A guest post by Benjamin Cole
A couple of years back already, the gigantic U.S.-based bond manager Pimco ($1.97 trillion under management) berated the European Central Bank (ECB). The man-bites-dog part of this recounting is that the Pimconians bashed the ECB for being too tight.
Readers know that the financial sector is dominated by conservatives, and it is a curious and hardening modern-day affliction of Tories everywhere that they reflexively extol tight money. For their own reasons, central bankers embrace and fan this predilection.
To state the obvious, the ECB didn’t listen to PIMCO; now the Irish Independent newspaper has just run an op-ed that bluntly stated, “Europe needs to start printing more money—and it needs to do it now.”
Duh. The continent is sagging towards deflation; Italy is in its third recession since 2008. The International Monetary Fund has called on the ECB to consider quantitative easing (QE).
Frankly, there is no choice; the ECB must go to QE. Even Taylor Rule aficionados have to concede that for PIGS countries a Taylor diktat would require negative interest rates—on other words, a fictional solution. And that has been the ECB’s course so far—embracing a fictional solution.
Is the USA So Different?
Like many others, I have lamented the glacial pace of the U.S. recovery, and the timid, irresolute flat-footedness of the Federal Reserve. But the U.S. did seem on the mend, as seen by GDP and unemployment statistics.
But recently I came across a chart that made me wonder if the “recovery” was even slower and more constrained that I had thought.
Here you go:
Egads, Americans are working fewer hours than in 2007!
This is “recovery”?
Granted there are productivity gains in the U.S., granted some people are retiring. But fewer hours worked now than in 2007?
Fed Chief Yellen is right to ponder if the official unemployment rate has become a misleading figure—but she should do more than merely pontificate and ponder. She should fight to keep QE, or threaten to resign her chairmanship.
The Fed has undershot its 2 percent inflation “target” for years. Would it kill the FOMC to overshoot for a few years?
You Can’t Tighten To Kill Structural Impediments
To be fair, the observers who blame “structural impediments” for retarded U.S. economic growth often have a point. For example, there are now nearly 12 million people in the United States collecting “disability” payments, from the Social Security system, or the Veterans Administration.
That 12 million figure is much larger than the less than 4 million who collect unemployment insurance. I think the 12 million disabled is a number large enough to have macroeconomic considerations. I am happy to link arms with government bashers and leftie-haters and demand these two “disability” programs be cut in half. We can chant, and write letters. Then we can chant some more….
But the fact remains: Monetarily asphyxiating the economy does nothing to push those 12 million back into the private-sector and payrolls. Quite the opposite.
It is a sad fact of political and economic life that a central bank cannot fix structural impediments, but it can starve an economy—and good employees and businesses—of prosperity.
That is what is happening now in Europe, and to a lesser extent, in the United States.