
Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020 - simulate
https://www.bloomberg.com/news/articles/2018-06-07/bernanke-says-u-s-economy-faces-wile-e-coyote-moment-in-2020
======
smallnamespace
The combination of tax repatriation, tax cuts, and large-scale deficit
spending (fiscal expansion) late in the economic cycle (recessions typically
happen every 8 years or so, and the current expansion has been going on for
~10 yrs now) while the Federal reserve is raising interest rates (monetary
'contraction') is more or less unprecedented (we've never seen it happen in
modern times in the US or any other large developed economy).

The risk is that fiscal policy is pouring more fuel on the fire at the precise
time when the economy typically starts slowing, further inflating asset
bubbles and making the Fed's job (to avoid inflation and keep employment high)
much potentially harder and making it more likely a misstep will happen.

Popping bubbles or slowing their formation is inherently a tricky proposition
(just look at the run-up in stocks from early 2017 until now); move too
aggressively and you risk sparking a liquidity crisis and plunging your
economy directly into recession; move too slowly and you end up with an even
larger bubble later on to deal with.

This is tricky in normal times, but doing so while the other wing of
government is actively stimulating the economy makes it _much_ harder to gauge
the impact of monetary policy and withdraw Fed support in a prudent and
measured way.

~~~
coliveira
The so called business cycle is created by the FED itself. Left uncontrolled,
the market will disconnect from reality and create bubbles that can destroy
the economy, as it did in 1929. The unrecognized work of the FED is to
increase the interest rates periodically to force these bubbles to pop and
create a minor recession before they can collapse the economy. The real risk
of this cycle is that the FED has already lost the opportunity to contain a
major bubble which is already forming in the stock market.

~~~
tim333
Business cycles have been around longer than the FED and in countries where it
doesn't operate. Hence it probably didn't create them all. The FED tries to
moderate the cycles I guess.

~~~
tabtab
The "Tulip Bubble" of 1630's is arguably the first speculative bubble. No FED
back then. Maybe the FED affects the timing and depth of the business cycle,
but probably cannot prevent all "bubbles"...Unless, maybe you give the FED a
clue-stick to use on stupid investors.

~~~
_dps
The historical view of tulip speculation has changed a lot in the last 20
years, but popular conception has not caught up.

In a nutshell, it is now believed by several researchers to have been a very
narrow phenomenon with minimal impact to the national economy. Per Wikipedia

"While Mackay's account held that a wide array of society was involved in the
tulip trade, Goldgar's study of archived contracts found that even at its peak
the trade in tulips was conducted almost exclusively by merchants and skilled
craftsmen who were wealthy, but not members of the nobility.[44] Any economic
fallout from the bubble was very limited."

[https://en.wikipedia.org/wiki/Tulip_mania#Modern_views](https://en.wikipedia.org/wiki/Tulip_mania#Modern_views)

Taken at face value, this suggests that the tulip "bubble" was dramatically
different from either the dotcom or the mortgage bubble, which had wide
ranging participation and damage. One could argue that the latter two would
have been impossible without the Fed.

~~~
tabtab
Economies ran slower in those days so it's hard to compare. But the principle
of hype and me-too-ism was present in the Tulip incident even if it didn't
spill over to other economic areas. Whether human nature breaks big gizmos or
small gizmos, it's still human nature at play. The FED did not make people pay
way too much for silly dot-coms.

But bubbles continued. I wonder if one can make a case that pre-FED bubbles
were notably smaller than post-FED bubbles, factoring in the fact that the
nature of modern economies may magnify bubbles. In other words, if there is a
continuous upward slope to the size of bubbles from the 1600's up to now, then
it would appear FED made no significant difference. But if there is a spike or
jump when FED formed, it could mean they magnify them.

------
mindcrime
_“The economy is already at full employment.”_

I'm not sure that's _actually_ true. Yes, the govt. reported "official"
unemployment number is 3.8% or whatever. BUT... that comes with a couple of
big, big caveats:

1\. Those numbers by definition don't include job-seekers who have left the
market and quit being job-seekers. IOW, people who became so despondent that
they gave up. But, there's nothing specific that stops these people (or some
portion of them) from re-entering the job market to fill demand.

2\. These numbers don't reflect _underemployment_ where someone has "a job"
but the job doesn't require the skills the individual actually possesses and
pays significantly less than they would expect to earn in a "normal" position.

3\. Wage growth is still very low, which suggests that the economy is not
being hamstrung (yet) by lack of available workers. At some point, if demand
exceeds supply by enough, you're inevitably going to see wage growth. A
significant jump in wages would, IMO, be the best sign that there's an actual
gap between labor supply and labor demand.

Note that I'm not saying that Bernanke's theory is wrong, but this one little
point jumped out to be as something that's at least somewhat questionable.

~~~
hawkesnest
But problems 1 and 2 are the same for the official unemployment metric in
times past as well.

1\. If the person has stopped looking for a job, their likelihood of resuming
their job-seeking is pretty low. That's especially true for the unusually
large aging baby-boomer population who are taking an early retirement rather
than seeking re-employment.

2\. While that's clearly another indicator of the strength of the job market,
it is hard to argue that no job is better than a job which isn't ideal for
skill/pay reasons. If you have a suggestion on how to accurately measure this
that'd be great.

Who knew that a single number was insufficient to measure something as complex
as employment? Yeah, we need to look at the larger picture, but it's hard to
say we have exceptionally low unemployment AND that this is a good time for a
stimulus.

~~~
mindcrime
_But problems 1 and 2 are the same for the official unemployment metric in
times past as well._

Absolutely. Don't get me wrong... I'm not arguing for or against any specific
policy in the post above, or making any particular claim regarding Bernanke's
argument. I just wanted to point out that saying "we're at full employment" is
_at least a little bit_ questionable as an assertion, at least if we take
"full employment" to represent a situation where lack of available labor
represents a threat to the economy, vis-a-vis other policy issues.

Maybe I'm just picking nits with this observation, but that jumped out me for
some reason, when I was reading the article.

~~~
mywittyname
But "full employment" is widely considered to be a sub 5.0% unemployment rate.

> at least if we take "full employment" to represent a situation where lack of
> available labor represents a threat to the economy, vis-a-vis other policy
> issues.

I believe that there are officially fewer unemployed people than there are
open jobs in the US [1]. Not sure if that's the kind of "threat" you're
looking for, but it qualifies, as a risk at least.

[1] [http://money.cnn.com/2017/06/06/news/economy/us-job-
openings...](http://money.cnn.com/2017/06/06/news/economy/us-job-
openings-6-million/index.html)

------
mhneu
2020: policies put in place under this administration will come home to roost
during the next administration, which will get the blame.

This lag between economic policy and outcomes is a big reason the US has such
a disingenuous public debate. Getting what you can in the short term, while
being deceptive about long term effects, has become a good strategy. [1]

[1] [https://mobile.nytimes.com/2017/12/18/opinion/republicans-
ta...](https://mobile.nytimes.com/2017/12/18/opinion/republicans-tax-cuts-
rich.html) “The essence of this strategy is to take tax policy out of the
hands of experts and entrust it to activists. These campaigns do not usually
have much credibility with card-carrying economists. ”

~~~
maxxxxx
" 2020: policies put in place under this administration will come home to
roost during the next administration, which will get the blame."

That has often been the case. Bush suffered through Clinton's internet bubble.
then Obama suffered through Bush's real estate bubble. Trump now benefits from
Obama's policies. We'll see what happens after Trump.

~~~
ams6110
Trump benefits from Obama's policies by reversing them.

~~~
megaman22
It's startling what the growth on my 401k has done since November 2016.
Essentially flat for years before, then immediately jumping, once the election
results were in. Q1 2018 was a bit sluggish, but it's back on that tragectory
again.

Even outside the market, people are hiring again, companies are making
investments, it's a hell of a turn around.

~~~
moorhosj
“People are hiring again”, any data to back this up? BLS seems to disagree:

\- The United States added almost 3 million jobs in 2014, 2.7 million in 2015
and 2.2 million in 2016.

\- The U.S. economy added 2 million jobs in 2017

[http://money.cnn.com/2018/01/05/news/economy/december-2017-j...](http://money.cnn.com/2018/01/05/news/economy/december-2017-jobs-
report/index.html)

------
Bucephalus355
Ben Bernanke’s point in his recent memoir is that central banks can only do so
much.

At the end of the day, monetary policy is not social change, moral evolution,
or political coalition building. These things happen outside the Central
Banking system and are just as important for a functioning economy.

I know this sounds controversial, but at this point quite frankly the deficit
does not matter. There is so much debt in the world, we are likely heading
towards a global debt write-off.

It doesn’t help that China has essentially been spewing entirely fictitious
accounting numbers for the last 20 years. It’s not even about padding an extra
10-15% anymore. There are journal articles out there claiming that Alibaba, a
company as big as Oracle, is making up _whole cloth_ 95% of it’s accounting
statements. Ridiculous...

~~~
pjc50
> global debt write-off

This would also be a global abolition of the private pension system, FYI.

People keep talking about debt write-off, but interest rates are bouncing off
the lower bound. These are difficult to reconcile.

~~~
AnimalMuppet
Well... the low interest rates mean that we can borrow large amounts and be
able to afford the interest payments. "Large amounts", as in, more than we can
comfortably pay back the principle on. But we're doing OK because the rates
are low.

One day the rates will (probably) rise. At that point, it will be more painful
even to pay the interest.

------
CompelTechnic
I have a question about the federal funds rate that I haven't ever had a good
explanation for. It is: To what extent is the fed funds rate set to match
market demand, and to what extent is it controlled completely independently of
market demands? If anyone has a good answer, I would appreciate it a lot.

To flesh out my question a little further, let's say that the fed decides one
day to change the fed funds rate from 1.75% to 2%. They put the bonds up for
auction and find out that they were only able to auction off the allotment of
bonds at an effective rate of 1.8%. Is this typical? Or is it usually the case
that the bond buyers will quickly hoover up whatever rate they are given?

Maybe a more formal way to put it- is the elasticity of demand for these bonds
low enough for the fed to have complete control over the fed funds rate such
that they can set any interest rate they desire?

~~~
burkemw3
The fed rate commonly publicized isn't a bond rate. It's like the rate on a
personal checking account. It can vary at the fed's desire. See
[https://en.m.wikipedia.org/wiki/Federal_funds_rate](https://en.m.wikipedia.org/wiki/Federal_funds_rate).

Changing that rate does cause impacts on the rest of interest rates (e.g.
bonds), though.

------
alex_young
Remember that economists have predicted 15 of the last 7 recessions. Hold on
to your hats.

~~~
mandeepj
> predicted 15 of the last 7 recessions

Did you mean to say 17 instead of 7?

~~~
hmate9
I don’t think so. He’s basically saying there is always somebody saying the
economy will collapse and there are always people saying the economy is going
to be stronger than ever.

------
patrickg_zill
My inner skeptic asks: What is Bernanke's record on predictions that he has
made in the past?

He said that subprime was "contained" in 2008, IIRC.

The Mises Institute (an avowed hater of the Fed) has this, for example:
[https://mises.org/library/ben-bernanke-was-incredibly-
uncann...](https://mises.org/library/ben-bernanke-was-incredibly-uncannily-
wrong)

~~~
maxxxxx
Yes, in 2008 he didn't see the problems right in his face. He was supposed to
be a great scholar of the Great Depression but seemed to have learned nothing
from it. Maybe he has learned from his own crisis...

------
samsonradu
It’s quite an old trick in the book for any administration, whichever color it
has, to try to push the can down the road until it gets re-elected. After
that, it’s buyer beware.

Something to consider is that in times like these money are flowing in the
wrong direction, instead of going from developed countries (US, EU, JP) to
developing countries with better return rates (Emerging markets) it is the
other way around, going into developed countries estates, bonds and stocks
even with low returns which look already overvalued. That would normally read
that there is way more liquidity than actual growth and the valuations are not
accurate.

~~~
frockington
With recent earnings, the stock market isn't very inflated. We have a long way
to go until "bubbled-up"

------
jorblumesea
The Fed has been used as a stop gap to fix incompetent/malicious policies
driven by political actors. The reality is that central banks can only do so
much, and Congress and others are leading the nation off a cliff to pursue
short term political goals.

Beating the other team in the short term is seen as more important than the
long term health of the nation. You can see this play out in the tax cut,
deficit spending and many other examples.

> Who cares if the world explodes in 6 years? I need to be reelected in 2.

------
overcast
This is just another reminder to always have emergency funds in your bank
account, not tied into the markets. Allows you to weather the storm, until
things correct themselves.

~~~
CupOfJava
How does savings in a bank account help you weather inflation?

~~~
dgzl
The poster's sentiment is correct is saying that it's a good idea to have low-
risk resources available as a safety net. However I'd say having physical
things like items you know you'll need in the future, or food storage, would
be more valuable than having cash. Inflation wouldn't hurt the value of a
computer or food you already own. In the other hand, I would imagine investing
in gold would be a good idea as well.

~~~
komali2
I always think of it in disaster tiers.

Market slowdown, you'll want your bonds.

Recession, you'll want your cash.

Depression, you'll want gold and barterable goods.

Economic collapse or apocalypse, you'll want food, medicine, and alcohol
(possibly the most barterable good, also delicious).

In any case anybody reading this in a major city faces non zero likelihood of
disaster (take your pick for your city, hurricane, earthquake, tornado,
terrorist attack, war) and should be stockpiling 3 liters of water per person
in the house per day you want to be able to survive on your own, alongside 2k
calories of food, trash bags, etc. I say have a stocked liquor cabinet as well
because my experience in Backcountry many week hikes has taught me you can get
nearly anything in return for good liquor :)

I've also heard strong arguments for the stockpiling of pornography and
certain chemicals that are valuable in tbe production of medicine or just used
as general reagents, don't know too much about chemical stockpiling though.

Careful for the prepper rabbit hole, it runs so very deep ;)

~~~
pjc50
Yeah, there's a very deep end it's possible to go off.

However after this winter's experience where two feet of snow ran the
supermarkets out of fresh food, I'm going to keep slightly more food and
folding money on hand.

But remember these are long-term processes. Ultimately your connections and
community will become important in economic collapses, because they're usually
very slow-motion.

~~~
komali2
Regarding that, I highly recommend "a Paradise in hell."

It analyzes the citizen responses to several catastrophic disasters. Turns
out, people don't turn into ravaging wolves in a disaster, they immediately
begin to help their neighbor, with no regard to race color Creed etc. It's
when the national guard comes in that issues start arising...

------
wjn0
When I read articles like this I wish I had a better grounding in economics, I
guess specifically macroeconomics? Is there a well-known, digestible textbook?

~~~
mindcrime
_Basic Economics_ \- Thomas Sowell [https://www.amazon.com/Basic-Economics-
Common-Sense-Economy/...](https://www.amazon.com/Basic-Economics-Common-Sense-
Economy/dp/0465002609)

~~~
frgtpsswrdlame
^ Not this one. Mankiw is already ideological enough, Sowell and Hazlitt
should be stayed far away from. The real answer to the above commenter is that
you can't, not really. You can put a lot of work into understanding Mankiw and
then you go to econ grad school and learn all the caveats and how much of it
is basically wrong. Economists themselves barely understand the economy and
they spent years and decades getting to 'barely.' A layman is basically
incapable.

In that sense maybe I'm wrong and maybe Sowell is the good choice, just decide
your ideological viewpoint on the economy now, read enough to defend your
viewpoints to other laymen and let that be that.

------
jsoc815
For those interested in the full context in which the comment was made, a
video of the event is available here:
[https://www.youtube.com/watch?v=dnXLEaAJqno](https://www.youtube.com/watch?v=dnXLEaAJqno)

I was in attendance and it is worth noting that Bernanke did not take any
questions from the audience (apparently unexpected by some of the staffers)
and that he did not remain for any of the (illuminating in my opinion) panel
discussion that followed.

Suggest that people pay attention to the remarks of Mr. Warsh, who in my
opinion actually should have gotten the nod to be Fed Chair -- though I
understand completely why that would have been untenable for many.

Last thing I'll add: some of what is said openly during Congressional
testimonies, these fora, and the like is knowingly contradicted in private
conversations.

------
kaycebasques
It’s a fascinating time in the markets. You’ve got all these different forces
pulling in different directions. Quantitative tightening, fear of trade war,
tax cuts, continuing buybacks, lots of accumulated debt, the rise of high-
frequency traders and their tendency to remove liquidity at the hint of any
change in fundamentals, strong earnings, low employment, high asset prices. It
doesn’t surprise me that ^SPX is swinging between 2600 and 2800 with all of
these conflicting signals.

------
debt
The language here is interesting. "Wile E Coyote moment" in the abstract looks
and feels like a bubble, but he doesn't use the term bubble.

So a sharp correction? But isn't that what a bubble does? Why not just say
we're in bubble fueled by artificial growth caused by numerous government
subsidies.

~~~
throwawayjava
I guess for some very broad definition of bubble.

Consider, e.g., real estate prices in a relatively stable area after that area
is plunged into a long-running war. Prices will sharply correct, but talking
about a "peace bubble" is a bit disingenuous.

------
matte_black
This is consistent with what I’ve heard. Seems no one expects a recession
until at least 2020 or 2021. Be ready.

~~~
komali2
Conveniently, my finances should be in order for a house purchase around then.

~~~
Clubber
Don't downvote. The best time to invest is during a recession. Everyone should
be saving money today for the next one, then buy.

~~~
matte_black
Indeed, for some buying during a recession is the only shot they have at home
ownership. Prices are only going up now.

------
polskibus
I wish the money printing game ended. The longer it goes the rougher the
finale will be, globally. 1.5 T USD will push inflation globally.

~~~
lostmsu
What's wrong with inflation?

~~~
icu
In basic terms, inflation is the loss of purchasing power due to an increase
of the monetary supply faster than economic growth. In plain English, this is
where more currency is chasing the same number of goods and services.

This means your unit of currency buys less over time. What is 'wrong' with
this is that inflation is a transfer of wealth—some people even go so far as
calling it theft or a 'stealth tax.'

This is because the purchasing power that you had in your unit of currency
isn't 'lost', it is actually transferred to the institutions creating the
money. If you had $1 worth of pennies in your pocket, and inflation was 1%, it
is like an invisible hand reaching into your pocket and stealing a penny. Do
that a hundred times and you can 'create' $1, but by the time this is done,
you will find that your $1 can only by 99 cents worth of goods and services
now. In a fiat based, fractional reserve system that we have today in the
West, the institutions that are reaching into your pocket (AKA creating money)
are central banks and commercial banks.

For example, say the Fed (the central bank for the US) creates an initial $10m
of reserve currency, this is then used by commercial banks to 'create' an
additional $90m through loans from that $10m reserve. It is therefore
commercial banks, not central banks, that predominantly create currency in
society—and depending on growth and circulation (economists call this
velocity) in the real economy, creates inflation. You see if the creation and
circulation of money was perfectly in line with the growth of the economy than
there would be no inflation. The real problem is that the growth in monetary
supply has far outstripped the growth of Western economies. Indeed there is a
compounding effect of inflation.

But yeah, I can understand that this material may seem unbelievable... I have
included a URL to a YouTube video where a Bank of England (the central bank of
the UK) representative actually says in no uncertain terms that commercial
banks create most of the money in the economy.

The important passages are:

"...banks create additional broad money whenever they make a loan"

"Now, while this is nothing new, it's sometimes overlooked as the main way in
which money is created and it runs contrary to the view sometimes put forward
that banks can only lend out deposits that they already have."

"In fact, loans create deposits, not the other way around."

Source:
[https://www.youtube.com/watch?v=CvRAqR2pAgw](https://www.youtube.com/watch?v=CvRAqR2pAgw)

I've tried my best to quickly find Fed resources but these facts seem to be
obfuscated or not officially made available.

For further information see the following:

Werner, R.A. (2014). Can banks individually create money out of nothing:
[https://www.sciencedirect.com/science/article/pii/S105752191...](https://www.sciencedirect.com/science/article/pii/S1057521914001070)

McLeary, M., Radia, A., & Thomas, R. (2014). Money creation in the modern
economy:
[https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-
bulletin/2014/money-creation-in-the-modern-
economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654)

~~~
pdonis
_> if the creation and circulation of money was perfectly in line with the
growth of the economy than there would be no inflation._

While this is technically true (at least for some interpretations of
"inflation"), it's important to realize that the wealth transfer effect you
describe _still_ occurs in this case. The only way it would not occur is if
the newly created money was distributed exactly in accordance with the current
allocation of money: in other words, if the economy grows by 1 percent, every
current holder of a dollar gets a penny. But of course that's not how money
creation is actually done.

~~~
icu
Yes absolutely thank you for pointing the wealth transfer effect printing
money has even when monetary supply is such so that inflation is zero.

------
ravenstine
I'll keep this thread bookmarked for when 2020 ends and nothing happens.

~~~
metalliqaz
I'll keep this comment bookmarked...

------
jcomis
Ok, say you believe this is going to happen. What the hell can you really do?

~~~
nickik
You can bet on the market going down. Just go to your banker and tell him to
do it. The question is just, do you believe it?

~~~
AnimalMuppet
"The market can stay irrational longer than you can stay solvent."

Be very careful betting on the market going down. You not only have to be
right, you have to be right soon enough.

~~~
nickik
I hate that statement. Because people who say it claim they were right based
on it, when they were clearly wrong and just trying to excuse their failure.

Saying 'at some point in the future prices might be lower' without a time
attached to it is an intellectually empty statement.

~~~
appstateguy
The thing to understand about shorting is that your losses have no upper
bounds. You short a stock at $100 and it goes up to $1,000, you now OWE $900.
Here's [0] a story of a guy going to bed with $30k in his ETrade and waking up
to a $106k debt call.

[0] [https://www.marketwatch.com/story/help-my-short-position-
got...](https://www.marketwatch.com/story/help-my-short-position-got-crushed-
and-now-i-owe-e-trade-10644556-2015-11-19)

------
chollida1
This is one area where I think the US system shows the power of separation of
concerns.

Trump would love lower interest rates but the Fed, tends to run itself without
much political influence. These people are all "adults" and very accomplished
and knowledgeable.

They set the FED rate and everyone else falls along. They have been actively
raising rates, with more rate hikes expected in this year to cool inflation,
and the economy by extension.

At the very least the US will have some wiggle room to lower rates when the
economy slows down again.

~~~
__derek__
> At the very least the US will have some wiggle room to lower rates when the
> economy slows down again.

While true, one of the lessons from 2008-9, and part of Bernanke's point, is
that monetary policy alone can't always accomplish the task. If we use up all
the extra fuel in the run-up to a rough patch, we risk not having enough to
get us out of the rut ahead.

~~~
nickik
Yeah and he is wrong and telling a false history.

Go back to 2008 and look at their policy and meeting. The fact is that they
were talking about HIGH INFLATION in the meeting in late 2008.

They did not lower interest rates to zero and had a policy of sterilization
(selling bonds to buy troubled housing assets, instead of buying the troubled
with new money).

The did not even deliberately end this policy, the market forced them because
they were running out of T-Bonds. Later the called this 'QE1' but it was not
really QE, it was them preserving a minim of T-Bonds (and that's their own
account).

While they did go on to do QE1/QE2 they also payed interest on reserves to
prevent that money from creating more inflation. And this was very deliberate
policy, they explicitly said 'We are doing this to prevent the money from
going out'.

The fact is that while nominal income collapsed in 2008 the Fed did nothing
while the economy collapsed, like Nero in Rome.

How can you claim that a bank that can print infinite amounts of money could
not do anything against this:

[https://oregoneconomicanalysis.files.wordpress.com/2011/10/n...](https://oregoneconomicanalysis.files.wordpress.com/2011/10/ngdp_trend1.jpg)

Friedman, Bernanke and many others have written about how the central bank
could do much at the zero bound and other countries like Switzerland showed
that this is true.

The Fed failed as a institutional because they didn't plan for 0% interest,
not because its impossible to do anything.

