MONETARY FUDGING

If the unemployment rate--due to be announced this Friday--falls to 5.9%, it'll be the lowest that figure has been in six years.

This is the number that the Yellen-led Fed stated it's following not GDP. Besides fighting just inflation somewhere along the line the Fed took up the task of providing stable employment. The consensus guess, and that's the operative word, guess, is for 225,000-250,000, depending on whom does the guessing.

With all the fines and money many of these quasi-government agencies have been raking in one would think these bureaucrats would want more bubbles to burst. Some observers even go so far as to claim the Fed not only wants these bubbles but purposely makes them.

For these folks the Fed by focusing on things they don't have a clue about--job creation and income growth, etc.-- resort to blowing bubbles via the now well-known so-called "wealth effect."  "Hey, man, my stock portfolio is skying, my house resale value is out of sight. We're all feeling good. Let's go spend some money."

And for those who don't recall Mr. Greenspan during his infamous tenure talked much about the wealth effect. Here's a quote from a Wall Street Journal article May 8, 2000, entitled "How Greenspan Finally Came to Terms with  the Market."

In August 1999, Mr. Greenspan formally announced his abandonment of "irrational exuberance" at the Fed's annual retreat in Jackson Hole, Wyo. He said the market reflected the "judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes." The Fed had no business contradicting those investors, he concluded.

That didn't mean, however, that his concern with the market had gone away. He remained as preoccupied as ever, especially when the Nasdaq soared nearly 50% in the three months after Jackson Hole. But his line of his inquiry shifted from trying to understand why stocks were rising to the impact of rising stocks on the economy at large.

The buzzword inside the Fed became the "wealth effect" -- how riches generated by stocks and real estate were changing the psychology of consumers, leading them to spend more of their wages and salaries and putting a smaller portion into savings. 

In a presentation for the Fed chairman, forecaster Joel Prakken flashed a picture from his local paper, the St. Louis Post-Dispatch, with a dog in a spacious room under the headline, "Luxury boarding kennels are only one indication that people ... are spending more freely." Mr. Prakken inserted a caption that had the dog proclaim, "I sure enjoy consuming master's recent stock-market gains!"

Mr. Greenspan mixed and matched statistics to discern wealth effect patterns. His research indicated to him that, even if it were wholly rational, the bull market was hauling the U.S. economy into warp speed by generating greater spending.

Indeed, the more he and his colleagues believed that the New Economy and the stock market made sense, the more they worried that the economy was veering out of control. 

At policy making sessions through late 1999 and early 2000, intense debates broke out as officials grappled with the ways that changing productivity affects the economy. It was a question the central bank hadn't confronted for four decades. Fed Vice Chairman Roger Ferguson literally dusted off his old macroeconomics textbook from college


Now it shouldn't surprise that there is little agreement in the economic profession about the wealth effect, home values or stock values. Some claims equities have little or no affect. Others claim the opposite. Still others believe higher homes prices do and some believe both do.

Fudging is what it is. It's not against the law. But maybe when it comes to Wall Street and the government it ought to be. There are at least two places where we know fudging routinely takes place, economic predictions and earnings reports. Both are prominently the news this week.

Sure the numbers are coming this Friday and there will be some reaction. But keep in mind these folks are academics in the main. And numbers get revised. Which brings to mind an old saying about never send a kid to do a man's job. 

Maybe investors would be well informed to tweak that a bit: Never let a bunch of academics run your monetary policy. If you do you deserve all the fudging you're going to get.
t. man hatter