Over My Shoulder | Mauldin Economics

Over My Shoulder

Charles Gave: The Euthanasia of Pensioners in Peoria

March 28, 2014

Charles examines the disconnect between Treasury bond rates and GDP growth and points his finger at the Fed. And guess what, he says, the US budget deficit isn't really contracting.

"If negative, the difference between long bond rates and the economic growth rate is effectively a subsidy paid by the saver to the government. In short, this difference measures the amount of financial repression taking place in an economy. The fact that it is not paid to the Treasury does not mean it doesn't exist. It is a tax paid by a nation’s savers—e.g., pensioners in Peoria."

Download - The_Euthanasia_Of_Pensioners_In_Peoria_2.pdf

David Zervos: FMV vs Jobs – A Misguided Tradeoff

March 28, 2014

I am sitting here on a beautiful Thursday afternoon in Cafayate and going through emails, reading, and preparing to write my weekly letter. While it was somewhat hard to tear myself away from the alfresco lunch in the middle of the vineyard, duty calls.

One of the more interesting things I have come across is this note from David Zervos. David is one of the most cogent, and certainly most enthusiastic, fans of an aggressive Fed policy of QE. He is also a consummate insider, as he knows most of the players in and out of the Fed. So when he writes like he does today, I pay attention. He is critical of Jeremy Stein, who would like to see the Fed pay more attention to Financial Market Vulnerability (FMV) as a driver of policy. I think most of my readers would assign part of the blame for the bubble that led to the Great Recession to the extended low rates promoted by Greenspan and then Bernanke. Both claimed they could not know when a bubble was being created. And Zervos does make a point when he looks at the track record of the Fed in predicting economic events and says, why do we want to trust these guys to maintain market stability?

I think I may ask him that question specifically at our conference this year, because he is a fan of more QE and Federal Reserve intervention. If we can't trust the Fed to intervene prior to a bubble being formed, then why should we trust them to try to fine-tune the economy when there is slack growth? How do we trust 12 people sitting around a table to manage an entire economy of 330 million people? It seems to me he wants to have it both ways.

But whatever the question, it is worthwhile reading David to see what a lot of the guys on the inside think. And then to ponder the consequences.

I will admit that it is easier to ponder when the weather is perfect and I'm not having to endure the freezing temperatures in late March in the Northeast.

Download - FMV_vs_Jobs.pdf