Here is another one of those giggles I find while reading the financial news – and from the usual suspect, too – CNBC. This time Ken Griffin is quoted as he was making a speech at the 2013 Milken Institute Global Conference.
Here’s a CNBC writer with a quote from Mr. Griffin:
… He fears that the zero interest rate target and quantitative easing may be backfiring, causing businesses to reduce employment rather than adding jobs.
According to Griffin, low interest rates have encouraged businesses to invest in technology that reduces the demand for human labor. Meanwhile, health care reforms have increased the cost of human capital—so it’s a double whammy.
“As we’ve all learned over the years, if you reduce the cost of capital you increase your use of fixed assets and you take out jobs. Corporate America, seeing an ever increasing cost for its employee base and extraordinarily low interest rates, is taking every step it can possibly take to reduce employment, to build factories abroad and domestically to substitute technology and automated processes for people,” Griffin said.
And for the summary:
That’s pretty far from standard economic thinking, for sure. But it at least tells a coherent story about why the massive increase in the Fed’s balance sheet hasn’t been more effective and putting us on a healthier economic path.
I would substitute the word “coherent” with “superficially plausible;” because there are more “coherent” stories to be told about why the Fed has a massive balance sheet with little to show for it – like the tight money story and the IoER story. Or maybe the one about quantity and calendar-based easing is better; or the story about hawkish chatter coming from the Fed minutes is even more plausible.
The story of Murphy’s Law is probably the best one because wherever there was a place in procedure or practice to fail, the Fed hit them all. First, it tightened in an oil price shock. Then, it continued threatening to tighten all the way through the first 3 quarters of 2008 while NGDP was taking a plunge off a pier as if it had been fitted with a brand new pair of cement shoes. As if that weren’t enough, it decided to implement IoER in the 4th quarter of 2008, causing the banks to hoard excess reserves. For the coup de grace, just about every single Fed president came out talking about the evils of inflation, refusing to do anything at all about missing the target as the losses were piling up everywhere. Hear no evil, see no evil… everything is just peachy in sado-economics land as the reality of severe disinflation comes crashing down around everyone else.
The baby-step approach to fixing this monetary fiasco has been very painful, and at times it looks to be ineffective. But it isn’t as bad as doing absolutely nothing; the ECB has pretty much done nothing and we can see the difference. We are in better shape than the euro zone; and so I would say that the only thing wrong with the approach the Fed has taken since late last year, since it decided to do something more meaningful about the problem, is that, like most of the rest the attempts, it hasn’t done near enough. But perhaps before we start complaining about the ineffectiveness of QE, we should take a look around and be thankful we’re not on the euro.