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Rex Column                                                                               20 February 2017

The Counterfactual    

by Cees Bruggemans          words 750

Not everyone understands the economy or how markets impact. That could be crucial when deciding on a change in underlying policy. SA has been subjected to such a reality for years, when the focus moved away from market- and business friendly policies to one favouring central authority directing resource allocation.

In the US we have currently major shifts under way, which especially in trade and migration policy could be heavily damaging. There is a yet bigger fish, however, still swimming free but coming rapidly into focus. That is monetary policy as conducted by the Fed.


In SA the equivalent would be the policies of the SARB.

Political contrasts of course run deep in the US, and have for centuries. Once in a while, political changes come along that can have a definitive bearing on the Fed composition, as it can have on the Supreme Court. This doesn't remain without effect. Via markets, any Fed changes could have even major global consequences.

Listening to Fed chair Yellen reporting back to Congress lifts the veil on these realities, in ways that can be very disconcerting. The questioning of chair Yellen can at times be downright rude, by senators and congressmen throwing their weight around, but in the process also showing ignorance on a remarkable scale.

It is rather clear that many Republicans have the culling knife out for the present Fed and its policies. This has been around for a long time, but has become much more significant with the recent shifts in power balance.

And though one rude senator or representative doesn't make a summer, the writing is rather on the wall. Things will change. But with what consequences?

The one breathtaking thing that stands out is the ignorance on display. All economic outcomes are blamed on the Fed and its monetary policy, as if there isn't a fiscal policy or congressional politics to take into account. Also, society has a way of responding to circumstances, through a lack of confidence, that cannot easily be undone by the Fed’s few instruments.

Especially disconcerting is lack of awareness of the counterfactual. As the great financial crisis started to unfold, the Fed alongside the US government’s fiscal policy stepped into the breach. But when ere long fiscal policy had to pull back because the long term debt consequences threaten to overwhelm, it was left to the Fed alone, and central banks in other major regions, to prevent a total collapse.

This seems to be conveniently forgotten. Instead, the Fed is blamed for slow growth and a decade of low interest rates that didn't favour everyone. But these erstwhile questioners don't seem to consider the counterfactual if the Fed had taken the kind of turning that turned the 1930s into the general depression disaster that it became, ultimately only overcome through the stimulatory character of another global total war.

If Bernanke & friends had not done what they did, and had not kept doing since then, namely to provide liberal monetary support to overcome the worst of the regressive forces causing markets and economies to fail, the present world generation would have gone through yet another hell difficult to contemplate.

Be that as it may, as Bernanke would say.

The fact of such ignorance makes one wonder what lies ahead once the Fed composition is changed, regulations are eased and policies are made even more supportive than they are at present “to stimulate the economy”.

There are adults here playing with fire. Even if the US economy isn't as yet at full resource utilization, it certainly is approaching that condition at some speed. To want to institute policies now that would accelerate the pace artificially through simple credit creation, rather than more fundamental stuff that would help to boost long run productivity growth, might just achieve the opposite of what is wanted. Overheating hasn't happened in decades, but it could easily happen before this decade is out. And then the right public servants to manage the situation wouldn't be in place.

Just like in the late 1960s and throughout the 1970s. A generation of insight and policy knowledge would become undone, just as these same people a mere decade ago would apparently have wanted to replay the 1930s.

The worst hasn't happened yet. But watch it arrive piecemeal, in what could still prove a very short period of time. That is, if these rude Yellen questioners were to get their hands on the reins, as doesn't look at all unlikely.

Hope you are ready for all eventualities. SARB I suspect will be.


Cees Bruggemans

Bruggemans & Associates, Consulting Economists



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