Bonds, the Wall Street Journal, Jobs, and other mattersPosted: June 3, 2012
The Great Recession has been miserable for many reasons (and it does not look to be over), but it has also reminded us that major world events can help us see politicians, elites and institutions for what they really are. Conventional wisdom and the Very Serious People (a term coined by Paul Krugman) who crowd and speak the loudest on talk shows, newspapers and the airwaves have had a terrible track record over the last several years. The last month or so has been especially illustrative.
Here is the Review & Outlook section of the Wall Street Journal from May 29, 2009, a little over 3 years ago:
They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.
Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.
This past week, the U.S. Government could issue 10-Year Treasuries while offering around 1.5 per cent a year. If you think inflation will be around 2 per cent for the foreseeable future, which is very low, they federal government can essentially borrow for free or at a negative interest rate. Here is the graph that plots yields from 2009 to the most recent data point available from FRED (May 31, 2012) although on June 1, it fell even more (hitting close to 1.4 at one point).
So much for inflation and investors shifting out of safe assets. These are still topics that periodically make appearances on the Wall Street Journal’s editorial page whenever it suits their interests. It’s not out of good intentions that they continue to misread the situation in the economy. Whether they are simply wrong every time on accident or if they are simply advocating whatever policies would accomplish their agenda and willfully lying is irrelevant in some sense, though I think it’s clear they fall into the latter category. And it’s reason enough for people to stop reading them and listening to them as enlightened voices on the economy.
I bring this up because on editorial pages and television, the focus has consistently been on debt. For a while, people tried to advocate for immediate debt reduction by arguing it would also help the broader economy and job growth. The austerity argument has proven a tremendous failure everywhere it has been attempted, from the United Kingdom to Ireland to even the United States to the extent that local and state governments have cut back significantly. Finally, over 3 years after the financial crisis started, it seems like people may be getting the right idea. Francois Hollande was elected in France, and he has openly called for less austerity and more growth-oriented policies.
The above WSJ piece I quoted from also said the following:
It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.
Here is a recent story from the pages of the Financial Times about what major players in the financial markets are saying, not that they have been so great at understanding the economy over the past several years:
Some of the world’s biggest investors have indicated they would back heavier spending to encourage growth by governments with very low borrowing costs, warning that austerity alone will not restore their budgets to health.
All of this leads up to the last several jobs reports. March, April and May all had data that came in well below expectations. Even meeting expectations would have basically been sub-par given the enormity of the jobs crisis. Again, people took early victory laps and used the opportunity not to talk about how to further reduce mass joblessness, but instead how to reduce the debt, even as the government could borrow at record-low rates. Cutting spending in a depressed economy shouldn’t have made sense just because of a few good data releases, but for the Very Serious People, it was another opportunity to shift the conversation towards something that was more up their alley.
I had previously expressed significant skepticism about the momentum in the economy everyone else was taking for granted as self-sustaining. I wrote, “it’s not yet clear to me that it is fully self-sustaining. This will be a difficult year with Europe now in a “mild” recession, China growing at a slower rate, and oil prices at very high levels. I would need to see two to three more months of solid employment numbers before feeling “good” about the recovery.” I wrote this after February’s data was released in early March. The following shows the payroll data for 2012 so far. Data for May was released 2 days ago, and it is by far the most depressing indication of the awful state of affairs we are in.
Previously, Justin Wolfers, being a little facetious, had said that the strongest part of the US Economy was the Revision Sector. His comment was making light of the fact that for the first several months of the year, revisions to previous months’ data tended to systematically go up rather than move randomly.
The revision sector has officially faltered. The following table shows original data points as well as each successive revision for January through May.
The most recent jobs report revised April’s data down from 115 to 77 thousand jobs added. March was revised down from 154 to 143 thousand jobs. May came in at 69 thousand jobs added from the previous month. We are in a deep hole.
All of this makes me depressed about many things. Those who have been consistently wrong continue to enjoy an air of confidence and attention from the media. Without people like Paul Krugman, it seems to me that advocacy for the right kind of policies would be barely heard at all. And with each weak jobs report, it looks even more likely that the Republicans will at the very least take the Presidency in November. Even before we reach that point, it may be the case that we have another debt ceiling debacle which may paralyze the recovery even further. And into next year, as Republicans try to implement their plans to slash spending on unemployment benefits, Medicaid, Medicare, and SNAP, the U.S. economy may enter another recession even as it has barely begun to recover from its last one, only with an even weaker safety net than before. But maybe at the end of the day, they can pat themselves on the back and be glad that debt will have decreased, even as the livelihoods and futures of millions of people are destroyed. If this assessment sounds overly harsh and pessimistic, you need only look to the current political and economic realities to find its justification.