The Econtrarian
December 23, 2014
Legacy’s Senior Economic and Investment Advisor Paul L. Kasriel
The 2014 Festivus* Airing of Grievances
Well, it’s that time of the year again for the airing of grievances.
And I’ve got a lot of problems with you people! First of which
are those of you (PK, NYT?) who insist that the Fed’s QE did
not result in any inflation. It all depends on your definition of
inflation. If your definition is restricted to the prices of goods
and services, you are right. No matter how you slice it or dice it,
there has been no discernible upward trend in the price changes
of consumer goods and services since the start late 2012 start of
QE III, as shown in Chart 1.
If, however, you expand the definition of inflation to include
the prices of assets, then there has been a discernible pick-up in
inflation since late 2012. For households, their holding gains on
assets (stocks, bonds, houses, e.g.,) scaled against the market
value of their total assets have moved up noticeably since the
onset of QE III in late 2012, as shown in Chart 2. In fact, asset
inflation in 2013, according to this measure, was approaching
the housing-bubble highs of 2005-06.
You don’t think that QE had anything to do with asset inflation
starting in late 2012? Check out Chart 3, which shows the
behavior of credit granted for the purchase and carrying of
securities and thin-air credit, i.e., the sum of credit created by
depository institutions and credit created by the Fed in the form
of depository institution reserves held at the Fed and their vault
cash. Perhaps asset-price inflation will moderate in 2015 as
growth in thin-air credit does.
My next grievance with you people is your dark-cloud reaction
to the recent decline in petroleum prices. When these prices rise,
the talking heads warn of dire economic consequences. When
they fall, the talking heads also warn of dire consequences. My
approach to ascertaining whether the recent decline in energy
prices is a “good” economic development for the U.S. economy,
in particular, and the global economy, in general, is to keep in
mind that more is better than less. That is, if more energy is
available, then more of the final goods and services we consume
can be produced. Think of an agriculturally-based economy.
Which will contribute to higher standard of living for the
residents of this economy – a bumper crop or a lost crop? The
bumper crop, obviously. Similarly, more energy production is
better than less energy production with regard to our standard
of living. Chart 4 shows that U.S. energy production has been
CHART 1
CPI-U: All Items
% change, year-to-year NSA, 1982-84=100
FRB Cleveland 16% Trimmed-Mean CPI
SA, 12 Month % change
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
2012
2013
Sources: BLS, Haver Analytics
0.5
2014
CHART 2
Households: Holding Gains on Assets as a % of Total Assets
4-quarter moving average
4
4
2
2
0
0
-2
-2
-4
05
06
07
Source: Haver Analytics
08
09
10
11
12
13
14
-4
CHART 3
Security Credit
% change, year-to-year NSA, Bil. $
Depository Inst.: Loans, Securities, Reserves @ Fed. & Vault Cash
% change, year-to-year NSA, Bil. $
16
12
8
4
0
-4
-8
16
12
8
4
0
-4
-8
2012
2013
Sources: Federal Reserve Board, Haver Analytics
2014
Continued next page
* Festivus is a fictitious holiday popularized on an episode of the Seinfeld sitcom. Festivus is “celebrated” with an evening meal on
December 23. One of the Festivus traditions is the airing of grievances in which celebrants recount the accumulated disappointments they
have with each other during the year. Another tradition is the feats of strength in which one of the celebrants, usually the youngest family
member, attempts to pin the head of household in a wrestling match.
The Econtrarian
December 23, 2014
The 2014 Festivus Airing of Grievances
Continued
and services in the economy does not decline. Rather your
decrease in current spending on goods and services is offset
by an increase in spending by the entity that ultimately
received the funds with which you purchased the stocks or
bonds. So, if rich people are earning relatively more income
than less rich people, total spending in the economy need
not go down if the rich people save relatively more of their
income. Rich people’s increased saving enables other entities
to increase their current spending. The saved income does
not vanish from the spending stream, as today’s Keynesian
talking heads would have you believe. Rather, it gets
transferred to others who are eager to increase their current
spending. As an aside, if the increased saving by rich people
funds spending on capital goods, all else the same, the
economy’s future potential to produce goods and services is
enhanced. In sum, increased saving is not a “bad” economic
thing in the short run and is potentially a “good” economic
thing in the long run.
soaring in recent years. That’s a “good” thing, economically
speaking.
CHART 4
IP: Energy, Total
12-month moving average SA, 2007=100
120
120
115
115
110
110
105
105
100
100
95
95
90
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
90
Source: Federal Reserve Board, Haver Analytics
Another grievance I have with you people is your
Keynesian (probably not Keynes, himself, rather his
subsequent interpreters) view of saving. How many times
have you heard that if extra income goes to the rich, they
will just save it, which won’t stimulate total spending in
the economy? But if income goes to the less rich, they
will spend it, which will stimulate total spending in the
economy. This popular view is that when people save, funds
somehow disappear from the total spending stream of the
economy. This popular view of saving is often advanced
as an economic argument to buttress a moral argument for
government-mandated income redistribution. But except in
one case, this popular view of saving is fallacious.
Income redistribution generally will not stimulate total
spending in the economy. If income is taken from the
rich and given to the less rich, the rich will react by either
cutting back on their current spending and/or cutting back
on their saving, which implies less spending by some other
entity. Either way, the increased spending by the less rich
will be offset by the decreased spending and/or saving by
the rich. Thus, income redistribution will not result in a net
increase in total spending in the economy. Again, there may
be a moral argument for income redistribution, but there is
not a macroeconomic reason for it.
What does it mean to increase your saving? It means you
cut back on your current spending on goods and services
relative to your income. When you cut back on your goods/
services spending, what do you do with that saved income?
You typically, directly or indirectly, purchase equities or
bonds. In other words, you transfer some of your income,
which you have voluntarily chosen currently not to spend
on goods and services, to another entity, perhaps a business,
a government or even another household, that currently
wants to increase its spending relative to its income. So, in
this case of increased saving by you, total spending on goods
Now, there is one case in which an increase in saving can
lead to a decrease in total spending in the economy. If you
increase your saving and choose to use your extra unspent
income to increase your balances at depository institutions,
total spending in the economy will decline, all else the
same. But wait, doesn’t the bank lend the increase in funds
it received from you? Probably. But the income you received
but chose not to spend now came to you from the bank of
Continued next page
Paul His
L. Kasriel,
insights have helped shape
The economic
Econtrarian
and financial policies
a global
scale.Economic and Investment Advisor and former Senior Vice President
Paul is on
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and Chief
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at Legacy.Trust Company. Paul works across Legacy’s wealth
management initiatives, consulting on investment strategies with his innovative research.
Considered
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as measured by long term accuracy, Paul is a highly regarded,
Paul L. Kasriel is Senior
Economic
and Investment
for Legacy Private
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Company and former Chief Economist at The Northern Trust Company. Paul is a highly
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regarded economic researcher whose forecasts and Econtrarian perspectives have helped
form economic policy at national and global levels.
He and the Legacy wealth management team focus on providing innovative investment
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Visit www.lptrust.com to read Paul’s commentaries and out-of-the-box perspectives on
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The Econtrarian
December 23, 2014
The 2014 Festivus Airing of Grievances
Continued
some other entity. That bank has lost funds and, thus, has to
reduce its loans. So, the result of you using increased saving
to build up your deposits is net decline in goods/services
spending in the economy. In the 1930s, when Keynes was
advancing Keynesianism, this type of saving was referred to
as hoarding “money”. Back in the Great Depression, when
many businesses and depository institutions were failing,
people preferred to save in the form of currency and/or
in deposits at super-liquid banks because of the safety of
principal of these types of assets. This saving in the form
of cash, or hoarding, is what motivated Keynes to have a
dim view of saving in his Keynesian macroeconomic theory.
Although I suspect that Keynes understood the different
implications regarding total spending in the economy
between an increase in saving that took the form of stocks
and bonds and an increase in saving that took the form of
currency and deposits, it is not clear that current adherents
to Keynesian macroeconomic theory understand this
difference. For whatever reason, the term “hoarding” has
gone out of fashion. We now refer to saving in the form of
cash (either currency or bank deposits) as a decrease in the
“velocity” of money. If a decrease in the velocity of currency
and deposits is not countered with an increase in the supply
of currency and deposits, then nominal spending in the
economy will decrease.
I have one last grievance to air. This one, however, is not
with you people. Rather it is with me, people! Throughout
2014, I had been telling you people to steer clear of bonds,
especially investment-grade bonds, because I had thought
that bond yields would rise. The reason I had thought bond
yields would rise is that I also thought that 2014 growth in
domestic nominal spending on goods and services would
be stronger than the Fed and the consensus expected as a
result of increased growth in thin-air credit. I figured that
the Fed would be reluctant to pre-emptively raise the federal
funds rate in 2014, but that market participants would
anticipate more aggressive funds rate increases in 2015,
which would result in higher bond yields in 2014. Well,
growth in domestic nominal demand did turn out to be
relatively robust in 2014, save for a weather-depressed first
quarter. And the Fed did not raise its policy interest rates
in 2014 nor even seriously threaten to do so. But Treasury
bond yields did not rise during 2014. As Chart 5 shows,
Treasury bond yields actually fell. The yields that did rise
were those on shorter maturity Treasury coupon securities,
as represented by the yield on the 2-year Treasury security
in Chart 5. Perhaps market participants believe that the Fed
will raise its policy interest rates in 2015 sufficiently to slow
growth in economic activity in 2015 and 2016 such that
goods/services price inflation will stay in check. And given
the pronounced slowdown in the growth of thin-air credit
in the closing months of 2014, this market “bet” might be
right.
CHART 5
3.2
10-Year Treasury Note Yield at Constant Maturity
EOP %
2-Year Treasury Note Yield at Constant Maturity
EOP %
0.675
3.0
0.600
2.8
0.525
2.6
0.450
2.4
.0375
2.2
0.300
2.0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0.225
2014
Sources: U.S. Treasury, Haver Analytics
But I was dead wrong on the direction of bond yields in
2014. So, I’ve been pinned. That means that the airing of
grievances is over for 2014 and the Festivus celebrations can
now begin in earnest. Gather around your Festivus poles,
preferably made of aluminum because of its high strengthto-weight ratio, and join me in singing the Festivus Carol. n
A Festivus Carol
(Lyrics by Katy Kasriel to the melody of O’ Tannenbaum)
O’ Festivus, O’ Festivus,
This one’s for all the rest of us.
The worst of us, the best of us,
The shabby and well-dressed of us.
We gather ‘round the ‘luminum pole,
Air grievances that bare the soul.
No slights too small to be expressed,
It’s good to get things off our chest.
It’s time now for the wrestling tests,
Feel free to pin both kin and guests,
Festivus, O’ Festivus,
The holiday for the rest of us.
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