NORTHERN TRUST economist Paul Kasriel says that Wayne Angell (and by implication his star disciple Larry Kudlow) is an idiot.
The New-Look WSJ Puts Entertainment Features On Its Op-Ed Page
April 26, 2002
I guess The Journal is trying to compete with the television networks by combining informed
opinion with entertainment. That's the only conclusion I can come to after reading Wayne
Angell's essay, "Accommodating Mr. Greenspan," on the op-ed page of today's (April 26)
Journal. If my memory serves me correctly, Bear Stearns was sued by an irate client for
alleged bad investment advice given by Mr. Angell, who, at that time, was the chief economist
for BS. I recall reading that Mr. Angell's boss testified under oath that the suit was frivolous
because Mr. Angell was not considered by the firm to be an investment adviser but rather an
"entertainer." For this reason, and for the content of Angell's essay, I have to conclude - that's
entertainment!
Mr. Angell argues in his "Entertainment Weekly" piece that the Fed's 1.75% funds rate target is
not representative of an accommodative monetary policy. Rather, 1.75% is just right. Some of
the arguments Mr. Angell presents are entertaining, as is the theater of the absurd. Some of the
facts Mr. Angell presents in defense of 1.75% are pure fiction.
Let's get the fiction out of the way first. Mr. Angell states that a rising US dollar is evidence that
the 1.75% funds rate is not leading to the Fed's printing of too many dollars. When was this
article written? April of 2001? As Chart 1 shows, the US dollar has had a reversal of fortunes in
recent weeks. In terms of the JP Morgan trade-weighted index, the US dollar has been on a
depreciating trend since late February.
Chart 1
According to Mr. Angell, "[I]f monetary policy is truly accommodative then commodity prices
would be rising…" Unless I've got Chart 2 turned upside down, commodity prices are indeed
rising.
Chart 2
There is another commodity price that has been rising of late that Mr. Angell, in the past, has
associated with higher inflation expectations - namely gold. Upon doing an "edit check" on his
Journal piece today, the word "gold" did not show up. I wonder why? Chart 3 might have some
bearing on this. Gold stocks have been glittering since the beginning of the year - up about
40%. Might this not signal that a 1.75% funds rate is leading to the printing of too many
greenbacks?
Chart 3
There's another market-price indicator of inflation expectations that Mr. Angell conveniently
leaves out - the spread between the yield on regular 10-year Treasuries and the yield on
10-year inflation-protected Treasuries (TIPS). This spread is a market-based proxy for
investors' inflation expectations. Chart 4 shows that these inflation expectations have been
trending higher since the beginning of the year.
Chart 4
Mr. Angell thinks that the composition of the money supply contains information about the
public's inflation expectations. According to Mr. Angell, if the public is willing to hold more of its
money in non-transactions balances, it views money as a good store of value. That is, rising
non-transactions money balances imply declining or steady inflation expectations. All right. Now,
let's look at the facts. Chart 5 shows that growth in MZM money (money with zero maturity),
which represents transactions balances, has been growing at the highest rate in the past 40 or
so years except for 1983, when depositary institutions were allowed to offer money market
deposit accounts. Chart 6 shows that growth in non-transactions money balances is the lowest in
five years. So, once again, Mr. Angell ought to check the facts before putting pen to paper.
Chart 5
Chart 6
Now I want to deal with the Mr. Angell's theater of the absurd. He hypothesizes that corporations
have little pricing power because "people have learned not to buy unless the product is on sale
or the price is right." I see, it has taken people over 5,000 years to learn this! I see, prior to the
past few years, folks enjoyed paying retail or bought even when the price wasn't "right."
Absurd.
Then there is the Angell argument that because businesses have no pricing power, they will dip
into their widow's cruse of productivity enhancers to increase output-per-hour of their labor.
Wait a minute. Businesses strive to increase their productivity only when they can't raise their
prices? I must be under the mistaken impression that competition would always induce
businesses to seek greater productivity. If I can raise my prices and everyone else can raise
their prices, why should the value of my firm increase? If I can raise my prices and my
suppliers can raise their prices, are my price-adjusted profits going to increase? Maximization of
real profits is the name of the game. And increased productivity is the way you win the game,
regardless of your pricing power.
Finally, what Mr. Angell fails to realize is that monetary policy works with a lag. And the lag is
relatively long when it comes to inflation - about three years. So, even though inflation may be
low today, today's monetary policy is sowing the seeds of inflation three years from now. Chart
7 shows this three-year relationship between money and inflation. Money is most pernicious
when it is rising relative to private saving. Saving implies transferring purchasing power from
one entity to another. I cut back on my current demand for goods and services so that you can
increase yours. Fiat money creation, a.k.a. legal counterfeiting, allows me to maintain my
current demand for goods and services at the same time that it allows you to increase your
demand. The money variable in Chart 7 is the dollar change in the M2 money supply as a
percent of private sector saving. It is advanced by 3 years. Inflation is represented by the
year-over-year percent change in the CPI excluding energy. The correlation coefficient is 0.61
out of a possible 1.00 - not bad for private sector work.
Chart 7
So, Mr. Angell, although you may think that 1.75% is just right, when it comes to future inflation,
the markets and the historical relationship with money supply suggest that 1.75% is just wrong.
BTW, I've wondered why the "new-look" Journal no longer lists its op-ed pieces on the first
page. After reading Angell's essay today, I think I know why. It's better not to call readers'
attention to such nonsense. |
