Federal Reserve Chair Bernanke from Jackson Hole - August 31, 2012
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:
- the Federal Reserve Monetary Policy as executed in 2007 - 2008;
- the subsequent focus of the Federal Reserve from 2009 to date of acquiring longer-term U.S. treasuries, which policy has been aimed at (among other things) putting downward pressure on long-term interest rates, increasing household and business confidence, and diminishing deflation concerns;
- discussion of improved Federal Reserve communication, and the difficulties of measuring the success (or perhaps better said 'curtailment of failure') of what Mr. Bernanke referred to as 'nontraditional tools'; and,
- current U.S. economic prospects that, like his remarks made in recent months following successive Federal Reserve monthly meetings, centered on U.S. unemployment, slower than hoped for U.S. economic growth, and stalled (my word) political fiscal policies.
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':
I don't understand why the physical gold and U.S. financial markets would 'grab on hard' to such a statement in the positive way they did on Friday afternoon; and,
I don't think Mr. Bernanke's final statement was the 'most important thing he said on Friday.
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:
first, he said "some have taken the lack of progress (on the U.S. employment front) as evidence that the financial crisis caused structural damage to the (U.S.) economy, rendering the current levels of unemployment impervious to additional monetary accommodation"; and,
second, he said "although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years".
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:
toward more capital intensive manufacturing from less capital intensive manufacturing;
toward the service sector and away from the manufacturing sector; and,
from higher-hourly rate income jobs to lower-hourly rate income jobs.
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:
ongoing trend change, albeit less obvious change, in the manufacturing and service sectors in the United States after 2007; but,
an important shift in the those employed in the U.S. workforce from 'generally higher paying jobs' to 'generally lower paying (and I think part-time) jobs'. I see this as an important 'structural change' if that trend is not reversed quickly. I have written a commentary on this that will be included in tomorrow's Newsletter.
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.