Recession or no recession for the US in 2016? I’m looking at what a lot of people think about that question, and my good friend Lacy Hunt’s take on it has really added to the clarity of my own thinking. In today’s Outside the Box, Lacy focuses first on the factors that made 2015 a disappointing year for the economy, and he points out that we were losing momentum as the year closed.
At this point we have to ask, “Why?” Why, after seven years of post-recession central bank stimulus, a doubling of US federal debt, and humongous stock-market gains, is the economy still limping along at stall speed? Well, it’s about that stimulus, says Lacy:
Since the introduction of unconventional and untested monetary policy operations like quantitative easing (QE) and forward guidance, an impressive amount of empirical evidence has emerged that casts considerable doubt on their efficacy. The historical facts regarding the grand experiment by the Federal Reserve Open Market Committee (Fed) are worth considering.
Indeed. Lacy cites a study titled “Persistent Overoptimism About Economic Growth,” by Kevin J. Lansing and Benjamin Pyle of the Federal Reserve Bank of San Francisco, published in February 2015. The study systematically examines the Fed’s forecasting record – a topic I’ve been pounding away on for years, as you well know. Their conclusion:
Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint.
And the failure of QE, unrelenting forward guidance, and other radical (not to say desperate) central bank measures has not been limited to the efforts of the Federal Reserve – the central banks of Europe, Japan, and China have had no better results.
But again, “Why?” Why haven’t the best efforts of our earnest central bankers and their legions of computer-equipped economists turned the global economy around? A causal mechanism has been needed to explain their failure. And now we have it, Lacy tells us, in the form of a new book, Growing Global: Lessons for the New Enterprise, by Michael Spence (2001 recipient of the Nobel Prize in economics) and Kevin M. Warsh (former governor of the Federal Reserve), published in November 2015.
Here is their causal argument:
QE is unlike the normal conduct of monetary policy. It appears to be qualitatively and quantitatively different. In our judgment, QE may well redirect flows from the real economy to financial assets differently than the normal conduct of monetary policy…. We believe the novel, long-term use of extraordinary monetary policy systematically biases decision-makers toward financial assets and away from real assets.
Financial assets, huh? Whoodathunkit? Lacy has much more to say on this, um, delicate subject – all of it worthwhile – but without stealing any more of his thunder, let me just mention that he will be one of the featured speakers at our upcoming Strategic Investment Conference, May 24–27 in Dallas. It’s about time to hop on the bandwagon – if you register by January 31, you’ll save $500 off the later rate.
And have I mentioned that, in addition to all the fabulous speakers that are already on the program, Niall Ferguson and Jim Grant have both just committed to come to the conference and share their latest views? We’ll be adding another half-dozen speakers in the next few weeks. We’re still nailing down a few major names, but it looks like my goal of making sure the conference is better every year is very attainable.
Now, without any further personal comments (as is my usual wont), let’s jump into Lacy’s latest and greatest. You have an excellent week!
Your didn’t know he could be this busy analyst,
John Mauldin, Editor
Outside the Box
Hoisington Quarterly Review and Outlook – 4Q2015
A Weak Finish to a Disappointing Year
The economy was supposed to fire on all cylinders in 2015. Sufficient time had passed for the often-mentioned lags in monetary and scal policy to finally work their way through the system according to many pundits inside and outside the Fed. Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal…