Federal Reserve Chair Bernanke from Jackson Hole - August 31, 2012

By: Ian Campbell | Tue, Sep 4, 2012
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Why read: You will by now have been bombarded for three-plus days by written and verbal commentary on Federal Reserve Chair Bernanke's Friday, August 31, 2012 remarks made from Jackson Hole, Wyoming. You will have observed last Friday afternoon's U.S.$35+ jump in the physical gold price, and the Dow Jones Industrial Average and S&P 500 Index advances on Friday on the same news. Friday was a 'when Mr. Bernanke speaks, everyone listens positively' moment, even if it is 'just possible' that not everything Mr. Bernanke said on Friday ought not to be seen positively.

I invite you to review my thoughts on Mr. Bernanke's remarks, and reach your own opinion as to whether you think my thoughts make sense.

The full text of Mr. Bernanke's remarks can be found here, and in the 'topical reference' link following.

Commentary: Mr. Bernanke's remarks were a compendium summary of:

He then ended his remarks by reiterating once again that "taking into account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor conditions in the context of price stability". This has been picked up by the media and most other commentators as positive reinforcement that QE3 either is already here, or 'is coming soon to the U.S.'.

While I can understand why Mr. Bernanke would make such a bland, circular 'motherhood statement':

If you take the time to read only part of Mr. Bernanke's remarks, I suggest you read the paragraph that begins at the bottom of page 6 with the words "In light of the policy actions .....". Mr. Bernanke makes two statements in that paragraph I think are worthy of careful thought:

Perhaps importantly, Mr. Bernanke did not define 'structural damage' or 'structural change'. That said, it seems reasonable to assume that he did not intend to distinguish for purposes of his remarks between 'structural damage' and 'structural change'.

Importantly, I think it also is reasonable interpret his words to mean he does not believe there has been 'substantial structural change' to the U.S. economy after 2007. That, of course, doesn't preclude that Mr. Bernanke may think 'substantial structural change' did occur in the U.S. economy prior to 2008.

While 'structural change' in an economic context can be (and is) defined in multiple ways, the most common meaning is associated with changes in the relative importance of different sectors of a given economy over time - where that change is measured by the share of output or employment of each sector of that economy. For a more fulsome discussion of 'structural change in an economic context' see Structural Change in the World Economy, Main Features and Trends, a working paper published in 2009 by the United Nations Industrial Development Organization.

The definition of structural change set out in the previous paragraph is fairly narrow, particularly when structural change (or lack thereof) generally seems to be measured in terms of 'individual sector percentage of overall economic activity' for a given country or grouping of countries. But even viewed that way, from 20,000 feet it seems to me that from and after 1980 there has been a long-term structural shift in the United States economy:

While I tend to broadly agree with Mr. Bernanke with respect to 'substantial U.S. economy structural change after 2007', I do think that after 2007 there has been:

I would find it surprising if Mr. Bernanke disagrees with this.

So what do I take from this? Simply put, to date the U.S. Federal Reserves policies after 2007 have, for me, largely been aimed at shoring up and stabilizing the financial system - they have not been strategically addressing what can be done to promote meaningful economic recovery in a 'structurally different economy' than existed in the U.S. before 1980.

I think Federal Reserve strategies that fail to take into account that the U.S. economy is structurally different today than it has been in the past will in the end likely be ineffective. I also think that more 'general quantitative easing' to support an economy that is part of, and dependent upon, a globalized economy simply is unlikely to produce the desired result of meaningfully long-term economic growth that would put America solidly on the road to maintaining its place as the world's most successful economy.

It will not be surprising to me if the question of whether or not there has been, and is ongoing, structural change in the U.S. economy and what it means to U.S. economic strategy does not become a more widely discussed topic in the next months.

Curiously, I have not seen any other commentator pick up on Mr. Bernanke's Friday reference to 'structural change'.

Topical Reference: Chairman Ben S. Bernanke at the Federal Reserve of Kansas City Economic Symposium, Jackson Hole, Wyoming, from The Federal Reserve, August 31, 2012 - reading time 20 minutes.



Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Business Transition Simplified

Through his www.BusinessTransitionSimplified.com website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world economic and financial markets influences on those two topics. A recognized business valuation and transition authority, he founded Toronto based Campbell Valuation Partners Limited (1976). He currently is working to bring his business valuation and transition experience to both business owners and their advisors in our new economic, business and financial markets normal.

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