John Hussman on the Federal Reserve and Economy

My introductory statements are followed by Hussman’s comments in double-quotes.

The source of wealth:

“Understand that securities are not net economic wealth. They are a claim of one party in the economy – by virtue of past saving – on the future output produced by others. Fundamentally, it’s the act of value-added production that ‘injects’ purchasing power into the economy (as well as the objects available to be purchased), because by that action the economy has goods and services that did not exist previously with the same value. True wealth is embodied in the capacity to produce (productive capital, stored resources, infrastructure, knowledge), and net income is created when that capacity is expressed in productive activity that adds value that didn’t exist before.

Future returns and the destructive effect of the Fed on the economy:

“Bubbles do not create wealth. They simply raise the current price of a security, lower the future expected long-term return, and, at best, leave long-term cash flows unchanged.

“I say “at best” because there’s no evidence that yield-seeking speculation, encouraged by central banks, has any positive effect on long-term cash flows at all. Indeed, I don’t think there’s any real doubt that the crisis and disruption following the collapse of prior yield-seeking bubbles is precisely what has crippled the accumulation of productive capital at every level (real investment, work experience, infrastructure) in the real economy. Given that the accumulated stock of productive capital is the basis for the net worth of our nation (as detailed above), it follows that yield-seeking speculation, intentionally encouraged by the Federal Reserve, is perhaps the single most destructive force in the U.S. economy, and in the lives of the American people.

On the Fed’s mandate updated in the 1970’s (Humphrey-Hawkins):

“For me, probably the saddest part of this whole spectacle was watching an earnest, well-meaning congressman asking Janet Yellen, during her Humphrey-Hawkins testimony two weeks ago, why the Fed was not doing “more” on behalf of unemployed people of color. The problem here is that the underlying assumption is false. If one actually examines data across history, there is no reliable or economically meaningful relationship between activist monetary policy and subsequent changes in output or employment. This congressman was essentially begging the Fed to deliver poison to his community.

On the correlation of monetary policy and desired outcomes on the economy:

“Virtually nobody cares to look at the utterly weak and insignificant correlation between monetary policy and desired outcomes, apparently preferring a dogmatic insistence on some little graph or model they learned in Economics 101. While Janet Yellen showed enough conceit to give the Fed credit for millions of new jobs since 2009, the path of the economy since the crisis has been nearly identical to what one would have anticipated in the absence of all of this monetary insanity (a result that one can demonstrate using vector autoregression).

What “saved” the economy:

“The crisis itself was not “fixed” by monetary policy, but ended the same week that the Financial Accounting Standards Board announced it would waive the requirement for financial institutions to mark their assets to market value, allowing them “significant judgment” in how they valued those assets, and eliminating the specter of widespread insolvency with the stroke of a pen.

On the correlation between interest rates and equity prices:

“Still, the relationship between equity valuations and bond yields is far weaker than investors seem to recognize (the “Fed Model” is an artifact of the 1980-1997 disinflation), and low interest rates have never durably removed equity market volatility, downside risk, or the tendency for compressed equity risk premiums to be restored over the completion of the market cycle.”

Whole thing.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s