Wednesday, August 16, 2017

Larry Summers reminds us how fucked the US really is


Larry Summers - this is precisely how fucked the US is. Quote right from the start:

With the term of Janet Yellen as Federal Reserve chair ending next February, the president will have to nominate and the Senate will have to confirm a new head of the central bank in coming months.

Yup. The US is going to have to rely on Trump (or Pence, ahem) to nominate the next Fed Chair.

As an economics student, let me tell you that the next Fed Chair could royally fuck up the entire planet for a hundred years if he's so much as a fan of Prescott & Sargent.

Boring details:

If history is any guide, it is more likely than not that the economy will go into recession during the next Fed chair’s four-year term. Recovery is now in its ninth year with relatively slow underlying growth for demographic and technological reasons, very low unemployment and high asset prices. Even without these factors, experience teaches that recessions are almost never forecast or even rapidly recognised by the Fed or the professional consensus forecast, but there is at least a 20 per cent or so chance that if the economy is not in recession, it will be so within a year. So the likelihood that the next Fed chair will have to address a recession is probably about two-thirds.

Historically, the Fed has responded to recession by cutting rates substantially, with the benchmark funds rate falling by 400 basis points or more in the context of downturns over the past two generations. However, it is very unlikely that there will be room for this kind of rate cutting when the next recession comes given market forecasts. So the central bank will have to improvise with a combination of rhetoric and direct market intervention to influence longer-term rates. That will be tricky given that 10-year Treasuries currently yield below 2.20 per cent and this would decline precipitously with a recession and any move to cut Fed funds.

As a result, the economy is probably quite brittle within the current inflation targeting framework. This is under-appreciated. Responsible new leadership at the Fed will have to give serious thought to shifting the monetary policy framework, perhaps by putting more emphasis on nominal gross domestic product growth, focusing on the price level rather than inflation (so periods of low inflation are followed by periods of high inflation) or raising the inflation target. None of these steps would be easy in current circumstances, but once recession has come effectiveness will diminish.

But now that you've been put to sleep by blah blah technical stuff, let's scare you back to full wakefulness:

There must be more risk now of presidential interference with the Fed than at any time since Richard Nixon. In dealing with international matters, the Fed is partnered with an understaffed and amateurish Treasury and a president who is dissipating US credibility. Most fundamentally, the temper of the times has turned against technical expertise in favour of populist passion and the Fed is the quintessential enduring apolitical institution.

Yeah.

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