The Big Jackson “Hole” in the Fed’s Understanding of the Economy- by NEIL SISKIND


By: Neil S. Siskind

Federal Reserve Bank of Philadelphia President, Patrick Harker, said the following during an interview with Bloomberg on August 23rd at the Fed’s 2019 Economic Policy Symposium in Jackson Hole:

“Inflation clearly is a conundrum. That is, we don’t really understand why it has been low for so long … So, there’s some underlying trends with the economy that are different today than before that we continue to try to understand.”

Members of the Federal Reserve find low inflation – or, how inflation works in our economy- to be “a conundrum” (synonym: a riddle). Yet, the Federal Reserve (the FOMC, actually) determines monetary policy and sets the target federal funds rate for the United States. So, naturally, this hole in the Fed’s understanding of the economy is very concerning. (Federal Reserve Bank presidents from across the country serve one-year terms on the FOMC on a rotating basis, with the president of the New York Federal Reserve Bank always being on the Committee. Mr. Harker is one of the Federal Reserve Bank presidents scheduled to serve in 2020.)

Here are some insights for the Fed into the prime reasons for persistently-low inflation in the economy (and for disinflation or deflation in some industries):

i. A global workforce with lower wages, and, by and large, a lower standard of living that competes with domestic U.S. labor- with its higher wages, minimum wage laws, and modern living standards- in the performance of manufacturing activities and services (such as phone support for banks and e-commerce companies);

ii. heavy competition among factories in a multitude of countries to supply products to U.S. corporate customers, with many such customers being so large that they can pressure prices lower and lower with a supplier that wants to obtain and/or maintain the customer’s account;

iii. low costs of capital over years of low interest rates leading to enormous “scale” for companies that use debt to fund online marketing initiatives, loss leaders, and aggressive pricing tactics to steal market share, helping large companies to grow larger in all industries and destroy smaller competitors, providing more market share to fewer companies with the resulting ability of such companies to accept volume and revenues over profit margins (i.e. lower consumer prices) and to achieve more bargaining power with labor, including providing more benefits in lieu of a higher wage- or neither;

iv. companies borrowing money to buy back their shares, and to achieve scale through lower prices to grow revenues, and to engage in mergers to control costs to grow profits, all instead of focusing on and investing in R&D and capex;

v. private equity funds flush with cash searching for yield and profits resulting in the funding of the growth of startup and unprofitable companies through the use of loss leaders and even free services designed to steal market share and achieve economies of scale, forcing existing companies to lower their prices and surrender margin to compete, and funding fringe benefits and campus-like work environments for employees, in lieu of higher wages;

vi. the Internet leading consumers to the best prices, over all else, as offered by companies that use low prices to scale, and then, in turn, use that scale to negotiate lower input costs (due to economies of scale), and, thus, achieve even lower consumer prices and scale even bigger;

vii. Internet competition for the lowest price, placing retailers in races to the bottom to get customers at any sort of profit, where, with the Internet, consumers prioritize price over location and relationships;

viii. consumers trading-in their relationships with local retailers, familiarity with local stores, the desire for thoughtful service, and shopping near our homes, for lower prices online (i.e. the desire for the lowest prices over service, relationships, and locality);

ix. use of advertising-driven and data-sales driven business models where services are free if users provide access to their personal information;

x. stagnant consumer prices through size and economies of scale and online competition acting as a double-whammy on inflation as employees (a/k/a consumers) don’t demand higher wages because they don’t see their household costs rising, and, in turn, producer prices don’t need to rise to offset rising wages;

xi. the Fed’s existing measures of inflation don’t include, but perhaps should include, measures of asset inflation, including inflation in equities and debt instruments. (I developed “The Shifted Path of Capital” Principle to explain that, in the modern (liquidity-driven) economy, debt capital, often, flows directly from banks, to borrowers, and into assets, such as stocks and houses for investment purposes, causing their respective values to rise, instead of debt capital flowing, first, into the things that are supposed to, or that historically have caused the resulting asset appreciation, such as into companies that grow their earnings to achieve higher stock prices, and to employees who buy houses after attaining income levels that make a house affordable as a home, with such shift leading to potentially-dangerous asset inflation, without more general economy-wide producer and consumer price inflation, and even with economy-wide price disinflation or deflation, where there’s been a systematic failure by businesses to use debt capital to stimulate organic business and earnings growth, instead of for asset growth (and market share expansion through low prices).

This shifted path of capital leads to asset and debt and house inflation that displaces price and wage inflation, as capital flows directly from the Fed to banks, and from banks to borrowers who acquire assets- instead of investing in capex, innovation, productivity, and wage growth- leading to higher stock and home prices sans organic earnings growth or rising incomes.

In other words, the inflation, and the economic risks, materialize elsewhere.

A rise in the value of asset prices is not referred to as “inflation”, but is referred to as “appreciation”, and, when it becomes exuberant, a “financial stability” risk, or a “bubble”, or “capital misallocation”. But, it’s inflation. If it’s too much capital chasing too few resources (such as in the case of a shortage of public stock, or a low supply of investment grade or high yield corporate bonds, or a limited number of houses in preferred neighborhoods that can provide investors with the best ROI) causing the prices to rise too much, and causing risks to overall economic stability, then it has the same effect, and provides equal or even greater risk to the overall economy, as does troublesome consumer price inflation.

In the modern economy, a mature economic cycle means less price and wage pressures, and more asset bubbles and financial imbalances from misallocations of cheap credit. As the Fed looks at accepted economic indicators to evaluate inflationary pressures, it misinterprets signals, like a soft PCE deflator, to indicate a low level of economic risk (because of low price inflation), and then keeps rates too low for too long, as asset imbalances grow- until it’s too late to ease-out of the situation or achieve a soft landing by slowly raising interest rates, because economic growth is rapidly slowing. 

When the Fed does decide to act because it sees credit and asset bubble risks, this divergence in how debt capital has affected prices and assets (to cause price and wage stagnation, or disinflation, or de-flation vs. asset in-flation) puts the Fed into no-win scenarios. Raising interest rates where economic growth and inflation are muted, but where assets grow pricey, causes public and political outrage because the Fed is deflating assets that have been the engine of the economy (such as real estate) while pushing already low growth and low inflation even lower through higher costs of capital. The Fed’s attempts to limit systemic risk from crashing asset prices where the Fed has let asset bubbles fester is difficult where price and wage growth and overall inflation are muted, with low inflation having been exacerbated by the cheap cost of money.

In the modern economy, if the Fed fails to raise interest rates in a timely manner (by choice or by external pressures) where inflation is not justifying such action, a business cycle will still come to an end, only in a different manner- despite investors preferring to not recognize this. If growth and inflation are low and the Fed maintains low interest rates to extend business cycles, asset prices and debt will become inflated, and, instead of economic slowdowns, we get asset crashes and financial crises, which can be triggered by any variety of events.

Whether the Fed should target asset prices (stock prices, real estate prices, corporate bonds) through monetary policy, or at least track and regulate the path of capital from banks to businesses and consumers, and be able to react to problematic flows before they result in systemic risk from credit and asset bubbles, may be worth a fresh look.);

xii. growth in domestic oil production;

xiii. lower commodities prices as China demand wanes; and

xiv. global excess capacity and capital misallocations from excessive global liquidity.

Low interest rates and excessive liquidity used by companies to grow revenues at the sacrifice of profit margins, leading to lower input costs through economies of scale for ever-larger companies which then take control of their respective industries with their ability to offer the lowest prices, and, then, to a resulting reduction in competition for them for customers and labor, all while these companies fail to make capital investments, and, instead, put cheap money towards marketing and growing market share through low consumer prices, combined with a global workforce, e-commerce, and the misallocation of cheap capital, plus the slowdown of demand from China (and other nations, since the trade war began), causes low inflation (or disinflation, or deflation).

This should not be a “conundrum” for Fed Governors or the FOMC- considering that it (the FOMC) is the decider of interest rates in these delicate and anxious economic times. The facts, data, and evidence on the matter are abundant.

It would be nice if members of the United States central bank would be able to understand what causes rising inflation, low inflation, deflation, and disinflation in our economy- and not find it all to be a conundrum. One would think this to meet just the minimum threshold of knowledge that should be held by the Fed and the members of the FOMC- even as the economy has shifted. It’s been shifting for many years, already.

Consider this: How can the FOMC effectively execute monetary policy in ways that address and manage the negative effect(s) that tariffs on U.S. imports from China may have on producer and/or consumer price inflation, or on overall economic in-flation or de-flation, if there are holes in the Committee members’ general understandings of the transmission mechanisms for inflation even without tariffs as a factor at all?

From Philadelphia Fed President Harker’s comments, it seems to me that Jackson Hole wasn’t the biggest or most noteworthy hole in the Wyoming mountains last week.

_ _ _

About the Writer

Get business and personal debts restructured and reduced; collect debts owed; monetize invoices by selling receivables:

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Neil Siskind is: President of The Siskind Law Firm,, focused on debt negotiation and restructuring, debt collection, debt investing, product investments, trademark licensing, and product distribution; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 9 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products. On December 11, 2017, in his article The Yield Curve Speaketh: Why Stocks Might Crash in Early 2018, Neil Siskind accurately predicted the February, 2018 stock crash, the largest single-day point drop in the Dow Jones Industrial Average’s history. All the stock indices are down approximately 6% for 2018. In his September 26, 2018 article, Lots of “Bull” In The Bull Market: Let’s Look At What’s “Really” Growing, Neil Siskind explained that, despite Wall Street’s bullishness, the economic data and stock market underpinnings were in decline, and the economy and stocks were at imminent risk. By the closing of markets on October 23, 2018, the S&P 500 had fallen approximately 7%, with October being the S&P’s worst month since August 2015 (and December being the S&P’s worst month ever), the Nasdaq continues to have its worst month since 2016, and is down approximately 8% from article publication, and the DJIA is having its worst monthly performance since 2008. In 2018, Neil Siskind coined the phrase “synchronized global slowth™” (or “synchronous slowth™”) to describe the occurrence or condition of multiple emerging market and developed market economies commencing a downward trajectory of economic and GDP growth, or actually contracting to a point of slow, stagnant, or negative economic and GDP growth, at simultaneous, or nearly simultaneous times, largely, or, at least in part, due to rising interest rates and/or stricter lending regulations (such as higher bank reserve requirement ratios and stricter bank balance sheet requirements) in the larger, more developed or fully developed economies, such as the United States and China, resulting in diminished liquidity in those economies, and, thus, diminished liquidity in smaller, or emerging economies, in turn. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

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