Economics 101: Long Material, Short Certified Idiots

By: Fred Sheehan | Tue, Apr 12, 2011
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Some relationships:

The last time the U.S. dollar exceeded 120 on the dollar index (ticker symbol DXY: a measurement of the dollar against other currencies) was in January 2002. The close on April 8, 2011, was 75.08, a 37 % decline.

Since January, 2002, gold has risen from $282 to $1,475 an ounce, also quoted at the April 8, 2011, close

Silver has risen from $4.30 to $40.93 an ounce.

A barrel of crude oil (WTI) has risen from $20 to $113. A barrel of WTI crude rose $20 (from $93) within the past two months.

Oil is ubiquitous. A rising price increases the costs and prices of wheat, corn, gold, silver, shipping, and Internet searches.

Christina Romer is the poster child for the Home-Schooling Movement.

On April 7, 2011, Aaron Task, host of Yahoo's "Daily Ticker" show, interviewed President Obama's former Counsel of Economics' Adviser Chair Christina Romer. Before quoting Romer, context follows.

Federal Reserve Chairman Ben S. Bernanke, the poster-child for the No-Schooling Movement, knows that his stock-market support operations are coming to an end, or a pause - time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of U.S. Treasury securities, is due to end in June.

For instance, on Monday, April 11, the New York Fed is dispatching $6.5 to $8.5 billion of currency (U.S. dollars) into the banking system as payment for 5- to 7-year Treasury notes. Classified as Permanent Open Market Operations (POMOs), auctions of similar size are held almost every work day. Fed-heads claim the banking system will pump this $6.5 to $8.5 billion of high-octane currency (they call it money) into the job-creating economy. Nothing of the sort is happening, nor will it.

After three years of negative interest rates and a Fed balance sheet that is $1.8 trillion larger than in the fall of 2008, jobs; wages, working hours, and production industries still wane.

Chairman Bernanke wants the POMOs to continue, forever. A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. ("Bankrupting" was not their description.) These speeches may have been genuine or may have been orchestrated to observe sentiment in the stock market.

Christina Romer is Ben Bernanke's Siamese twin (below). She spoke for the Bernanke plank: quantitative easing has been a success - let's keep doing it! Quoting Romer on Yahoo!: "I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don't understand why we'd be dialing back that tool." The average American knows Romer should either be working in a soup kitchen or eating in one. (See bottom.)

Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the "Daily Ticker," we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade will accelerate (see top, "Some relationships").

In this regard, it is good to bear in mind, that:

(Again.) The dollar index has fallen 37% since January 2002.

The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million.

Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million.

Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002.

The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation - but: the government's calculation of inflation - from a base set in 1982-1984. Given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20% (remember the influence of compounding over a nine-year period).

Now, onto the Romer-Bernanke relationship. This is not only a useful study regarding our current dollar policy, but is also an example of the inbreeding among celebrated economists. They will not change their minds because they cannot change their minds, for reasons of silted brain arteries, respectability, and civil wedding receptions.

We have, first, Christiana Romer, Class of 1957 Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President's Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985.

We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President's Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979.

In Ben S. Bernanke's Essays of the Great Depression, the book which conferred upon him the title of "The Greatest Scholar of the Greatest Depression," he states, on the very first page: "We may agree with Romer" that is: Christina Romer, not her husband David Romer, the current Herman Royer Professor of Political Economy at the University of California, Berkeley, etc., etc., who received his Ph.D in economics from the Massachusetts Institute of Technology in 1985. N. Gregory Mankiw, (See "The Best and the Brightest Protect Greenspan and Betray the American People", "Government Authorities are Looking Out for Themselves - as Should Everyone", "The Flations - Part II") currently, Professor of Economics at Harvard University, past staff economist on the Counsel of Economics Advisers, A.B. in economics from Princeton University, Ph.D in economics from the Massachusetts Institute of Technology in 1984, etc., etc., etc., served as best man at David and Christina Romer's wedding. David Romer served as best man at the wedding of N. Gregory Mankiw. In a notorious decision, but one that would appeal to well-bred economists, The Honorable Oliver Wendell Holmes wrote: "Three generations of imbeciles are enough." The American people may want to consider applying Holmes' legal remedy to the field of economics.

Christina Romer's "The Nation in Depression," (Journal of Economics Perspectives, 1993), enlists Bernanke's scholarship to encase her theme. Bernanke's Greatest Scholarship of the Greatest Depression was stated in his Massachusetts Institute of Technology Ph.D. thesis, a pompous name for a paper that was more-or-less footnotes he scribbled from Friedman and Schwartz.

Paul S. Samuelson (1915-2009), the economist who propelled M.I.T. to the forefront of economic studies after World War II, was interviewed by the Atlantic in 2008: "The 1980s trained Macroeconomists - like... Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had.... I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression."

Samuelson's nephew is Larry Summers, currently the Charles W. Eliot University Professor at Harvard University, past Director of the National Economic Council, past Secretary of the Treasury of the United States, B.S. from the Massachusetts Institute of Technology in 1975, who received his Ph.D in economics from Harvard University in 1983. Larry Summers is the son of Robert Summers (born: Robert Samuelson), professor emeritus at the University of Pennsylvania, received his Ph.D in economics from Stanford University. Larry Summers' mother, Anita Arrow Summers, is professor emeritus at the University of Pennsylvania, etc. Anita Arrow Summers' brother, Kenneth Arrow, is currently the Joan Kenney Professor of Economics and Professor of Operations Research, Emeritus at Stanford University, and past recipient of the Nobel Prize in Economics [Sic].

From Aaron Task's interview on Yahoo's "Daily Ticker":

TASK: A lot of people say the Fed's been very successful helping financial markets and helping people at the upper end of the income scale. There hasn't been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]?

ROMER: Noooooooo! [Phonetic approximation - FJS.] If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it's easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we're exporting more, we need more workers to produce it.

TASK: Isn't it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a 'weaker dollar' means the dollar doesn't go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them

ROMER: So, you need to be very careful. It's hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do.

And, of course, on the price of the dollar we're not talking about what's happening to your purchasing power here; we're talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down."

[Interruption: How could studies conclude anything since they can't even separate announcement effects? And: absolutely? This falls into the Ben Bernanke 60 Minutes "100% sure" of himself claim. Before concluding that Romer and Bernanke are talking 100% claptrap (my view), her statement is technically correct if she is addressing "risk-on" in the stock market, commodities, the New Wave of collateralized sub-prime mortgages, etc. And, just why are "we" not talking about purchasing power here? Falling purchasing power (per Task) has only "encouraged spending" because Americans need to spend more just to buy the same - or fewer - items than three months ago. This is going to put people back to work!! How is it that purchasing power is independent of the foreign exchange markets!!! Americans should borrow more so they can spend more, even though they are buying less with depreciating dollars, and this is good for Americans!!!! "Everyone" agrees about the lower price of the dollar!!!!! Oh, this is too stupid to continue. - FJS]

There is the possibility that Romer is making it up as she goes along (the most charitable proposal), but, it was not Task, but Romer, who started talking about the dollar and its influence. She either thought her argument was so convincing she wanted to take advantage of this public forum or she is not operating with a full sea bag. The latter seems more probable when listening to other Romer claims in the interview.

ROMER: There's no evidence that what's holding back business spending or consumer economy is government activism.

In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: "Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game."

For more of what Romer claims there is "no evidence," see Corporate CEOs Won't Invest in America, Why Should You?

Fellow brand-name professors and Fed economists stand behind Romer. The New York Fed published a paper on April 6, 2011: "Large-Scale Asset Purchases by the Federal Reserve: Did They Work?" (Take a wild guess.) The Fed still has $200 billion of QE2 purchases but the history has already been written.

Dispensing with accredited economists, how did the average American respond to Romer? Whether average or not, the "Comments" by Yahoo! viewers showed a far better grasp of economics.

Comment #1 was from "Ross," who asked "Is this chick retarded or what?" Of viewers who expressed an opinion about Ross' analysis, 227 liked his comment; 16 disliked it.

Comment #2 was from "Brian," who queried: "Who knew it was so easy? Someone should go tell those poor nations in Africa that we've learned the secret: just produce more of your currency." (Score: 182 to 11.)

Comment #3 was from "Kimmie Taylor" who observed: "QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits." (253-18)

Comment #4 was from "Jack," who stated one obvious problem and a fair conclusion: "The woman has never held a real job and knows nothing about the real world. She is a complete failure."

There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.)

We will finish with "PhilippeB" (#6), a fast learner: "No idea who she is but it is now official: Christina Romer is a certified idiot." (62-3)

What to do about it? Please refer to the very top: "Some relationships."



Fred Sheehan

Author: Fred Sheehan

Frederick J. Sheehan Jr.

Frederick J. Sheehan

Frederick J. Sheehan Jr. is an investor, investment advisor, writer, and public speaker. He is currently working on a book about Ben Bernanke.

He is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein, of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve (McGraw-Hill, 2008). He writes regularly for Marc Faber's "The Gloom, Boom & Doom Report."

Sheehan serves as an advisor to investment firms and endowments. He is the former Director of Asset Allocation Services at John Hancock Financial Services where he set investment policy and asset allocation for institutional pension plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S. Naval Academy. He is a Chartered Financial Analyst.

Copyright © 2007-2014 Frederick J. Sheehan Jr.


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