Posted by on September 20, 2015

After moving house and taking a two-week break in Canada and New England, there is a lot of catching up to do.  Let’s start with today’s post, the length of which I apologize for in advance.

The Fed Decision

Last Thursday, the Federal Reserve decided to maintain its zero interest rate policy (“ZIRP”) for at least another month and to maintain the size of its quantitative easing (“QE”) program by continuing to reinvest the principal repayments from its portfolio.  This decision means that the Fed has a very good chance of extending ZIRP into December, which will mark the seventh anniversary of this “emergency” response to the financial crisis.  The proponents of ZIRP apparently see no irony in this sentence.

As further evidence that they have an insufficiently developed sense of irony, I offer the following: The penultimate edition of the Economist featured two articles, back to back.  The first was entitled “More red lights than green – The case for raising interest rates is worryingly hazy.”  This article uses the usual collection of price and wage data to show that the US economy is far from experiencing the type of inflationary pressures that would normally warrant a rate increase.  The very next article is entitled “Many unhappy returns – High valuations should give investors pause” and it reports on a recent Deutsche Bank study that claims that investors should expect very low, or negative, returns in the future due to today’s inflated prices across all asset categories.  The article includes the statement that “(t)he current high valuations owe much to the near-zero yield on safe, short-term investments in most developed countries; investors have been tempted by the higher returns available on less liquid (and riskier) assets, bidding up their prices.”  Translation: ZIRP has produced asset bubbles across the board.

I subscribe to a financial press service (Oxford World Financial Digest) that recently displayed a similarly deficient sense of irony.  In its Newsletter of September 16, it featured, also on a back-to-back basis, summaries of two articles entitled “Central Banks Keep Making the Same Mistake: Raising Rates Too Soon” and “Be Careful Before You Chase High Yields.”  In the little commentary that Oxford provides to each article, it is clear that the editor agrees with the thrust of both of these articles.  And that he apparently sees no contradiction in this.

What amazes me about the debate is how thoroughly the proponents of continued ZIRP have misunderstood the arguments of the rate-rise camp.  (We will call them the “Risers” for short.)  Or, probably more accurately, erected a straw man.  Take your choice.

If I can arrogate to myself the role of spokesman for the Risers, I would like to make one thing perfectly clear: the argument for terminating ZIRP has absolutely nothing to do with the fear of imminent rampant inflation.  Although most of us Risers believe that the statistics mask significant real-world inflation, particularly due to the skew introduced by the current commodities implosion and the funky way that things like rent are treated in the indices, nobody believes that we will shortly be joining Venezuela in hyper-inflationary hell.   Instead, our argument is based on the following (much of which has already been stated in an earlier blog and which has also been nicely summarized in a recent post by Brad Brooks that somehow snuck past the BloombergView editorial board):

  • ZIRP has created huge distortions in the capital markets, where there is now strong evidence of bubbles across all major, and many minor, asset categories.  Not only will these bubbles, when they inevitably pop, cause massive socioeconomic and political problems, but they have proven to be very destructive for the real economy.  After all, the “emergency” from which we are currently trying to recover is the result of precisely the same type of problem.  The traditional central banker response, famously articulated by Ben “What Me Worry” Bernanke, that bubbles are impossible to identify and therefore can only be dealt with ex post facto, is simply not adequate when the Fed’s finger prints are all over these distortions.
  • The notion that either businesses or consumers make investment or consumption decisions based on 25bp increments in interest rates is nonsense.  Consumers are largely tapped out – what David Stockman refers to as “peak debt” – and companies are awash with cash from operations and borrowing, but using it for stock buybacks and other forms of financial engineering, not for investment.  A rate rise on the order of what can be reasonably anticipated from the Fed is unlikely to materially affect the demand coming from either of these sectors, but it will serve as a very useful signal to the financial markets that the party is over and the Fed is belatedly taking away the punch bowl.  Much of the froth in financial markets is based on the belief that investors can count on a “Greenspan/Bernanke/Yellen” put to save them from any material corrections, making risky assets a one-way bet.  An end to ZIRP is the minimum needed to wipe this bubble psychology from the markets.
  • The argument that deflation must be resisted through all measures is spurious, particularly when much of the deflationary pressure is coming from a collapse in the price of commodities which is, despite the nonsense spewed by so many central bankers and commentators, an unalloyed economic and geopolitical gain for most of the developed world.  The idea that deflation is materially and destructively self-reinforcing is nonsense to anyone who has ever bought a computer or other electronic device, instead of infinitely deferring the purchase to wait for the better, cheaper models to come.  Or anyone who has ever fed, sheltered, medicated, educated or transported himself today instead of waiting for cheaper opportunities to do so tomorrow.  Or anyone who has looked at the continuous strong growth that America (and most of the rest of the world) experienced during the second half of the 19th century despite persistent deflation during the entire period.
  • ZIRP, and the asset bubbles it has created, is a leading cause of the growing wealth and income disparities we are seeing in the world today.  The consequences of this problem, and its inevitably erroneous diagnosis, are extremely negative for the economy and politics.  And this is not even an unintended consequence of ZIRP and QE, which are designed to create a “wealth effect.”  It is a feature, not a bug.
  • ZIRP and QE, and the hunt for yield they create, are causing huge misallocations of resources in the real economy.  In fact, a big factor behind the deflationary pressures in today’s world is the excessive investment in things like shale oil, steel mills, iron mines, etc., that ZIRP/QE produced.   Like the and sub-prime booms, today’s bubbles are drawing real resources into fundamentally unprofitable activities.  When the busts come, they will create unemployment, social dislocations and price collapses for which we will be exhorted to provide more “hair of the dog.”
  • Although I have never seen studies to show this, I have long wondered whether our aging population no longer responds to interest rates the way central bankers think.  The boomers are entering retirement.  The “financial repression” imposed by ZIRP means that their expected retirement income is reduced.  If they were invested in risky assets at the commencement of ZIRP and QE, then they have had a windfall capital gain to offset this income loss.  But having been twice burned by bubbles, I suspect that a lot of them weren’t.  Which means that the only way to rebuild is by greater saving and delaying retirement, both of which run contrary to the Fed’s desire to increase consumption and create job openings.  This may very well be a factor in Japan’s weak economy and it may now be manifesting itself in an aging America.

That is the argument of the Risers.  To me, it clearly tips the scales in favour of an end to ZIRP that should have happened a long time ago.  Each of these points is debatable, but the mainstream consensus refuses to engage on its merits.  Instead, it continues to hammer away at the straw man it has created.  Like ZIRP, it is time to end this.

Oh Canada

While touring around Canada, I was reminded once again about what a beautiful and bountiful country it is.  Full of natural resources, thinly populated, and with an orderly and productive population that more or less speaks the same language as we do (aside from Quebec, where it is very unclear what they speak) and likes the same food.  I, mean, who wouldn’t want to own it?  And it is right at our doorstep.

Over in Norway, there is a TV series, scheduled for release in October, which is causing outrage in Russia. The title translates as “Occupied” and it depicts a fictional invasion of Norway by a Russia intent on having the North Sea oil fields.  With the exception of South Park: Bigger, Longer and Uncut, which imagined a US invasion of Canada to cut off the corrupting influence of its cartoonists, I don’t think that there has been anything comparable coming out of Canada.  And I don’t think that South Park drew any official rebukes from the US government.  Doth the Russian lady protest too much?

The US invaded Canada during the War of 1812, but that doesn’t really count since Canada was still part of England and the Brits had just burned down the White House.  Since then, the USA and Canada have lived peaceably, side by side, for over 200 years, despite the USA’s vastly superior numbers and military power, and the manifest attractions of Canada.  The two countries share the world’s longest non-militarized border.  I cannot think of an analogous situation anywhere in the world or in world history.

This is all a long way of saying that, the next time you are with someone who denies American exceptionalism, tell them to speak to a Canadian.

The UK Labour Party

One of the big news items in Old Blimey is that the Labour Party has overwhelmingly voted to make Jeremy Corbyn its next leader.  For those of you in America who don’t know who Jeremy Corbyn is, you can be forgiven: he is not much better known here in the UK.  Except maybe to archeologists.  Jeremy Corbyn is a political stone axe, an artefact from an earlier epoch.

The cover of this week’s Economist feature a heroic Corbyn exhorting his colleagues with “Backwards, Comrades.”  The article inside enumerates some of his stands, which include admirations for Hugo Chavez, Vladimir Putin, Hamas (and the Palestinian cause in general), and Syriza.  Domestically, he wants to re-nationalize certain industries, restore the unions and implement “QE for the people,” with the Bank of England using printed money to directly invest in infrastructure.  He is stridently anti-American, anti-Israel and anti-NATO.  At a recent ceremony to commemorate the Battle of Britain, he ostentatiously refused to sing the British national anthem.  He is, in short, a retrograde imbecile.

His campaign slogan?  “I voted for a new kind of politics.”  I kid you not.

The Conservatives are over the moon with his election.  They know that his leadership will guarantee Tory victories for as far as the eye can see.  One is reminded of the very leftist Labour Party manifesto (“platform,” for my American readers) from 1983, dubbed “the longest suicide note in history,” which kept Labour out of power until 1997, when the party was dragged, kicking and screaming, into the second half of the 20th century by Tony Blair.  Corbyn wants to take it back to the first half.[1]

One little-commented consequence of this election is that it will substantially increase the pressure for Scottish independence.  In addition to pure nationalism, the push for independence has a policy component.  Scotland is considerably more left wing than the rest of the United Kingdom.  With a viable Labour Party, the Scots could at least imagine a coalition government (Labour and the Scottish National Party) more to their taste.  This possibility is now foreclosed and the Scots will be increasingly tempted to go it alone.

Tennis and PC Nonsense

The US Open was another heartbreaker for Roger Federer fans, myself included, who thought that he had a real shot at another major after crushing Novak Djokovic in the finals of the Cincinnati Masters with his new serve-and-volley game.  But, in the immortal words of Stan Wawrinka after losing to Djoko in the 2013 Australian Open, Novak was just too “f**king strong.”  Still, it was a very good match and there were moments of absolute brilliance from both sides of the court.

The tournament is useful to examine for another reason.  There has been a running debate in tennis about whether there should be prize money equality for men and women, a debate that the Women’s Tennis Association has largely won.  This is another example of political correctness triumphing over logic and market forces.  If anyone disputes this, you should point them to the 2015 US Open.

The women’s side of the tournament was a soporific event.  The big draw was Serena Williams, who was shooting for the Calendar Grand Slam and tying the career Grand Slam record of Stefi Graf.  As I have commented before, the only question in woman’s tennis is whether Serena wins or whether she beats herself, which does not exactly make for sporting excitement.  In a semi-final match versus an unranked and thoroughly unexceptional Roberta Vinci from Italy, Serena pursued the latter strategy.  So, we had repeated sightings of Serena drilling returns of 75mph second serves, and equally weak groundstrokes, into the net while the BBC commentators gamely tried to convince the audience that this was the result of some very clever tactics by Vinci.  Nonsense.  I didn’t even bother to watch the all-Italian final between Vinci and her childhood friend Flavia Pennetta, which, amazingly, Italian Prime Minister Matteo Renzi found the time and desire to attend.

So, on the men’s side, we had the 42nd encounter between two of the all-time greats, a rivalry which is now totally even.  When they aren’t playing each other, they can also be seen in action against Rafael Nadal or Andy Murray, both of whom can make similar claims to greatness.  Or against Stan Wawrinka, who on a given day can beat anyone with the most amazing combination of shot-making and power in tennis – or, in any game, for that matter.  Conversely, on the women’s side, we watched a decent match between Serena and her sister, after which the former self-destructed and then we could barely keep our eyes open.

For whatever reason, women’s tennis has never really produced the type of extraordinary rivalries that have been routine in men’s tennis.   With rare exceptions – such as the matches between Chris Evert and Tracy Austin, where they tried to bore each other into submission with their endlessly looping baseline exchanges – there has typically been one dominant player in women’s tennis, which explains why there are six women who have more career Grand Slam singles titles that Roger Federer, who leads the list for the men.  This is the first reason why women’s tennis provides nowhere near the same entertainment value as the opposite gender, and it should not be compensated in the same way.

The second reason is even more fundamental.  In addition to rivalry, people are willing to pay large amounts of money to watch sporting events due to the extraordinary skills that are on display.  And these skills are absolute, not gender-relative.[2]  Serena has openly doubted, in a putative match against Andy Murray, whether she would win a single point.  Yet, Serena has also claimed that “I deserve to get paid the same amount.  I don’t deserve less ‘cause I have boobs and they don’t.”  This is perfect example of the faulty logic that underlies so much political correctness.

For winning the 2015 US Open, Pennetta picked up the same $3.3 million check as Novak Djokovic.  But from the standpoint of the skills and sheer athletic ability on display, the women’s final was probably the equivalent, if I am very generous, of watching the 500th ranked male professional player against the 501st. You could have a very good, and very tight, match between these two, but frankly no one would care and the winner would be paid peanuts.  It would therefore be more accurate for Serena to say that she is vastly overpaid only because she has boobs.   All the more reason for her to be proud of them.


I think that Tom Hardy is one of the great, unsung actors of our time.  It will therefore be very interesting to see if he gets an Academy Award nomination for his performance as both of the Kray twins, famous London gangsters from the 1960s, in the very underrated film LegendHere is the trailer.  (A word of warning to my American audience: the Cockney accents are frequently impenetrable, even to someone who has been in this country for over 20 years.  It might be best to wait for the DVD and put on the sub-titles.)


Lest anyone think that I have been completely loafing these last few weeks, here is a list of the subjects of BloombergView articles on which I have recently commented:

Unfortunately, my comments are frequently buried in a long list of other, obviously less interesting, ones and therefore it is sometimes hard to find them.  I think that there is a mechanism to “follow” my comments on Bloomberg, and get an automatic notice when I next vent my spleen, but don’t ask me how to do it.  Good luck.

In Bed with the DOJ

I thought that it would never happen, but Obama’s Department of Justice and I finally agree on something.  A short while ago (under theFIFA” sub-title here), I commented on the superior dissuasive power for bankers of closed confinement with someone named Leroy or Billy Bob.  After filling its boots with billions of dollars of fines meted out to various financial institutions, the DOJ has finally accepted my argument and decided that pursuit of individuals is a more effective deterrent to white collar crime.  However, like Barry Ritholz over at BloombergView, I am skeptical on whether this will actually be implemented.

In any event, we are certainly unlikely to see a return to the good old ways, as embodied in this 1321 bankruptcy law for bankers from Catalonia in Spain:

“…they would fall into public disgrace, which would be proclaimed throughout Catalonia by a town crier.  Immediately afterward, the banker would be beheaded directly in front of his counter, and his property sold locally to pay his creditors.”

Now, those were the days.

Brazil and Goldman’s Jim O’Neill

After having lived by the Chinese-driven commodity boom, combined with an indigenous debt explosion, the Brazilian economy is now dying by it.  In the latest example of locking the stable doors after the horse has bolted, Brazil has just been downgraded to “junk” status by Standard and Poor’s, with similar exercises expected shortly by Moody’s and Fitch. Which means that, out of the original members, only India remains standing out of the “BRICS” (Brazil, Russia, India and China) acronym, coined by Jim O’Neill when he was the Chief Economist at Goldman Sachs.    As Ambrose Evans-Pritchard from The Telegraph has commented: “Little remains of the BRICS allure that captivated the world seven years ago, and now looks like a marketing gimmick.”

But we should never disparage marketing gimmicks in the world of investment banking.  After all, look what the coinage of “BRICS” did for the career of Jim O’Neill, for many years my personal favorite for the title of “World’s Most Overrated (and Overcompensated) Economist.”   He rode this marketing gimmick to a highly lucrative partnership at Goldman and then, in an example of excellent market timing that he rarely displayed as the Chairman of Goldman’s $800 billion Asset Management Division, he retired in 2013 before the BRICS really started to crumble.  He is now enjoying his life peerage (as Baron O’Neill of Gatley), while dispensing doubtlessly flawed advice to the government as Chairman of the Greater Manchester Local Enterprise Partnership Advisory Board.

As I have said before, one of the strongest arguments for graduated taxation is the significant role of luck in compensation and wealth.  Although this random element has been hugely augmented by the boom-bust policies followed by governments and their promotion of leverage, there will always be some of it in any society, regardless of how it is organized economically.  Free-market capitalism – not the “crony” variety – probably does a better job than any form of economy at rooting this out, but the career of someone like Jim O’Neill shows that it will never disappear entirely.

Paid Sick Leave

President Obama celebrated Labor Day in the USA by signing an executive order requiring government contractors to provide one hour of paid sick leave for each 30 hours worked, equivalent to seven days a year.  I doubt that any proof of illness will be required to benefit from this provision, but even if so, I am pretty sure that most people will be able to find a friendly doctor or nurse.  So, with a stroke of his mighty pen, Obama has given a large group of workers seven extra vacation days per year.  Thank you, POTUS!

Having delivered this little piece of electoral candy, Obama couldn’t resist the temptation to take a couple of swipes at Republicans, who have apparently been “wrecking the economy for a long, long time” and who “won’t let facts or evidence get in their way.”  Anticipating that this act of noblesse oblige might be criticized for raising the cost of government contracts, Obama’s Labor Department asserted that any costs would be offset by the savings that contractors would realize through lower attrition rates and increased worker loyalty.  However, the department offered no “facts or evidence” to support this claim – doubtlessly because the Republicans would just ignore them anyway – nor any explanation why thousands of private sector employers were unable to arrive at this managerial brainstorm themselves.  Apparently, Obama has drawn upon his years of successful business management to bring enlightenment to the issue.

Oh, and the executive order doesn’t take effect until 2017, when Obama will be safely removed from any of its consequences.  He might even be delivering a speech decrying the short-termism of businessmen when it takes effect.

When I read things like this, or when I watch something like this video on the minimum wage by the hack Robert Reich, I always pause to think that it is downright amazing that democracies don’t have economic policies that are considerably more left wing than the already too leftist ones they have.  What could be more superficially appealing than giving workers paid sick leave costlessly?  This is truly the government as the Candy Man or, in the phrase of Frédéric Bastiat, “the great fiction, through which everyone endeavors to live at the expense of everyone else.”  Although it is very easy to disparage the voting population, and I am certainly as tempted by anyone to do this, there is a kernel of popular common sense that protects us from this type of demagoguery.  Sadly, that kernel seems to be shrinking.

Hillary and The Donald

It is pleasing to see Hillary’s poll numbers dropping, although not yet enough to make a “Jeremy Corbyn Moment” for the Republicans, when they could run against Bernie Sanders, very likely. Still, it is very gratifying that, in a recent survey, “liar” was the winner when respondents were asked to choose one word to describe Hillary.

The probe into her personal email account and her various incomplete, word-crafted and belated explanations of it may very well prove that Hillary is, in fact, a liar.  But even if it doesn’t, there is no disputing that she is something that makes her even less suitable for the position to which she aspires.  She is a lawyer.  And she is a career politician.  I have written before about how we have the misfortune to be governed by lawyers and career politicians, in large part because their betters will not often willingly submit to the tedious and degrading meat-grinder called “politics.”  Hillary would represent the apotheosis of both of these deplorable trends.   Add to this the “identity politics” that form a large part of her electoral appeal, and we would have a truly toxic blend.

Meanwhile, The Donald continues to do well in the Republican polls pursuing his strategy of making sure that he is never outdone when it comes to insults or outlandish claims.   We should not dismiss the latter too quickly.  After all, the prospect of his Republican candidacy for the presidency has already accomplished the seemingly impossible.  It the only thing in the world that would cause me to vote for Hillary Clinton.

Roger Barris, London

I Wish That I Had Said That…

“In the economic sphere, an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them …

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it is almost always the case that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Hence it follows that the bad economist pursues a small present good that will be followed by a great evil, while the good economist pursues a great good to come, at the risk of a small present evil,” Frédéric Bastiat, a 19th century French economist, as quoted in David Stockman’s Contra Corner.

“In establishing the rule of law, the first five centuries are always the hardest,” former UK Chancellor of the Exchequer and Prime Minister Gordon Brown, on why countries struggle to emerge


[1] Corbyn’s election also reinforces another tradition in British politics.  In the USA, Democrats and Republicans disagree on policy issues, but they are not physically distinguishable from each other.  Ditto the corresponding parties in France, Germany, etc. – in fact, anywhere else in the world.  Only in the UK do the major parties appear to have gone through speciation.  Like many other senior party members past and present – such as John Prescott, Robin Cook, Clare Short, Mo Mowlam and Margaret Beckett, all of whom were in Blair’s first cabinet – the variant “Corbyn” could only flourish in Labour.  The class system in England is so pronounced that it is etched in the human genome.

[2] Before I am accused of being relentlessly misogynist, I would point out that there are several sports – such as gymnastics and dance, which I actually believe are two of the most athletically demanding – where women’s skills are the equivalent of men.  Maybe different, but equivalent.  I strongly suspect, but I do not know, that women are paid the same or more than men in these areas, even without the intervention of the PC posse.

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2 Comments on "The Fed Decision"

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Mark B. Spiegel
This is EXCELLENT, and I’ll go one step further and explain HOW we know that the Fed is blowing bubbles all over the place: Real short term rates have been set at NEGATIVE 150-180bp for years now, which means the Fed is PAYING people to take money. Within the definition of “observed human nature” is the fact that any time you pay people to use a valuable resource it gets squandered in really stupid ways (if water meters ran in reverse, every lawn would look like the 18th green at the Masters), and that’s exactly what’s happening now. Money should… Read more »
Bernard Lahey

Excellent article, but why the gratuitous slam on Québec? We speak french, albeit with our own accent and expressions. Not sure you are aware but English spoken in Texas is a bit different than what is spoken in Scotland. But almost all Quebecers also speak English, as well as other languages. We think that is a good thing.