The Fed Surrenders

The central bank underscores the slow-growth reality.
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   The Federal Reserve Board Building on June 19, 2015 in Washington. Photo: Associated Press
 

So much for that June interest-rate increase, and maybe for July and the rest of 2016 too. The Federal Open Market Committee, which had been insisting for months that the economy is healthy enough to take rising rates, capitulated on Wednesday and signaled slow economic growth as far as their eyes can see.

As recently as December, the FOMC members had a median growth estimate for 2016 of 2.4%.

By March it had fallen to 2.2%, and on Wednesday it was down to 2%. This follows the Federal Reserve’s consistent record of forecasting error during this expansion in which it has begun every year predicting stronger growth than has always occurred.

Economic forecasting isn’t easy, but you could flip a coin and get it right more often than the Fed has since the recession ended seven long years ago this month. The indisputable fact is that the central bank has consistently overestimated the stimulative effect of its monetary exertions.

The Fed keeps saying its policies are “accommodative,” and while they have contributed to higher prices in stocks, real estate and other assets, they aren’t accommodating faster growth or broader prosperity.

This time the FOMC vote holding the target fed funds rate steady at 0.25%-0.5% was unanimous, which reflects the genuine risks to growth. Esther George, the Kansas City Fed president who had dissented the last two meetings, joined the new caution amid signs of a slowing job market, lousy business investment, and the risk of market turmoil if Britain votes to leave the European Union next week.

More distressing, the Fed now predicts growth won’t improve even in 2017-2018. In previous years the FOMC median forecast typically predicted that growth would accelerate in the future to a more normal rate above 3%. But now even the Fed has accepted the new abnormal of 2% being the best we will do. This may be more realistic than its previous optimism, but it also underscores America’s depressing slow-growth reality.



The Keynesian economists who have run U.S. economic policy since 2008 are clearly stumped.

First they said $800 billion in fiscal stimulus would stir a return to prosperity, then they said that monetary stimulus would do the trick. Now they blame their failure on “secular stagnation” and Republicans in Congress whose pro-growth proposals have been blocked at every turn by Senate Democrats and President Obama.

Poor Paul Krugman has to resort to requoting the same snippet of our editorial from 2009 to suggest we were wrong to oppose policies that haven’t worked and about an inflation surge we didn’t predict.

We can understand why he wants to change the subject because the reality is that this is the Krugman-Obama economy. The White House and Fed have spent eight years pursuing the City University economist’s agenda of raising taxes, increasing regulation in every possible section of the private economy, and trying any new monetary experiment.

Seven years after the recession ended, we know the score: The slowest expansion in decades, falling labor participation rates last seen in the 1970s, mediocre business investment, a declining pace of business start-ups, disappointing wage growth, rising inequality, and an outbreak of angry populism on the left and right. If we were responsible for that result, we’d try to deny paternity too.

Rethinking Robin Hood

Angus Deaton
. homelessness


MADRID – International development aid is based on the Robin Hood principle: take from the rich and give to the poor. National development agencies, multilateral organizations, and NGOs currently transfer more than $135 billion a year from rich countries to poor countries with this idea in mind.
 
A more formal term for the Robin Hood principle is “cosmopolitan prioritarianism,” an ethical rule that says we should think of everyone in the world in the same way, no matter where they live, and then focus help where it helps the most. Those who have less have priority over those who have more. This philosophy implicitly or explicitly guides the aid for economic development, aid for health, and aid for humanitarian emergencies.
 
On its face, cosmopolitan prioritarianism makes sense. People in poor countries have needs that are more pressing, and price levels are much lower in poor countries, so that a dollar or euro goes twice or three times further than it does at home. Spending at home is not only more expensive, but it also goes to those who are already well off (at least relatively, judged by global standards), and so does less good.
 
I have thought about and tried to measure global poverty for many years, and this guide has always seemed broadly right. But I currently find myself feeling increasingly unsure about it.

Both facts and ethics pose problems.
 
Huge strides have undoubtedly been made in reducing global poverty, more through growth and globalization than through aid from abroad. The number of poor people has fallen in the past 40 years from more than two billion to just under one billion – a remarkable feat, given the increase in world population and the long-term slowing of global economic growth, especially since 2008.
 
While impressive and wholly welcome, poverty reduction has not come without a cost. The globalization that has rescued so many in poor countries has harmed some people in rich countries, as factories and jobs migrated to where labor is cheaper. This seemed to be an ethically acceptable price to pay, because those who were losing were already so much wealthier (and healthier) than those who were gaining.
 
A long-standing cause of discomfort is that those of us who make these judgments are not exactly well placed to assess the costs. Like many in academia and in the development industry, I am among globalization’s greatest beneficiaries – those who are able to sell our services in markets that are larger and richer than our parents could have dreamed of.
 
Globalization is less splendid for those who not only don’t reap its benefits, but suffer from its impact. We have long known that less-educated and lower-income Americans, for example, have seen little economic gain for four decades, and that the bottom end of the US labor market can be a brutal environment. But just how badly are these Americans suffering from globalization? Are they much better off than the Asians now working in the factories that used to be in their hometowns?
 
Most undoubtedly are. But several million Americans – black, white, and Hispanic – now live in households with per capita income of less than $2 a day, essentially the same standard that the World Bank uses to define destitution-level poverty in India or Africa. Finding shelter in the United States on that income is so difficult that $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India or Africa.
 
Beyond that, America’s much-vaunted equality of opportunity is under threat. Towns and cities that have lost their factories to globalization have also lost their tax base and find it hard to maintain quality schools – the escape route for the next generation. Elite schools recruit the wealthy to pay their bills, and court minorities to redress centuries of discrimination; but this no doubt fosters resentment among the white working class, whose kids find no place in this brave new world.
 
My own work with Anne Case reveals more signs of distress. We have documented a rising tide of “deaths of despair” among white non-Hispanics – from suicide, alcohol abuse, and accidental overdoses of prescription and illegal drugs. Overall death rates in the US were higher in 2015 than 2014, and life expectancy has fallen.
 
We can argue about the measurement of material living standards, whether inflation is overstated and the rise in living standards understated, or whether schools are really that bad everywhere. But deaths are hard to explain away. Perhaps it is not so clear that the greatest needs are on the other side of the world.
 
Citizenship comes with a set of rights and responsibilities that we do not share with those in other countries. Yet the “cosmopolitan” part of the ethical guideline ignores any special obligations we have toward our fellow citizens.
 
We can think about these rights and obligations as a kind of mutual insurance contract: We refuse to tolerate certain kinds of inequality for our fellow citizens, and each of us has a responsibility to help – and a right to expect help – in the face of collective threats. These responsibilities do not invalidate or override our responsibilities to those who are suffering elsewhere in the world, but they do mean that if we judge only by material need, we risk leaving out important considerations.
 
When citizens believe that the elite care more about those across the ocean than those across the train tracks, insurance has broken down, we divide into factions, and those who are left behind become angry and disillusioned with a politics that no longer serves them. We may not agree with the remedies that they seek, but we ignore their real grievances at their peril and ours.
 
 


The Geopolitics of the Orthodox Church

While the Soviets shunned religion, Putin has used the Russian Orthodox Church toward geopolitical ends.

By Jacob L. Shapiro


Earlier this week, the Moscow Patriarchate – the leadership of the Russian Orthodox Church (ROC) – said that it would not participate in an upcoming meeting of the Pan-Orthodox Council. This came after the Orthodox churches of Bulgaria, Syria, Georgia and Serbia (so far) decided not to attend. Then yesterday, the Ukrainian parliament passed a resolution asking the current Archbishop of Constantinople and Ecumenical Patriarch to declare the Ukrainian Orthodox Church independent of the ROC.

The Russian Orthodox Church withdrawing from this meeting is significant for Russia’s relations with the countries in its historical buffer region. It also concerns the relationship between religion and state in a world where the basic constituent element is no longer primarily tied to faith or empire, but rather to the nation-state.

Today, there is an alliance between the Russian government and the Russian Orthodox Church. Russian President Vladimir Putin has used the ROC to help unify Russia and to project Russian influence into other Orthodox Christian countries.

This close relationship is the return of a historical alliance. Overall, the 20th century was a disastrous period for Russian-ROC relations. The ROC had been closely tied with the government of the Russian tsars, enjoying numerous benefits and privileges as a result. During the Russian Revolution, most of the ROC backed the White Army against the communist Bolsheviks. They did so because they knew what the communists thought of religion. Lenin wrote in 1905, “Religion is a kind of spiritual gin in which the slaves of capital drown their human shape and their claims to any decent human life."

After Hitler invaded the USSR, Stalin removed many of the restrictions on the ROC to rally Russian patriotism in the fight against Nazi Germany. But in 1959, Nikita Khrushchev cracked down once more, and until the Soviet Union’s collapse, the ROC remained severely restricted by Soviet rule. It was only after the Soviet Union fell that the ROC began to rise in importance, in part due to people’s natural impulse to find meaning after the collapse of a governing ideology (that was the only one some generations had ever known), and in part as a politically expedient way for Russia’s rulers to keep the country strongly united.

Putin has used his alliance with Patriarch Kirill of Moscow to extend Russian influence beyond Mother Russia. The Russian Orthodox Church is made up of different parts. The Ukrainian Orthodox Church enjoys autonomy in its affairs but is still a branch of the ROC. The Belarusian Orthodox Church, despite recent requests for greater independence, is an exarchate of the ROC (exarchate is the Byzantine word for a province that was ruled by the Byzantine emperor). Self-governed churches in Estonia, Latvia and Moldova, as well as metropolitan districts in Kazakhstan and Central Asia are all technically part of the ROC.

However, Eastern Orthodoxy is not a monolith, and many of the current tensions in the region go back many centuries and are reflected in the divisions between the various Orthodox churches. This weekend’s council meeting was to be the first full council meeting of all the Orthodox churches in over a millennium – since 787 AD.

One of the many reasons for the split between Catholicism and Orthodoxy in 1054 was a disagreement over the role of the Pope. Catholics believe supreme authority rests with the Pope. While some Orthodox Churches recognize the Archbishop of Constantinople as a “first among equals,” the leadership and decision-making of Orthodox Christianity is regional, and all bishops are considered equal.

It is no accident that the Serbian Orthodox Church and the Bulgarian Orthodox Church are among those joining Russia in skipping the council. These churches have historically close ties to the ROC. This closeness goes back centuries to when Serbia and Bulgaria were under Ottoman Empire rule and part of the Russian Empire's geopolitical strategy was to actively support Slavic Orthodox communities living in the Ottoman and Austro-Hungarian empires.

In the 1877 to 1878 Russo-Turkish War, Russian troops fought the Ottomans, and the result was independence for Serbia in 1882 and autonomy followed by independence for Bulgaria in 1908. The ROC also helped to build and restore the churches in the new states that had just won their independence from the Ottomans.

Other Orthodox churches are not necessarily close to the ROC. Romania also fought alongside Russia in that war and had its independence recognized in 1879 as a result, but the Romanian Orthodox Church kept its religious rights during the Ottoman occupation and thinks of its Christianity as stretching back to the Byzantine Empire. The Greek Orthodox Church is its own entity and is further removed from the Russian sphere of influence. Some of the Orthodox churches respect the Archbishop of Constantinople because of the prestige of his office.

The ROC, on the other hand, sees the Archbishop of Constantinople as a figure whose flock is only roughly 180,000 people in present-day Istanbul – a far cry from the over 100 million Russian Orthodox Christians. A council of Russian bishops installed its own leader in 1448 without the consent of Constantinople, which fell to the Ottomans five years later in 1453. The ROC has been operating with this independence and with a sense of being the major heir to the fall of Orthodoxy’s historical capital for over six centuries. Part of the ROC’s influence comes from the fact that it represents more than 100 million people, or just under 40 percent of all Orthodox Christians in the world.

Russia’s resurgence into its borderlands has brought many of these long-forgotten dynamics back into the limelight. The history of the Eastern Orthodox Church is long and convoluted, filled with schisms and doctrinal arguments. But while those disagreements are often theological, they also represent very real political divisions that can influence current politics. The Russian Orthodox Church is a powerful potential tool for Russia to use to establish legitimacy and engender sympathy in some of these regions.

Which brings us to the more abstract significance of this intra-Orthodox spat. Religion and geopolitics are not separate. Religion is as much a part of geopolitics as are military affairs and economics. The importance of religion has diminished since the 19th century, when nationalism rose across Europe and fundamentally reshaped the Continent and the world.

Nationalism rules the day – but religion is a potential mode of political organization that has not completely dissolved into the past. Look no further than the Islamic State for evidence. In the Middle East, a combination of the disillusionment with dictators sponsored by Western imperialism, the failure of Pan-Arabism and socialism, and a lack of opportunity have caused many to turn to religion as a source of meaning in the world. Islam is the only thing that has ever been able to unite the Middle East.

We don’t often think of Europe in quite the same terms. How could we, when the European Continent gave us the Renaissance, Enlightenment and Scientific Revolution. But the Arab world was also once the beacon of intellectual life of the world. In geopolitics, nothing is permanent.


The map above combines national boundaries with religious ones. Some observations immediately jump out. We have drawn a line in Russia that marks the area behind which Russia cannot retreat or else risk its national security. The Orthodox areas beyond that line are Russia’s traditional buffer zone where it seeks to re-establish some of its former influence.

The Balkans are a hodgepodge, not just of nationalities, but also religions and make up the borderland between Turkey and Europe – between Christendom and Islam. Western Europe is largely Catholic, but Germany, as it always has been, is at the center of the European Continent and yet is not quite like the rest of its neighbors. Across various channels and seas, the United Kingdom and Scandinavia have their own faiths.

Most striking is that Eastern and Western Europe are divided by religion. The Schism of 1054 separated Catholicism from Orthodoxy. One could argue that to this day it continues to mark the boundary between East and West.

The days of popes or patriarchs crowning emperors, declaring crusades or other wars, and controlling the geopolitical fates of Europe have long passed. But occasionally, from the depths of the past, the (holy) ghosts of history reach out to shape the present. The Russians no longer have the ability to dominate these areas by force. But despite this relative weakness, it still has tools at its disposal, and the church is one of them.

The Russian Orthodox Church pulling out of a council meeting with the rest of the Orthodox world then tells us much about Russia’s relations with its would-be buffer zones. But it also offers the chance to think back to a time when religion, more than any political entity or ideology, was arguably the most potent way of organizing human beings into groups larger than just one’s family or tribe. And while religion does not hold the same type of overt power toda in Europe that it once did, the inheritance of the centuries of its power remain very much alive in tday’s conflicts. Nietzsche said God is dead. But that never meant that belief can’t be resurrected.

Gold: A Huge Upside Opportunity And Excellent Bet Against Overprinted Dollar

by: Bull and Bear Investor
 
- I have made a model of gold price, which explained gold rise after abolition of fixed $35/oz rate in 1970s.

- The main model factor is US monetary base, and others are adjustment for world gold production and for US-only consumption.

- The target gold price is $3,750/oz.

- US dollar is overprinted, as US monetary base shows 2 clearly distinctive trends before and after 2008.

- One of the best ways to bet against dollar is buying gold.

 
Introduction. There have been many talks that gold (NYSEARCA: GLD) should rise in the long-term. The main reasons are that the USA is using artificial fiat money, as well as Fed's policy, and poor quarterly corporate results. I am going to evaluate gold price in terms of artificially printed dollars.
 
Such approach has been realized by SA contributor Chris Rutherglen. He started with $35/oz gold price in1934 and then forecasted it forward pro rata US monetary base, discounting it at 1.5% rate to account for change in money supply. Eventually, he concluded that gold price should be equal $5,500/oz. Although I appreciate his idea, I think his approach can be improved. The main reason is that gold price is influenced by global world supply and demand, and US monetary base is about America. But what happens when India and China increase their demand; why should it affect excessive US dollar amount in circulation?
 
Another way to appraise gold is by US monetary base/US gold reserves ratio. It appears that by using this approach, we can stay inside the US story. However, in my opinion, it would only be true, if the US was going to return to gold standard. Otherwise, I do not see how transfers of bullions to and from Fort Knox should influence gold price. In addition, there has been extensive discussion on reliability of US gold storage data.
 
When talking about monetary base vs. gold, there is one important point needs to be understood: "gold price" should not be understood in its ordinary way. I mean, when we say "oil price is $50 per barrel", we imply that oil is a variable thing and we measure it in 'fixed' dollars (NYSEARCA: UUP), (NYSEARCA: UDN), (NYSEARCA: USDU). It is not the same for gold in our story: we can either say "gold price is higher than it should be", or "too many dollars have been printed for a value of 1 gold oz". I believe that dollar value of gold is much higher than it should be. And a simple dualistic concept of "dollar value of gold" and "gold value of dollar" is needed; because I do not know whether gold will rise against dollar, or overprinted dollar will fall against gold and other things.
How Model Works. Like Mr. Rutherglen, I started from calculating gold pro rata US monetary base. Instead of 1.5% gold production discount rate, I discounted every gold price by actual share of current year's production to total gold production to date. These discount factors actually vary from 1.16% to 2.25%.
 
We need to understand the "US part of gold and dollar story", not a "world-level story". For each year, I calculated the share of US consumption in world consumption (actually, I was forced to take world production; see appendix for this and other imperfections of my model). Then, for each year, I multiplied draft gold price figure by US consumption share and divided that by average US consumption (total US consumption since 1934/total world consumption since 1934). By doing that I eliminated consumption effect from other countries. Basically, by multiplying draft gold price by US consumption share I "imagined" that all the world gold mining exists to produce gold for US only.
 
Then, to normalize the figure from "US contribution to gold price" to actual gold price, I divided that by average US share. So, the basic trend is the same, it only oscillates with changes in US consumption.
 
(Source: various Minerals Yearbooks, author's calculations).
 
What Model Shows. As we can see, forecasted gold price started to deviate from actual from the very beginning. Since late 1960s-early 1970s it was no longer possible to maintain $35/oz, so gold was left to be priced by a free market. Eventually, gold price started to rise gradually and reached $600/oz. Some people can note that gold price eventually reached its fundamental value, as predicted by my model; others might say that in 1980 there was a gold bubble, and it is just a coincidence. Anyway, one cannot ignore the fact that the model accurately followed gradual gold price decline from $594/oz in 1980 to $350/oz in 1994.
From that point actual and forecast prices started to diverge very significantly. The model gold price's growth from $350/oz in 1994 to $1000/oz in 1999 is mainly due to US consumption share surging from 3% to 10% respectively. Later, forecasted price rose from $1000/oz in 1999 to $1632/oz in 2008, because of monetary base increase from $550 billion to $850 billion, and lowering world gold production from 2,570 tons to 2,290 tons (lowering of US consumption share to 8% did not help).
 
So, here comes the most interesting part. As we all know, after 2008 crisis US government started QEs (quantitative easing) and ZIRP (zero interest rate policies). Monetary base increased from $850 billion to $4 trillion in 2015. Quite obviously, model gold price soared and reached $3,750/oz; and neither US consumption decrease, nor production increase could change the trend.
 
The Investment Thesis. Gold should cost $3,750/oz. There are many factors explaining its high price, but the main one is unjustified dollar amount surge. Overprinted dollars, accompanied by investors' fear, should lead to soaring gold prices. Since 2008, if not before, excessive cash has been flowing to the stock market, causing unreasonably high S&P growth. I showed in my previous article that inadequate S&P growth and its deviation from a long-term pattern of S&P/GDP ratio will lead to S&P adjustment.
 
Dollar and US Monetary Base. Overall, let's have a look at US monetary base since 1934.
 
 
I approximated this chart with 2 exponents: before 2008 it is ~exp(0.07*t), where "t" is time in years; and after 2008 it is ~exp(0.205*t). You can say it another way: in 1934-2008 US monetary base has been growing at 7% CAGR (compound annual growth rate), and in 2008-2015 at 20.5% CAGR. Anyway, even without these exponents and CAGRs it is obvious that before 2008 there has been 1 speed, and after 2008 the growth is much faster. We do not need a chart to show that this does not correlate with the real growth of US economy. This excessive money should be utilized somewhere. What is more, I believe that you can't create value by increasing monetary base; therefore, the system should return to equilibrium. This is a bit tricky, because dollar cannot fall by itself, it can only decline against something. Most of foreign currencies are not that "something", because their central banks also pump their economies with the money.
 
Gold is likely to be that something, so a long gold position would be a good bet against dollar.
 
Again, you can say it both ways: gold will rise (3.5x in my model) or dollar will fall against gold.
Conclusión. I forecast gold to be $3,750/oz. The analysis is based on growing US monetary base, also taking into account gold production, and considering US as if this country is the only gold consumer. The model has many imperfections, some of which are discussed in Appendix (see below). However, it explains gold price summit in 1980 after fix $35/oz price abolition in 1970s. I believe that we are likely to see similar gold price rally again. We also saw that US monetary base increased its pace in 2008 from 7% p.a. to 20%, and this cannot pass without consequences. The model does not claim that gold should rise exactly 3-3.5x times, it just shows that gold should rise significantly mainly due to overprinted dollars. Putting it another way, gold is currently measured with an "elastic dollar tape", which is stretched at least 3 times from normal. Or, dollar is valued too high, and buying gold is a good way to short dollar.
 
Appendix. Data and Model Imperfections. Imagine a drunk man standing under the street lamp and looks for something on the ground. The other man comes by and asks, "What are you looking for?".
 
"My watch", the first man answers.
 
"Where have you lost it?"
 
"Under that tree"
 
"But why are looking for it here?"
 
"Because under the tree it is too dark"
 
This is the story I thought of when I was preparing this article. There is no one place for data, it is all scattered through various mineral yearbooks for different years. Of course, methodologies of data collection are not strictly consistent year after year, and I could focus only on clear and understandable line items. Here are some issues:
 
1) When calculating US share of world gold consumption, I used world production instead of world consumption in the lower part of the fraction. I tried calculating consumption=production-change in reserves, but it did not give consistent data. World reserves are not available before 1960. Also, from 1963 to 1974 world reserves were calculated in dollars ($42 bln. to $50 bln.). When I divided dollar amount to the growing average gold price, it appeared that from 1962 the reserves decreased from 36,500 tons to 8,000 tons, and then suddenly increased again in 1963 back to 36,500. This just doesn't make sense. In addition, for other years calculated world consumption would have unusual incremental high peaks.
2) I skipped 1939 to 1950, as it relies on US consumption in dollars. These numbers are also unreasonably volatile.
 
3) I used "consumption in industry and the arts" as a figure for US consumption. "Apparent demand", which is basically an investment demand, would be better, but it is not available before 1970s-1980s.
 
The readers are welcome to suggest improvements to the model (both from conceptual and data collection points of view).