Posts filed under “Think Tank”

Dick Alford on Opportunities Lost by the Fed

Our colleague Richard Alford comments on recent Fed history and particularly how the organization failed to take notice of the warnings of one of its longest serving bureaucrats — Ted Truman — as he ended decades of service at the central bank.   I worked with Dick at the FRBNY where he contributed to the weekly report for the FOMC on the foreign currency markets.    — Chris

Opportunities Lost
By Richard Alford (

Against a backdrop of continued financial fragility and extraordinary policy actions, policymakers are discussing re-balancing global growth, restoring financial stability, and the future of the Dollar as the world’s reserve currency. In 2005, Edwin Truman proposed a list of policy measures that if followed would have reduced the US external imbalance and placed the reserve status of the Dollar on better footing.  Truman’s proposal differed from the standard litany of US fiscal discipline, Dollar adjustment, and increased demand in surplus countries. It called upon the Federal Reserve to slow the growth in US demand. More recent research, by Shin and Adrian, suggests that if the Fed had heeded Truman’s prescription, then monetary policy would have also mitigated the recent turmoil in financial markets.

In short, the Fed ignored external imbalance and the increasingly precarious nature of financial institution balance sheets when it pursued accommodative policy during the bubble years. The Fed disagrees. The official Fed position is that US monetary policy has no role to play in adjusting external imbalances:

“Members of the Committee noted that monetary policy was not well equipped to promote the adjustment of external imbalances …..Fiscal policy had a potentially larger role to play by promoting an increase in national saving, but the adjustment would involve shifts in demand and output both domestically and abroad…..” (FOMC 2004)

Truman pointed to the excess of total demand (gross domestic purchases/”absorption”) over potential output and the more rapid growth of demand relative to the growth of potential output. He concluded that:

“external adjustment is not just about the effects of exchange rates on exports, imports, and trade balances. It is also about slowing the rate of growth of domestic demand (gross domestic purchases) relative to the growth of production (GDP). To achieve any adjustment of the imbalance in real terms as a share of GDP, the growth rate of the former must be less than the growth rate of the latter.”
“… What the Federal Reserve has not acknowledged is that monetary policy has a role to play in slowing the growth of total domestic demand relative to the growth of total domestic supply or domestic output.”
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Category: Markets, Think Tank

Muddle Through, R.I.P?

Muddle Through, R.I.P?

Savings Equal Investments

Japanese Disease

Who Will Buy the Debt?

The New Muddle Through Economy

I first wrote about the Muddle Through Economy in 2002, and the term has more or less become a theme we have returned to from time to time. In 2007 I wrote that we would indeed get back to a Muddle Through Economy after the end of the coming recession. If you Google the term, at least for the first four pages more than half the references are to this e-letter. I get a lot of flak from both bulls and bears about being either too optimistic or too pessimistic. Being in the muddle through middle is comfortable to me.

Last week I expressed my concern that we as a country are taking actions that could indeed “Kill the Goose” of our free-market economy. I rightly got letters asking me how I could maintain Muddle Through in the face of that letter. I have given it a lot of thought and research. How likely are we to muddle through in the face of $1.5 trillion and larger deficits? Today we take another look at Muddle Through. It should be interesting.

But first, two housekeeping items. I want to welcome the 150,000 members of the National Association of the Self-Employed to this letter. They have asked me to be a special consulting economist to their group, and they will send this letter each week to their members. Since its beginning in 1981, the National Association for the Self-Employed has pioneered support for micro-businesses and the self-employed, and been a forceful advocate for small business in this country. ( I am honored. I am pleased to add you to my 1 million closest friends. I hope you find it useful.

Second, I will be going to South America at the end of next week, to Buenos Aires, Montevideo, Sao Paulo and Rio. I will be speaking in those cities and traveling with my new Latin American partner, Enrique Fynn of Fynn Capital (based in Uruguay). If you would like to find out about this tour or what services he can help you with, you can go to and sign up and Enrique will get in touch with you. And as always, if you are an accredited investor, you can go to that website and one of my partners in the world will get back to you. (In this regard, I am president of and a registered representative of Millennium Wave Securities, LLC, member FINRA.) And now to the letter.

Muddle Through, R.I.P.?

I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting.

I am not surprised about the response of the Fed to the current recession and credit crisis, whether it’s the large monetization of debt or the low interest rates. Assuming they more or less remove the monetary easing in a reasonable manner, there is nothing that would make me think we do not eventually recover, albeit at a very slow Muddle Through pace, with a jobless recovery that lasts for several years. It will not be pleasant, but we’ll survive.

However, gentle reader, never in my wildest dreams did I think we could be looking at government deficits of $1.5 trillion dollars and actually budgeting future deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic. Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019.

And that assumes nominal growth that is north of 3% and unemployment dropping back below 5% in reasonably short order. If you make less optimistic assumptions, the number can become much larger rather quickly. Where do we find that much money to finance that large a deficit? We will look at what might be the answer, but first we need to look at a basic concept in economics.

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Category: Think Tank

Wise Words from Economists ?

Mike Panzner just got back from The Economist’s “Buttonwood Gathering” in New York and thought I’d share a few of the more interesting (and, in some cases, quite enlightening) quotes (in no particular order) from the movers-and-shakers at the (well attended) conference: Secretary Tim Geithner, United States Department of the Treasury: “Generally, we did not…Read More

Category: Bailouts, Credit, Think Tank

Get your gold, now at Harrods

In case it was missed yesterday, a new sign of the times is apparent in a world of paper currencies with some being badly debased. Harrods, the huge department store in London, announced that they will be selling gold.

Category: MacroNotes

Economic data of the day

Following the 3 pt drop in the weekly ABC poll on Wednesday, the preliminary Oct UoM confidence figure also fell and was below expectations. At 69.4, it’s down 4.1 pts from Sept (which was the highest since Jan) and was 3.9 pts below forecasts. Most of the drop was in the Outlook as it fell…Read More

Category: MacroNotes

The King Report: Goldie’s Revenue Contributions

> Once again, just like in July, August & September, Benito juiced the system during expiry week. The previous three weeks, the Fed balance sheet contracted modestly. But for the week ended on Wednesday, Benito poured $54.747B into the system via the monetization of $70.699B of MBS… Term auction credit declined 22.937B. (See Table 9)…Read More

Category: Think Tank

Operation 1100

The following is the morning research note from a  major trading desk in NY ~~~ During options expiration week, the dealer community’s desire to “pin” the market to certain key levels renders all other thoughtful analysis moot. Options traders, like all traders, seek liquidity, and liquidity is in the big round number strikes – SPX…Read More

Category: Think Tank

US Foreclosure Activity

FST: > > Source: US foreclosures’ flurry of activity Charlie Carter USFST, 10/15/09

Category: Real Estate, Think Tank

Andy Xie: For Economic Stimuli, a Revolving Exit Door

Can interest rate adjustments, currency devaluation and zigzag policymaking help unwind economic stimuli? It depends.

Australia recently raised its policy interest rate 25 bps, becoming the first major economy to do so since the financial crisis a year ago prompted all major economies to rapidly cut interest rates to historical lows.

Financial markets had been chattering about economic stimuli exits for about a month before Canberra’s move. The consensus was that central banks would keep rates extremely low through 2010, and possibly beyond, on grounds that the economic recovery is still shaky.

Central banks also have been discussing the subject. Their messages are, first, that they know how to exit and will exit before inflation becomes a problem and, second, that they don’t see the need to exit anytime soon. They try to assure bond inventors not to worry about their holdings, despite low bond yields, while trying to persuade stock investors they need not worry about high stock prices, as liquidity will remain strong for the foreseeable future. So far, central banks have made both groups happy. But Australia’s action is likely to raise concern among financial investors who hold expensive stocks and bonds.

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Category: Think Tank

Trichet steps up the US$ rhetoric

In likely the most pointed, direct message given to the US government in a while on the direction of the US$, ECB Pres Trichet said yesterday, “It is extremely important that the US authorities, including the Treasury, the Secretary of the Treasury and the chairman of the Fed would pursue policies that take into account…Read More

Category: MacroNotes