It’s not the Fed’s fault, it’s those spoiled brats

Or so says Sean Williams:

Arguably, everything has gone right for investors and the companies that make up those indexes over the past four years. The unemployment rate has fallen in a slow but steady manner as part-time hiring has really picked up year-to-date. Similarly, record-low lending rates have spurred businesses to expand and have allowed both consumers and business to refinance their existence debt at substantially better interest rates. This is one of the many reasons the housing sector has been able to find a bottom and why homebuilders are now able to utilize low inventory levels to their advantage to improve their pricing power. Even the U.S. budget deficit has narrowed from four years ago, as the sequester has required the removal of $85 billion in spending from the federal budget.

It may not seem like the perfect scenario for the U.S. consumer, but all things considered, they’ve been absolutely spoiled since the recession. The Federal Reserve has enacted not one, not two, but three separate monetary easing programs catered to buoying a still fragile U.S. economy, and it has kept its federal funds target lending rate at a historic low to spur commercial and personal spending. And how, you ask, has the consumer acted since May? Like a spoiled brat!

The U.S. consumer says, “I’ll do what I want!”
Since the beginning of May, when the Federal Reserve first hinted that ongoing positive economic data may cause it to begin paring back its $85 billion in monthly bond purchases, 30-year mortgage rates have increased by roughly 120 basis points to 4.57%. Over that same time span, mortgage applications, which include refinancing as well as new home loan originations, have fallen in 15 of the past 18 weeks and are now 59% off their early May high. Furthermore, August’s U.S. retail sales data pointed to an ongoing theme from teen retailers that consumer spending is weak.

In the past 12 months real consumption expenditures are up by about 1.7%. Real disposable income?  Up less than 1%.  The consumers are doing their part, they need more income!!

It’s the nominal income shortfall.  And that means it’s tight money.

But Sean Williams worries that the Fed is running out of paper and green ink:

What we do know is that the Federal Reserve simply doesn’t have the funds (or need) to continue introducing free money into the economy each month.

Or maybe he’s worried about something else.  What do you think?

PS.  Does anyone know how TIPS spreads responded to the taper talk?  Andy Harless pointed out that stocks are a poor indicator, as long term rates also moved on the news.  I’m not looking for TIPS spread movements over a period of months, but rather on the day of major “taper” news stories.



33 Responses to “It’s not the Fed’s fault, it’s those spoiled brats”

  1. Gravatar of Alexei Sadeski Alexei Sadeski
    15. September 2013 at 10:43

    “Does anyone know how TIPS spreads responded to the taper talk? Andy Harless pointed out that stocks are a poor indicator, as long term rates also moved on the news. I’m not looking for TIPS spread movements over a period of months, but rather on the day of major “taper” news stories.”

    Dumb question.

    How would such information enlighten the situation, given the ‘never reason from a price change’ rule?

  2. Gravatar of Ashok Rao Ashok Rao
    15. September 2013 at 11:22

    Alexi, it’s potentially useful because it signals market expectations.

    As for the question itself, I don’t like to write much about the “taper talk” because it’s very confusing for me. Regardless, here’s a graph that sort of piques my interest:

    It doesn’t strike me that tapering is the dominant cause of movement here.

  3. Gravatar of ssumner ssumner
    15. September 2013 at 11:23

    Alexei, I would not be reasoning from a price change, I already would know the cause.

    Weird comment.

  4. Gravatar of Ironman Ironman
    15. September 2013 at 11:43

    ssumner wrote:

    Andy Harless pointed out that stocks are a poor indicator, as long term rates also moved on the news.


    We will agree however that things have begun changing, as expected, during this past week as investors have begun shifting their attention forward to a more distant future than the one associated with the Fed tapering its QE program sooner rather than later (2013-Q3). Since there is just one week left to run on the futures contracts for 2013-Q3, there’s little advantage for investors to continue dwelling on the possibility as the likelihood of the Fed tapering sooner has become a near certainty.

    In other words, absent an announcement by the Fed that deviates considerably from what investors are now expecting, stock market investors now have other, bigger factors to take into account in making their investment decisions given the transition in fundamental expectations that’s now underway.

  5. Gravatar of Steve Steve
    15. September 2013 at 12:37

    Summers Withdraws Name for Fed Chairmanship
    Former Treasury Secretary Calls Obama, Cites ‘Acrimonious’ Coming Confirmation

  6. Gravatar of TravisV TravisV
    15. September 2013 at 12:43


  7. Gravatar of TravisV TravisV
    15. September 2013 at 12:54

    Hahaaaaaaa Brad DeLong:

    “Let Me Just Say That Janet Yellen Is Now Clearly By Far the Best Technocratic Choice for Fed Chair of Those on the Short List”

  8. Gravatar of Negation of Ideology Negation of Ideology
    15. September 2013 at 12:56


    I second that! Now can we press for Christina Romer? (No disrespect to the admirable Janet Yellen)

  9. Gravatar of Tom Tom
    15. September 2013 at 13:01

    I’m not an economist, but can someone explain to me how declining median wages and record inequality aren’t THE problem in this economy?

  10. Gravatar of Morgan Warstler Morgan Warstler
    15. September 2013 at 13:02


  11. Gravatar of TravisV TravisV
    15. September 2013 at 13:11

    John Harwood on Twitter:

    “After counter-productive drama that hurt WH, expect swift turn to Yellen on same timetable planned for Summers. If not next wk, soon after”

    Meanwhile, Yglesias predicts that Obama will try to nominate Geithner:

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. September 2013 at 13:40

    Geithner has already been approached, and he turned it down.

    “One early candidate for Fed chairman was Timothy F. Geithner, the former Treasury secretary and Obama confidante, insiders said. The White House approached Mr. Geithner to ask if he would be considered for the job, but he declined.”

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. September 2013 at 13:49

    The full text of a letter he sent to the President:

    “Dear Mr. President,

    I am writing to withdraw my name for consideration to be Chairman of the Federal Reserve.

    It has been a privilege to work with you since the beginning of your Administration as you led the nation through a severe recession into a sustained economic recovery built on the policies to promote employment and strengthen the middle class.

    This is a complex moment in our national life. I have reluctantly concluded than any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery.

    I look forward to continuing to support your efforts to strengthen our national economy by creating a broad based prosperity and to reform our financial system so that no President ever again faces what you and your economic team faced upon taking office in 2009.

    Sincerely Yours,

    Lawrence Summers”

  14. Gravatar of TravisV TravisV
    15. September 2013 at 13:50

    BOB HETZEL should be Fed Chair!!!!!!

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. September 2013 at 13:54

    Another link to the Summers letter:

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. September 2013 at 13:59

    September 15, 2013

    Larry Summers is out as a Fed chair candidate. So what now?
    By Neil Irwin

    “…He could appoint Janet Yellen, the current vice-chair, who is respected in markets and academia and has a resume that seems tailor-made for the Fed job. She would also be the first female Fed chair in the 100-year history of the institution. Here is more on Yellen, and why the White House has been less than enthusiastic about making her arguably the most powerful economic policymaker on earth. And while appointing her would in many ways be the safest move, it also would amount to a bit of an embarrassment for the White House. It would have a clear appearance of going for their second choice candidate.

    Another option would be the third name that President Obama has mentioned for the Fed chairmanship in meetings with Congressional allies: Donald L. Kohn. Kohn was the No. 2 official at the Fed until 2010 and a key lieutenant of current chairman Ben Bernanke during the financial crisis. Here are the eight things you should know about Kohn.

    If, with Summers out of the picture, the president decides he doesn’t want to appoint either Yellen or Kohn, who does that leave? Tim Geithner has long been a favored White House choice, but has also sent clear-as-day signals that he does not want the job.

    That leaves dark horse candidates: Roger Ferguson. Stan Fischer. Jeremy Stein. Other players to be named later…”

  17. Gravatar of Geoff Geoff
    15. September 2013 at 14:09

    Sean Williams is your garden variety blame-the-victim authoritarian who views the state as mommy and daddy, and the citizenry as children who are expected to respect ad honor it.

    How dare the consumers not respect the coercive central banking system that “helps” them and saves them from themselves, by obeying what is expected of them with respect to lending rates.

    If only the consumers sacrificed themselves…to the state, then they would no longer be considered “spoiled.”


    “The consumers are doing their part, they need more income!!”

    “It’s the nominal income shortfall. And that means it’s tight money.”

    No, that will just raise prices, distort the economy further, and redirect purchasing power from later receivers to initial receivers.

    It won’t raise real incomes. Only saving and investment raises real incomes. Inflation does not raise real incomes.

  18. Gravatar of ssumner ssumner
    15. September 2013 at 16:40

    Tom, In my view high unemployment and high levels of poverty are much bigger problems than inequality and wages.

    Everyone, I have a couple new posts on the Summers situation.

  19. Gravatar of Tom Tom
    15. September 2013 at 16:51


    How can you say that high levels of poverty are a bigger problem than wages? Aren’t they directly related? Excuse my ignorance if I’m missing something simple.

  20. Gravatar of ssumner ssumner
    15. September 2013 at 17:13

    Tom, Low wages are rarely the cause of poverty in America. It’s unemployment or underemployment.

    Single motherhood is obviously also a big issue.

  21. Gravatar of Joe Eagar Joe Eagar
    15. September 2013 at 17:48

    Tom, low nominal wages are not a problem, no; if anything, raising nominal wages artificially leads to fewer jobs and higher inflation.

    I do think we have a problem with real (cost of living adjusted) wages, though, especially in states like California and New York (Northern California, especially, has plenty of room and resources for additional development; there’s no need for the cost of living to be as high as it is there).

    I wish American liberals understood that raising the cost of living hurts the poor even more than cutting their wages would.

  22. Gravatar of Tom Tom
    15. September 2013 at 18:01


    I don’t understand this argument. The real minimum wage is lower now than it was in the 1950’s. They had a TV show about the 50’s. It was called Happy Days.

  23. Gravatar of Morgan Warstler Morgan Warstler
    15. September 2013 at 18:28


    It’s like this, I’ll say it so it the way others won’t, so it makes sense… at the bottom of the pile, they are all about the same. Marginally, there’s no difference between one and the other.

    One with a job vs. one without a job? That’s a horrible disparity between two exactly the same workers.

    Better to have them SHARE the meager kill / nipples, than to have the “lucky ducky” ZMP worker with job keep growing skills, while the other gets none.


    Tom, this is my plan for Guaranteed Income / Choose Your Job:

    What it does is put everyone at the bottom to work in a job they LIKE, far beyond what they can have today…

    But more importantly, it doesn’t force 8% to be unemployed so a bunch of other guys at the bottom can earn $2 MORE per hour.

    What you want is for guys at top to earn less – to shift the entire curve down to absorb the guys not currently employed.

    And that a NICE want.

    However, humans are hired bc they deliver a ROI to the buyer. Buyers don’t care if the wage can cover labor’s nut, they care what the labor can do for them.

    BUT, Americans are given welfare bc they are American.

    The point is, wages are the absolute worst way to deliver a safety net. Welfare is the preferred best way to own the fact that many people can’t cover their own nut – as defined by US, we decide what people ought to have.

    The thing that improves the lives of the folks at the bottom is not their negotiating skills, its our notion of charity. Charity is helpful. Pretending the avg ZMP worker can deliver ROI at $10 hour is childlike naiveté.

    And since we are going to cover the nut of of ZMP workers, it is in their own interest if they also work for each other, so that the welfare we give them, BUYS THEM MORE STUFF.

    Hope this helps.

  24. Gravatar of Tom Tom
    15. September 2013 at 18:51

    Morgan, hmm interesting plan. Seems like it might cause a lot of workers to make less than they make now though. My pool guy makes a lot more than $280 a week but with your plan I think his wages would be pushed down to match all those now willing to clean pools for $40.00. No?

  25. Gravatar of Benjamin Cole Benjamin Cole
    15. September 2013 at 18:55

    “What we do know is that the Federal Reserve simply doesn’t have the funds (or need) to continue introducing free money into the economy each month.” Sean Williams.

    The central bank has run out of money. And when I drop a rock from my hand, it floats up. And the Chicago Cubs have won the World Series.

  26. Gravatar of Benjamin Cole Benjamin Cole
    15. September 2013 at 19:05


    Don’t be daunted; I think there is a lot unexplained in the answers to your viewpoints.

    In the 1960s, the minimum wage was about 30 percent higher than today, the top tax rate was more than 90 percent, unions were powerful, large manufacturers were powerful, large retailers were powerful, the economy was heavily regulated (anyone remember Reg Q or stockbroker commissions or fixed airline rates and telephone bills?) and international trade was a mere sliver of the economy.

    Yet we obtained very strong economic growth through the 1960s, of the kind we are told is not possible today in an economy with less structural impediments and more international trade.

    Real per capita incomes soared by 30 percent in the 1960s. There was palpable optimism. Real per capita incomes have been dead in the 2000s.

    Today, all you will hear about the 1960s is that inflation was too high (though still in single digits).

    The econ profession has no interest in explaining the robust growth of the 1960s, nor the 20 percent expansion of real GDP in the four-year period from 1976-9.

    The robust growth of the 1960s doesn’t fit in with current left- or right-wing thinking, or even with “enlightened” elements of Market Monetarism.

    But it happened.

  27. Gravatar of Tom Tom
    15. September 2013 at 19:22

    Benjamin, not to mention that we put a man on the freaking moon!

    Now I have a somewhat conspiratorial mind so my current gut feeling for what happened is the rise of the Soviet Union.

    Unlike what you’ll hear today, the Soviets actually made great progress in transforming their society from semi-feudalism to the 2nd greatest power on earth. Real living standards rose tremendously until the 70’s “stagnation” and then got much worse after the introduction of perestroika and its aftermath.

    So my theory is that the US plutocracy was engaged in a long con. They essentially allowed US gov’t policies to be pro-worker as it was better than the Soviet alternative. They didn’t want to end up like the Romanov’s, obviously.

    Once they got to Gorbachev, they felt they were free to dismantle all of the pro-middle class policies of the previous 40 years and it’s been downhill ever since for the average Joe who doesn’t have the IQ to be a chemist, banker, etc.

    I know, crazy right? But it make sense to me.

  28. Gravatar of Morgan Warstler Morgan Warstler
    15. September 2013 at 21:02


    Would you WANT to clean pools, would others?

    Much like states rights, and me simply not knowing, I prefer to find out.

    Who knows? There may be some guys who can put together a book of 10 houses charging $12 a piece. Get 10 customers who go in on $120 a week, and make $320 a week, for working 18 hours.

    Maybe they do it bc they are writing a novel, or are addicted to porn, or have a sick mom, or love beac volleyball.

    The point is you and I don’t know.

    BUT, I’m pretty sure the avg Wamart employee is going to demand a fatter paycheck for working 40 hours a week when they could go on GI and start deciding on their own what they are happiest doing.

    Look, at one extreme there is the give them Guaranteed Income and don’t make do anything.

    Slightly WORSE than that is telling them they have to do some social justice crap.

    BUT, much better than no or dumb job requirements, there is the very powerful and interesting human idea, that you can do WHATEVER job you want as long as someone else will pay their own money for it, starting at $40 per week.

    This wins the cold weather puritans who intuit no idle hands. It wins the Tea Party bc it reduces the cost of local and state government, and let’s them GET SOMETHING new, some truly low cost personal services as a reward for being an upright citizen. And it wins the Congressional Black Caucus, bc not only does consumption in ghetto increase 30%+, black entrepreneurs have their own personal oil strike – for the first time ever.

    Thats the base of both parties organized to take down the Fortune 1000 management and Wall Street.

    The thing you have to let go of is forcing the consumer base to value low end labor as much as you want it to be worth.

    Just accept it for what it is, and set up a system that empowers 15 yr old kids, no matter what their station in life, to learn EVERY SINGLE WEEK, what the rest of the market of their fellow citizens value, and don’t value.

    They can decide they don’t want to chase more money, but for once there will be a clear path, and a transparent market, and thats a lot more fair than anything being done today.

  29. Gravatar of Tom Tom
    15. September 2013 at 21:18

    Morgan, sounds worthy of a state experiment. Give it a shot in Texas and let us know how it goes.

  30. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2013 at 01:54


    You are not alone in speculation that the pressure to give workers a better deal—based on perceived Soviet competition—was a factor in the way the country was run in the 1960s and 1970s.

    I much prefer a free market system, and even freer markets than we have now in the USA.

    But the monetary policies of the 1960s and 1970s did result in tremendous growth, while middle class and lower people enjoyed lower tax rates than today (Social Security and Medicare taxes have exploded and most local and state government lean on the sales tax).

    My Uncle Jerry had a saying, “Even if it is true, I still don’t believe it.”

    That is how I feel when economists today say American life is more prosperous than in the 1960s. Adjusting for the wonderful improvement in technology, it is not, at least in major urban areas. I grew up in Pasadena-Los Angeles.

    Housing is expensive, medical care impossible (though better), insurance impossible. The University of California system was nearly free. Now it is expensive. I can remember average families having an extra car for Junior to drive around. That does not happen anymore.

    I assure readers that life was more prosperous in the Los Angeles area in the 1960s than today. It was also a lot smoggier, however.

  31. Gravatar of Brian Donohue Brian Donohue
    16. September 2013 at 03:03


    Not sure when the key Fed taper talk days were this year, but:

    In the first week of March, we saw a spike: Treasuries up 0.15%, TIPs up 0.20%, Exp. CPI down 0.05%.

    Nominal rates and exp CPI drifted back downward about 0.25% until the first week of May.

    Between May 2 and June 18, Treasuries nudged their way up 0.4%, TIPS went up 0.55%, and exp CPI went down 0.15%.

    Then, in the week of June 19-25, Treasuries spiked another 0.4%, TIPS up 0.6%, exp CPI down 0.2%.

    Early July saw a reversal, reacting to Bernanke’s soft shoe. But starting in August, the ‘taper’ pattern (Treasuries up, TIPS up more, exp CPI down) has resumed, reaching new recent highs (rates) and lows (exp CPI).

    Looks like an orderly-ish adjustment to telegraphing.

  32. Gravatar of ssumner ssumner
    16. September 2013 at 06:46

    Thanks Brian.

    Ben, My impression is that living standards have improved. For instance, the houses being built today are much nicer then the ranch houses built in the 1950s and 1960s. People eat out more, go to college more, have better medical care, nicer cars, more home appliances, etc.

  33. Gravatar of Randomize Randomize
    16. September 2013 at 11:06


    Low (nominal) wages would be boosted by loosening up the money supply, something that is preached here on a daily basis. While inequality pertains to how we slice the pie, this blog is dedicated toward making the pie bigger so everybody’d slice will be larger. With sales & incomes (NGDP) forecasted to be slow and remain below the pre-recession trend, businesses and individuals are still coping with deleveraging the investments they made based on that trend. If you’ve ever bought a home, you know that you expected it to be more painful in the early years and then get more manageable (and even cheap) as you got raises every year. Businesses do the same thing with their plant investments and inventory. They need a pay raise to make their debts smaller relative to their income so then, over time, they can go out and buy more. Without that raise, the pain is prolonged and that extra spending never comes. People planned their lives around nominal growth and the Fed has failed to deliver.

Leave a Reply