There comes a point where the markets leave any sensible person scratching their heads and wondering just what is driving the show along. Sure, fear and greed chase themselves backwards and forwards across the zig zags in the chart of any stock market index, and these are not emotions that make for wisdom. But behind all that seemingly random jitter there are very capable traders taking supposedly educated views on whether, in the short term, things are improving or getting worse.
In this they look for signals and one of the most important originators of “signals” is the US Federal Reserve. So the run up to Ben Bernanke’s latest “Jackson Hole” speech on August 26 created massive anticipation. Would the faltering state of the US economy prompt the Fed chairman to announce QE3?
Another mega buying spree by the Fed would be far too huge in its impact for markets to ignore, so just the prospect that Bernanke might jump that way had traders on the edge of their seats. It rapidly became clear as Bernanke launched into his speech that he had no intention of announcing the commencement of QE3, so the markets, which had reversed their downward trend of recent weeks, promptly fell.
Within an hour or two, however, traders had had a chance to reflect on Bernanke’s speech as a whole, or at least on other bits of it, and they seemed to come away with two nuggets. First, they drew comfort from Bernanke’s opening point, that nothing fundamental had been broken in the US economy over the last four years of bust-and-low growth, meaning that nothing fundamental, as far as the Fed chairman could see, stood in the way of a return to trend growth over the medium term.
Second, they grabbed hold of a rather thin reference by Bernanke to the possibility of the Fed doing “something” (QE3?) if things continued to slip slide along. That was enough, apparently, and by the end of the day the markets were trending back up.
Drawing confidence from a wound
Conservative economists like to argue, on the basis of the rational expectations hypothesis, that the key thing for monetary policy is for policy makers to send a clear signal to the markets that their policies are on track, and it is “rational” to expect them to achieve their goals. Viewed from this standpoint, Bernanke’s performance was a triumph. He gave nothing but the markets drew confidence (for a brief moment at least) from his performance.
That is a neat trick to pull off and even the bearded academic’s fiercest critics should give him a round of applause on that score. Of course it helps if the system gives you the ability to pull QE3 out of your hat at any time, but it still requires a polished performance to have that power and not spook the markets with a misplaced phrase or an injudicious reference when they are hanging on your every word.
As to whether he is right in his assertion that “the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years”, that is another matter. This is a very skilled formulation and everything depends on the gloss the reader gives to the word “permanent” which is the real keystone of the whole judgement. What the hell are a country’s (implied) “permanent growth fundamentals” anyway? Demographics? The technology base or knowledge pool? The accumulated capital stock? People grow old. Ageing populations are not a “permanent” source of growth. Technology moves on, and moves elsewhere too, if you are not right slippery about it. So calling that a “permanent fundamental” is pushing the point somewhat. Capital moves elsewhere at whim. And aren’t “permanent” and “altered” mutually contradictory propositions? If it's “permanent” it can’t be “altered” (ie, broke). How wonderful is the power of a tautology...
So what the devil is Bernanke actually talking about? The US is in deep doo-doo and confidently proclaiming that nothing is broke is a little eyebrow raising, to say the least. US housing market, anyone? US banks? Nevertheless, the markets were calmed, go figure. By Tuesday August 30 or slightly after, they may well have forgotten that Bernanke said anything at all the previous Friday, and, from one way of looking at it, they’d be right. He didn’t, which was probably the best part of his trick... blah, blah, blah and I bid you good day (thunderous applause for the magician who declined to conjure).
Further reading on the US economy and the Federal Reserve:
- Renewing Capitalism by Matthew Bishop
- Why the Thinking of the Austrian School of Economics Matters in Today’s Economy by Annette Godart-van der Kroon
- US economy, signs of hope? By Anthony Harrington (blog)
Tags: Ben Bernanke , eurozone , Federal Reserve , GDP , Jackson Hole speech , permanent growth fundamentals , qe3 , stock market index , US deficit , US economy