would like to learn more if possible.
  • staplers 8y ago
    we are likely heading towards a global debt write-off. Household debt has gone down quite a bit since 2008. It's government that is spending more. Household debt: https://fred.stlouisfed.org/series/HDTGPDUSQ163N https://fred.stlouisfed.org/series/HDTGPDUSQ163N "Public" (Government) debt: https://fred.stlouisfed.org/series/GFDEGDQ188S https://fred.stlouisfed.org/series/GFDEGDQ188S
• overcast 8y ago
  This is just another reminder to always have emergency funds in your bank account, not tied into the markets. Allows you to weather the storm, until things correct themselves.
  • CupOfJava 8y ago
    How does savings in a bank account help you weather inflation?
    • dgzl 8y ago
      The poster's sentiment is correct is saying that it's a good idea to have low-risk resources available as a safety net. However I'd say having physical things like items you know you'll need in the future, or food storage, would be more valuable than having cash. Inflation wouldn't hurt the value of a computer or food you already own. In the other hand, I would imagine investing in gold would be a good idea as well.
      • komali2 8y ago
        I always think of it in disaster tiers. Market slowdown, you'll want your bonds. Recession, you'll want your cash. Depression, you'll want gold and barterable goods. Economic collapse or apocalypse, you'll want food, medicine, and alcohol (possibly the most barterable good, also delicious). In any case anybody reading this in a major city faces non zero likelihood of disaster (take your pick for your city, hurricane, earthquake, tornado, terrorist attack, war) and should be stockpiling 3 liters of water per person in the house per day you want to be able to survive on your own, alongside 2k calories of food, trash bags, etc. I say have a stocked liquor cabinet as well because my experience in Backcountry many week hikes has taught me you can get nearly anything in return for good liquor :) I've also heard strong arguments for the stockpiling of pornography and certain chemicals that are valuable in tbe production of medicine or just used as general reagents, don't know too much about chemical stockpiling though. Careful for the prepper rabbit hole, it runs so very deep ;)
        • 8y ago
• polskibus 8y ago
  I wish the money printing game ended. The longer it goes the rougher the finale will be, globally. 1.5 T USD will push inflation globally.
  • lostmsu 8y ago
    What's wrong with inflation?
    • Clubber 8y ago
      It diminishes wealth.
      • roma1n 8y ago
        And debt; and favors work. Seems like a very good thing in moderate amounts.
        • icu 8y ago
          It only diminishes debt if your ability to service that debt outstrips the rate of inflation. If your ability to service debt does not grow in line with inflation, you are in no better state.
    • tehlike 8y ago
      Modest inflation is good hyperinflation is bad.
    • icu 8y ago
      In basic terms, inflation is the loss of purchasing power due to an increase of the monetary supply faster than economic growth. In plain English, this is where more currency is chasing the same number of goods and services. This means your unit of currency buys less over time. What is 'wrong' with this is that inflation is a transfer of wealth—some people even go so far as calling it theft or a 'stealth tax.' This is because the purchasing power that you had in your unit of currency isn't 'lost', it is actually transferred to the institutions creating the money. If you had $1 worth of pennies in your pocket, and inflation was 1%, it is like an invisible hand reaching into your pocket and stealing a penny. Do that a hundred times and you can 'create' $1, but by the time this is done, you will find that your $1 can only by 99 cents worth of goods and services now. In a fiat based, fractional reserve system that we have today in the West, the institutions that are reaching into your pocket (AKA creating money) are central banks and commercial banks. For example, say the Fed (the central bank for the US) creates an initial $10m of reserve currency, this is then used by commercial banks to 'create' an additional $90m through loans from that $10m reserve. It is therefore commercial banks, not central banks, that predominantly create currency in society—and depending on growth and circulation (economists call this velocity) in the real economy, creates inflation. You see if the creation and circulation of money was perfectly in line with the growth of the economy than there would be no inflation. The real problem is that the growth in monetary supply has far outstripped the growth of Western economies. Indeed there is a compounding effect of inflation. But yeah, I can understand that this material may seem unbelievable... I have included a URL to a YouTube video where a Bank of England (the central bank of the UK) representative actually says in no uncertain terms that commercial banks create most of the money in the economy. The important passages are: "...banks create additional broad money whenever they make a loan" "Now, while this is nothing new, it's sometimes overlooked as the main way in which money is created and it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have." "In fact, loans create deposits, not the other way around." Source: https://www.youtube.com/watch?v=CvRAqR2pAgw https://www.youtube.com/watch?v=CvRAqR2pAgw I've tried my best to quickly find Fed resources but these facts seem to be obfuscated or not officially made available. For further information see the following: Werner, R.A. (2014). Can banks individually create money out of nothing: https://www.sciencedirect.com/science/article/pii/S1057521914001070 https://www.sciencedirect.com/science/article/pii/S105752191... McLeary, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654 https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
• CompelTechnic 8y ago
  I have a question about the federal funds rate that I haven't ever had a good explanation for. It is: To what extent is the fed funds rate set to match market demand, and to what extent is it controlled completely independently of market demands? If anyone has a good answer, I would appreciate it a lot. To flesh out my question a little further, let's say that the fed decides one day to change the fed funds rate from 1.75% to 2%. They put the bonds up for auction and find out that they were only able to auction off the allotment of bonds at an effective rate of 1.8%. Is this typical? Or is it usually the case that the bond buyers will quickly hoover up whatever rate they are given? Maybe a more formal way to put it- is the elasticity of demand for these bonds low enough for the fed to have complete control over the fed funds rate such that they can set any interest rate they desire?
  • trailercamp 8y ago
    https://en.m.wikipedia.org/wiki/Bond_vigilante https://en.m.wikipedia.org/wiki/Bond_vigilante
  • jonwachob91 8y ago
    I don't think the Fed Fund Rate is controlled by bonds, but by money supply. They remove dollars from circulation until the borrowing rate rises to a pre-defined rate (such as 2%). Banks don't typically borrow from the Fed as it's viewed as a sign of being unable to borrow from another bank. It's part of the reason the Big Banks were forced by the Fed to ask for a loan during the 2008 crisis, so smaller banks could ask for loans without looking weak.
  • RobertoG 8y ago
    From: http://bilbo.economicoutlook.net/blog/?p=34830 http://bilbo.economicoutlook.net/blog/?p=34830 "[..] the central bank (that is, the government) can always set bond yields at whatever level it chooses including zero." A different question is if institutional arrangements will allow it. But even when they not, if the crisis is big enough they will. See the example of the debt crisis in the Eurozone. It finished the day that governor of the European Central Bank decided to do "whatever it takes" (1), even if the operations that they are doing are technically illegal in the framework of the Eurozone. (1). https://qz.com/1038954/whatever-it-takes-five-years-ago-today-mario-draghi-saved-the-euro-with-a-momentous-speech/ https://qz.com/1038954/whatever-it-takes-five-years-ago-toda...
• alex_young 8y ago
  Remember that economists have predicted 15 of the last 7 recessions. Hold on to your hats.
  • mandeepj 8y ago
    > predicted 15 of the last 7 recessions Did you mean to say 17 instead of 7?
    • hmate9 8y ago
      I don’t think so. He’s basically saying there is always somebody saying the economy will collapse and there are always people saying the economy is going to be stronger than ever.
    • tehlike 8y ago
      Works both ways. There are permebears and permabulls. One will overpredict and the other will under.
    • metalliqaz 8y ago
      He said it correctly. It's a common joke among economists and pundits.
  • WhompingWindows 8y ago
    I'm sure "economists" generally as a field can not accurately predict recessions, however certain individuals have used sound logic to predict certain downturns in the past. There is a general logic to the market, the debt cycle for instance, the natural hot/cold phases the USA and the world in general go through. So, while your comment is witty and I agree generally, I also think there is a possibility of a major downturn in the near future.
• jorblumesea 8y ago
  The Fed has been used as a stop gap to fix incompetent/malicious policies driven by political actors. The reality is that central banks can only do so much, and Congress and others are leading the nation off a cliff to pursue short term political goals. Beating the other team in the short term is seen as more important than the long term health of the nation. You can see this play out in the tax cut, deficit spending and many other examples. > Who cares if the world explodes in 6 years? I need to be reelected in 2.
• jcomis 8y ago
  Ok, say you believe this is going to happen. What the hell can you really do?
  • hmate9 8y ago
    Buy property, bitcoin, gold.
  • nickik 8y ago
    You can bet on the market going down. Just go to your banker and tell him to do it. The question is just, do you believe it?
    • AnimalMuppet 8y ago
      "The market can stay irrational longer than you can stay solvent." Be very careful betting on the market going down. You not only have to be right, you have to be right soon enough.
      • nickik 8y ago
        I hate that statement. Because people who say it claim they were right based on it, when they were clearly wrong and just trying to excuse their failure. Saying 'at some point in the future prices might be lower' without a time attached to it is an intellectually empty statement.
        • appstateguy 8y ago
          The thing to understand about shorting is that your losses have no upper bounds. You short a stock at $100 and it goes up to $1,000, you now OWE $900. Here's [0] a story of a guy going to bed with $30k in his ETrade and waking up to a $106k debt call. [0] https://www.marketwatch.com/story/help-my-short-position-got-crushed-and-now-i-owe-e-trade-10644556-2015-11-19 https://www.marketwatch.com/story/help-my-short-position-got...
  • frockington 8y ago
• mhneu 8y ago
  2020: policies put in place under this administration will come home to roost during the next administration, which will get the blame. This lag between economic policy and outcomes is a big reason the US has such a disingenuous public debate. Getting what you can in the short term, while being deceptive about long term effects, has become a good strategy. [1] [1] https://mobile.nytimes.com/2017/12/18/opinion/republicans-tax-cuts-rich.html https://mobile.nytimes.com/2017/12/18/opinion/republicans-ta... “The essence of this strategy is to take tax policy out of the hands of experts and entrust it to activists. These campaigns do not usually have much credibility with card-carrying economists. ”
  • maxxxxx 8y ago
    " 2020: policies put in place under this administration will come home to roost during the next administration, which will get the blame." That has often been the case. Bush suffered through Clinton's internet bubble. then Obama suffered through Bush's real estate bubble. Trump now benefits from Obama's policies. We'll see what happens after Trump.
    • salviasloth 8y ago
      Clintons internet bubble?
      • maxxxxx 8y ago
        During Clinton's time there was a huge run-up in the stock market fueled b a lot of internet companies. Clinton got all the credit for the growth during that time and then Bush suffered through the predictable collapse.
        • salviasloth 8y ago
          He was making it sound like the bubble was caused by specific Clinton era policies. I'm pretty sure the dot com bubble was largely just a speculative bubble.
• patrickg_zill 8y ago
  My inner skeptic asks: What is Bernanke's record on predictions that he has made in the past? He said that subprime was "contained" in 2008, IIRC. The Mises Institute (an avowed hater of the Fed) has this, for example: https://mises.org/library/ben-bernanke-was-incredibly-uncannily-wrong https://mises.org/library/ben-bernanke-was-incredibly-uncann...
  • maxxxxx 8y ago
    Yes, in 2008 he didn't see the problems right in his face. He was supposed to be a great scholar of the Great Depression but seemed to have learned nothing from it. Maybe he has learned from his own crisis...
  • frockington 8y ago
    He was also part of the "2% is the new norm" Fed. His forecasting abilities have a poor track record
• debt 8y ago
  The language here is interesting. "Wile E Coyote moment" in the abstract looks and feels like a bubble, but he doesn't use the term bubble. So a sharp correction? But isn't that what a bubble does? Why not just say we're in bubble fueled by artificial growth caused by numerous government subsidies.
  • throwawayjava 8y ago
    I guess for some very broad definition of bubble. Consider, e.g., real estate prices in a relatively stable area after that area is plunged into a long-running war. Prices will sharply correct, but talking about a "peace bubble" is a bit disingenuous.
• samsonradu 8y ago
  It’s quite an old trick in the book for any administration, whichever color it has, to try to push the can down the road until it gets re-elected. After that, it’s buyer beware. Something to consider is that in times like these money are flowing in the wrong direction, instead of going from developed countries (US, EU, JP) to developing countries with better return rates (Emerging markets) it is the other way around, going into developed countries estates, bonds and stocks even with low returns which look already overvalued. That would normally read that there is way more liquidity than actual growth and the valuations are not accurate.
  • frockington 8y ago
    With recent earnings, the stock market isn't very inflated. We have a long way to go until "bubbled-up"
• mindcrime 8y ago
  “The economy is already at full employment.” I'm not sure that's actually true. Yes, the govt. reported "official" unemployment number is 3.8% or whatever. BUT... that comes with a couple of big, big caveats: 1. Those numbers by definition don't include job-seekers who have left the market and quit being job-seekers. IOW, people who became so despondent that they gave up. But, there's nothing specific that stops these people (or some portion of them) from re-entering the job market to fill demand. 2. These numbers don't reflect underemployment where someone has "a job" but the job doesn't require the skills the individual actually possesses and pays significantly less than they would expect to earn in a "normal" position. 3. Wage growth is still very low, which suggests that the economy is not being hamstrung (yet) by lack of available workers. At some point, if demand exceeds supply by enough, you're inevitably going to see wage growth. A significant jump in wages would, IMO, be the best sign that there's an actual gap between labor supply and labor demand. Note that I'm not saying that Bernanke's theory is wrong, but this one little point jumped out to be as something that's at least somewhat questionable.
  • hawkesnest 8y ago
    But problems 1 and 2 are the same for the official unemployment metric in times past as well. 1. If the person has stopped looking for a job, their likelihood of resuming their job-seeking is pretty low. That's especially true for the unusually large aging baby-boomer population who are taking an early retirement rather than seeking re-employment. 2. While that's clearly another indicator of the strength of the job market, it is hard to argue that no job is better than a job which isn't ideal for skill/pay reasons. If you have a suggestion on how to accurately measure this that'd be great. Who knew that a single number was insufficient to measure something as complex as employment? Yeah, we need to look at the larger picture, but it's hard to say we have exceptionally low unemployment AND that this is a good time for a stimulus.
    • mindcrime 8y ago
      But problems 1 and 2 are the same for the official unemployment metric in times past as well. Absolutely. Don't get me wrong... I'm not arguing for or against any specific policy in the post above, or making any particular claim regarding Bernanke's argument. I just wanted to point out that saying "we're at full employment" is at least a little bit questionable as an assertion, at least if we take "full employment" to represent a situation where lack of available labor represents a threat to the economy, vis-a-vis other policy issues. Maybe I'm just picking nits with this observation, but that jumped out me for some reason, when I was reading the article.
• diebir 8y ago
  Oooohhh yes! We are headed for a cliff. The orange piece of shit and his republicans bitches have poured money into economy on the up cycle. There are so much money around, people don't know what do with them and prices shot up like crazy. It's a frenzy. This will end in a spectacular crash.
• deleted 8y ago
  [deleted]
• ravenstine 8y ago
  I'll keep this thread bookmarked for when 2020 ends and nothing happens.
  • metalliqaz 8y ago
    I'll keep this comment bookmarked...
• kaycebasques 8y ago
  It’s a fascinating time in the markets. You’ve got all these different forces pulling in different directions. Quantitative tightening, fear of trade war, tax cuts, continuing buybacks, lots of accumulated debt, the rise of high-frequency traders and their tendency to remove liquidity at the hint of any change in fundamentals, strong earnings, low employment, high asset prices. It doesn’t surprise me that ^SPX is swinging between 2600 and 2800 with all of these conflicting signals.
• jsoc815 8y ago
  For those interested in the full context in which the comment was made, a video of the event is available here: https://www.youtube.com/watch?v=dnXLEaAJqno https://www.youtube.com/watch?v=dnXLEaAJqno I was in attendance and it is worth noting that Bernanke did not take any questions from the audience (apparently unexpected by some of the staffers) and that he did not remain for any of the (illuminating in my opinion) panel discussion that followed. Suggest that people pay attention to the remarks of Mr. Warsh, who in my opinion actually should have gotten the nod to be Fed Chair -- though I understand completely why that would have been untenable for many. Last thing I'll add: some of what is said openly during Congressional testimonies, these fora, and the like is knowingly contradicted in private conversations.