Ambrose Evans Ambrose-Pritchard writes in The Telegraph that “monetary tightening is like pulling a brick across a rough table with a piece of elastic.
“Central banks tug and tug: nothing happens. They tug again: the brick leaps off the surface into their faces.”
Or as economist Paul Krugman puts it, the task is like trying to operate complex machinery in a dark room wearing thick mittens.
Lag times, blunt tools, and bad data all make it impossible to execute a beautiful soft-landing.
Way back in late 2007, the economy went into recession, a lot earlier than originally thought and almost a year before the demise of not-too-big-to-fail Lehman Brothers.
But the Federal Reserve apparently didn’t know – or acknowledge – that at the time.
The initial data release was way off base, as it frequently is at certain points in the business cycle.
The Fed’s main predictive model was showing an 8% risk of recession at the time. Today, by the way, it’s under 5%. Evans-Pritchard remarks, “It never catches recessions and is beyond useless.”
Fed officials later complained they wouldn’t have taken their hawkish stance on inflation the next year had the data told them what was accurately happening in real time.
And, more importantly, they wouldn’t have set off the chain reaction leading the global financial system to come crashing down.
Evans-Pritchard, however, ponders that had the Fed and its peers overseas paid more attention – or any attention for that matter – to the quickly evolving slowdown in the first half of 2008, they would have seen what was coming.
So, where does that leave us today as the Fed, European Central Bank and Bank of England hike rates at the fastest pace and more aggressively in four decades, with massive QT as icing on their cake?
According to Evans-Pritchard, the monetarists are again crying the apocalypse is coming! They’re accusing central banks of inexcusable errors:
First, they unleashed the high inflation of the early 2020s with an explosive monetary expansion.
Then, they swung to the other extreme of monetary contraction – disregarding both times the standard quantity theory of money.
By Dave Allen for Discount Gold & Silver
Ambrose Evans Ambrose-Pritchard writes in The Telegraph that “monetary tightening is like pulling a brick across a rough table with a piece of elastic.
“Central banks tug and tug: nothing happens. They tug again: the brick leaps off the surface into their faces.”
Or as economist Paul Krugman puts it, the task is like trying to operate complex machinery in a dark room wearing thick mittens.
Lag times, blunt tools, and bad data all make it impossible to execute a beautiful soft-landing.
Way back in late 2007, the economy went into recession, a lot earlier than originally thought and almost a year before the demise of not-too-big-to-fail Lehman Brothers.
But the Federal Reserve apparently didn’t know – or acknowledge – that at the time.
The initial data release was way off base, as it frequently is at certain points in the business cycle.
The Fed’s main predictive model was showing an 8% risk of recession at the time. Today, by the way, it’s under 5%. Evans-Pritchard remarks, “It never catches recessions and is beyond useless.”
Fed officials later complained they wouldn’t have taken their hawkish stance on inflation the next year had the data told them what was accurately happening in real time.
And, more importantly, they wouldn’t have set off the chain reaction leading the global financial system to come crashing down.
Evans-Pritchard, however, ponders that had the Fed and its peers overseas paid more attention – or any attention for that matter – to the quickly evolving slowdown in the first half of 2008, they would have seen what was coming.
So, where does that leave us today as the Fed, European Central Bank and Bank of England hike rates at the fastest pace and more aggressively in four decades, with massive QT as icing on their cake?
According to Evans-Pritchard, the monetarists are again crying the apocalypse is coming! They’re accusing central banks of inexcusable errors:
First, they unleashed the high inflation of the early 2020s with an explosive monetary expansion.
Then, they swung to the other extreme of monetary contraction – disregarding both times the standard quantity theory of money.
Economics professor Steve Hanke at Johns Hopkins University said, “The Fed has made two of its most dramatic monetary mistakes since its establishment in 1913.”
The growth rate of the broad-based M2 money supply has turned negative – a very rare event – and it has shrunk at an unusual pace of 5.4% over the last three months.
“The full impact of the monetary tightening has yet to be felt, given that transmission lags from policy changes can be two years or more.” Adam Slater, Oxford Economics
But it’s not just the monetarists who are bumming out, though they’re the most vocal.
Pritchard points to three former IMF chief economists of different stripes who’ve raised red flags – Ken Rogoff, Maury Obstfeld, and Raghuram Rajan. But it’s not much different among New Keynesian economists.
Krugman, for instance, is among that group warning that the Fed’s reliance on lagging measures of inflation – or worse, “imputed” measures like shelter and core services – paint a misleading picture at best and raise the danger of over-tightening.
Another, Adam Slater at Oxford Economics, said that the Fed and other central banks are moving into overkill territory.
He warned, “Policy may already be too tight. The full impact of the monetary tightening has yet to be felt, given that transmission lags from policy changes can be two years or more.”
Slater said the combined tightening shock of rate hikes, together with the switch from QE to QT, is equivalent to 6.6% in the U.S., 9% in the eurozone, and a whopping 13% in the UK.
He believes excess money created by central banks during the pandemic has largely evaporated, and the growth rate of new money is collapsing at the fastest rate ever recorded.
So, Pritchard asks, what should we make of last week’s primo-jobs report, which contradicts the recessionary signals?
He reminds us that the jobs data are erratic, often heavily revised, and almost always mislead when the cycle turns.
Employment didn’t peak until eight months after the start of the deep 1973-1975 recession. So don’t be fooled – a recession really is coming.
So, is the Fed right to fear a repeat of the 1970s when inflation seemed to fall back only to take off again – with worse impacts – because it relaxed policy too soon the first time?
Probably, but Evans-Pritchard points out that the money supply never crashed like this when the Fed made its historic mistake in the mid-1970s. Critics, in fact, say the Fed is putting too much weight on the wrong risk.
Thus, you gotta wonder, who in the end will screw up the most – the Fed, the ECB or the BoE? We’ll just have to wait and see for that answer.
But for now, the Fed is the likeliest to screw up first because it’s furthest along in the tightening cycle.
All points along the Treasury yield curve are showing a growing and continuing inversion, which would normally tell the Fed to stop tightening, if not reverse course, immediately.
Larry Goodman, who heads the Center for Financial Stability in New York, which tracks certain measures of money, said, “Inflation and growth are slowing more dramatically than many believe.”
It’s humbling to remember that almost nobody saw the global financial crisis coming in September 2008. Or if anyone saw it, they mostly kept it to themselves or their warnings were ignored.
We often say that past performance is no guarantee of what happens in the future. Unfortunately, it’s just as often true that those who don’t learn from the past are condemned to repeat it.