Tag Archives: Stanley Fischer

Fed Vice Chair Fischer Admits Fed is Waiting for Godot, by Wolf Richter

Now, according to Fed Vice Chair Fischer, the Fed is waiting for the mysterious appearance of animal spirits and other vapors in the economy. From Wolf Richter at wolfstreet.com:

In his keynote speech on the usual suspects of central-bank topics at the Institute of International Finance’s big shindig in Washington DC today, Fed Vice Chair Stanley Fischer nevertheless managed to develop a new theory for a fourth Fed mandate.

This new mandate would come on top of the third mandate: inflating asset bubbles at all costs (unlimited asset price inflation). The other two mandates are “full employment” (whatever that means) and “price stability,” which is ironically defined as consumer price inflation, the way the Fed counts it, of at the moment 2%, and a lot more in most people’s real-life experience.

Fischer has been grumbling about the slow growth of the US economy for a while – “Everybody is trying to find out what is going on,” he said today, and then went on to explain what’s going on. Turns out, what’s restraining economic growth and investment is a lack of “confidence” and “animal spirits.”

“Confidence has to be turned on for people to want to invest and we’re waiting to see that happen,” he said, according to MarketWatch. “It will happen at some point. But precisely when” is unknown he said.

“Animal spirits aren’t there – people aren’t excited about growth prospects.”

So no interest rate increases until these “animal spirits” and “confidence” show up?

But, but, but… the Fed’s monetary policies for the past eight years have created the biggest credit bubble in US history, including the biggest junk bond bubble ever, a stock market bubble, housing bubbles in numerous cities around the country that exceed by far the peaks of the prior housing bubbles that imploded so spectacularly, the most gigantic commercial real estate bubble, now according to the Green Street Commercial Property Price Index, 26.5% above its totally crazy bubble peak of August 2007….

Some of Fischer’s own colleagues have been loudly fretting about asset bubbles – including Boston Fed governor Eric Rosengren, a voting dove of the Federal Open Markets Committee, where monetary policy is decided, who’d zeroed in on the commercial real estate price bubble:

As the chart shows, bubbles get really crazy and then they implode. Bubbles are not great, long term, for the economy overall. They’re only great for their beneficiaries, if they can get out in time. Innocent bystanders suffer when bubbles inflate (for example, life gets more expensive but pay stagnates), and they get unceremoniously plowed under when bubbles blow up while the big beneficiaries that couldn’t get out in time, get bailed out.

The charts for these asset bubbles look just out of this world. Or they would have looked out of this world before the era of QE, ZIRP, and NIRP. Now they basically look normal. Because they just about all look like that.

Despite Fischer’s proclamation that “animal spirits” and “confidence” were lacking, it was precisely “animal spirits” and “confidence” that drove these investors, speculators, corporations, and Wall Street to take all these huge risks all the time, and plow other people’s money into these assets.

Animal spirits, pure and simple: Blind risk-taking associated with herd mentality. Everyone is chasing after the same thing, motivated by Fed policies and funded by nearly free money, building up maximum leverage, and driving prices higher and higher in the process. Exactly what the Fed had wanted from get-go. Bernanke called this policy goal the “wealth effect” in a Washington Post editorial back in 2010.

To continue reading: Fed Vice Chair Fischer Admits Fed is Waiting for Godot



Oil Economics, Part 2, by Robert Gore

Monday’s post, “Oil Ushers in the Depression,” was one of the most read, commented on, and controversial posts on SLL. Here is an amplification, and a doubling down on the prediction in that piece:

The sharp drop in oil will support U.S. growth by boosting spending, two top Federal Reserve officials said, playing down the risk that plunging energy costs could push inflation further below the Fed’s goal.

Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, speaking at separate events today in New York, both stressed the positive impact on the U.S. economy from the steepest decline in oil prices for five years.(Bloomberg, “Fed’s Dudley Says Oil Price Decline Will Strengthen U.S. Economic Recovery,” 12/1/14)

If that sounds eerily like Benjamin Bernanke’s infamous assurance that “…the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” it should (testimony before the Joint Economic Committee, U.S. Congress, 3/28/07). However, Fischer and Dudley go Bernanke one better. Bernanke at least acknowledged a problem, although he woefully underestimated its impact. The dynamic duo sees nothing but blue skies after oil’s precipitous fall. Their Panglossian visions reveal the rotten-to-the-core premise of Keynesian economics and complete ignorance of the towering debt skyscraper of cards their policies have helped erect.

In their Keynesian world, demand and consumption are the center of the solar system around which all other economic factors revolve. Reality, on the other hand, dictates that something must be produced before it is consumed, so we’ll stick with reality-based economics. Fischer and Dudley don’t even acknowledge that the falling price of oil might harm producers.

The Saudis are the world’s low cost producer. It is much cheaper to pump oil out of the desert than it is to frack it, extract it from tar sands or shale, or pump it from under the ocean, which is how oil is produced in much of the rest of the world. The Saudis amortized the costs of their petroleum industry long ago; the relevant cost to them is their marginal cost.They have decided to pump sufficient oil to drive its price low enough to make it uneconomic for many higher-cost producers to produce.

Their decision has political and economic motivations. The Saudis have been mightily displeased by the course of events in Syria. The Sunni Saudis don’t like Shiite Bashar Assad, Syria’s despot. They thought President Obama would fight their war for them when Assad crossed his red line. They were furious when Vladimir Putin gave Obama a face-saving out, not just because of Obama’s inconstancy, but also because Putin had thwarted a potential US attack against his ally, Assad. The U.S.’s half-hearted response to the Islamic State—its reluctance to put those all important boots on the ground—has further inflamed the Saudis, who view the campaign against the Islamic State as the perfect pretext for getting rid of Assad.

What better way to punish both the US and Russia (and perpetual enemy Shiite Iran), and reestablish dominance in oil, than by glutting the market? As a business plan, taking on debt at junk bond rates to fund oil production, as many US and Canadian producers have done, or basing government budgets and economic projections on a high price of oil, as Russia and many other oil-producing nations’ governments have done, leaves something to be desired when the lowest-cost producer can lay waste to your plan at any time.

The subprime fiasco offers the perfect analogy. Just as everything “worked” as long as house prices kept going up, the dreams in the oil patch seemed plausible when its price was high. As soon as oil’s price headed in the undesired direction in this highly leveraged market, the dreams evaporated, just as they did in the highly leveraged housing market. The debt of the most indebted producers, now losing money, is worth less than face value. Their creditors will eventually recognize losses. As previously noted, the one wrinkle is that so many producers are governments. They have not, in most cases, explicitly backed their debt with oil revenues, but they had assumed those revenues and based their future spending plans on them. Call it “soft” debt.

The dilemma is the same for both private and government producers. They can go on producing at an economic loss, for the cash flow, adding to the glut and the downward pressure on prices, or they can curtail production and their own revenues. The former is a short-term palliative only; the latter means immediate pain. Either way, total revenues accruing to uneconomic oil producers decline. Those producers will consume less—just as homeowners significantly curtailed their spending when house prices crashed, which is contractive and deflationary.

As the oil price drop leads to losses for producers, their suppliers, and creditors, assets will be sold, production curtailed, orders cancelled, and workers laid off. Eventually the price of oil will stabilize, but producers, especially government producers, may well continue to add to the glut due to short-term cash flow needs—it’s better than people taking to the streets. Even the House of Saud has committed much of its huge revenues to bribing their disaffected off the streets and keeping itself on the most kleptocratic and lucrative throne on the planet.

Dudley and Fischer refuse to acknowledge the debt daisy chain for which they and their fellow central bankers around the world are largely responsible, just as Greenspan and Bernanke have never fessed up to their mortgage-debt-and-securitization daisy chains. When oil-based debt implodes, it will stay as “contained” as the subprime implosion; daisy chains are daisy chains. However, given the much higher level of world debt now, the fallout from this conflagration compared to last time will be akin to the difference in fallout between hydrogen and atomic bombs.


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