Elon Musk Has a “Super Bad Feeling” About the Economy. JPMorgan’s Jaime Diamond predicts an “economic storm”. Both claims are false. An overheating of the economy, temporary inflation, the Fed not breaking the brakes, and reversal of QE, to the extent that it occurs, will certainly be benign. Larry Kotlikoff is a professor of economics at Boston University and the founder and president of Economic Security Planning, Inc.
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Tesla’s Elon Musk Has a “Super Bad Feeling” About the Economy. My first cynical reaction: Musk is working up an excuse for disappointing Tesla sales. As the president pointed out, Ford and other automakers are not crying. They’re making big investments (in electric cars!) and hiring thousands of new employees.
My second cynical response: Maybe Musk has shorted the market? There is nothing wrong in doing so. But when market-promoters discuss the economy, they must disclose whether they have a conflict of interest. The same goes for JPMorgan’s Jaime Diamond, who predicted an “economic storm”, if not necessarily a Level 5.
Cynicism aside, are Musk and Dimon right?
Not until he and other big-time influencers drag the economy into recession.
The economy can fail if everyone suddenly thinks that everyone else thinks the economy will fail. Thus, employer A will fire its employees, who are employer B’s customers, because A thinks that B will fire B’s employees, who are A’s customers, and vice versa.
Economists call this a multiple equilibrium. The other condition is coordination failure. President Roosevelt summed it up brilliantly in eight words: The only thing to be afraid of is fear. Unfortunately, explaining that everyone is panicking doesn’t stop the panic, which can kill an otherwise very healthy economy. Panic certainly caused the Great Recession.” None of the Federal Financial Crisis Commission’s “criminals” were guilty. Given that our economy could starve itself to death, Musk and Dimon needed to discuss the facts. and address your concerns.
What’s going on over here. The economy is red hot. The unemployment rate is 3.6 percent. This is one of the lowest rates we’ve seen in 70 years. Even better, the employed share of the working age population is 80.0 percent. It is close to the highest level in 70 years. Job growth slowed slightly in May. But job growth should be slow. Now there are not many people left who have to be hired. Meanwhile, companies aren’t looking at Dimon’s “Hurricane Sandy.” They’re not laying off employees, they’re trying to hire another 11 million.
Yes, inflation-adjusted gas prices have risen 75 percent in the past six months. But in 2012 they were 20 per cent higher and the economy did not collapse. Dimon says oil (and thus gas) prices could rise 50 percent to $175 a barrel. These may also drop by 50 percent. If Dimon’s “wish” was “will”, a barrel of oil would already cost $175.
Dimon knows this, so he was probably just saying that the economic risk is high. No question. But the market has already denied this fact, which is why it has lost 13 per cent since January. But that doesn’t mean it will continue to decline. In the case of Finance 101, the price of the financial asset, whether it is a barrel of oil or the value of the S&P, is not predictable. And 13 percent is a minor adjustment. The market fell 86 percent in the Great Depression, 50 percent when the dot-com bubble burst, and 53 percent in the Great Recession.
What about inflation? Based on the data of May, it stood at 5.0 percent compared to last year. But this is much lower than the rate of 8.3 per cent recorded in April. And the core inflation in the last 12 months was just 3.8 percent. Core inflation excludes food and energy prices, which are particularly volatile. Everyone is talking about high prices of food grains. But the inflation-adjusted price of wheat is lower today than it was in the past 40 years. Here, again, if the market was convinced that Putin’s war would drive the price of wheat even higher, it would have already done so.
Based on nominal and real Treasury yields, the market forecasts inflation to be less than 4 percent over the next five years. The market makes huge mistakes, but it reflects millions of estimates, not just Musk and Dimon. And the general consensus is that temporary supply-chain bottlenecks will continue to ease, leading to a moderation in inflation. Clearly, there are plenty of oil producers around the world who can make up for any short supply of oil from Russia. Same for wheat. Ukraine is the eighth largest producer of wheat. The top seven have a lot of spare capacity. Yes, the surplus wheat will take time to grow, but its supply will increase and its price will fall.
What about the Fed’s rate hike — another concern from Dimon. So far, the Fed’s actions have been cosmetic. Just look at the small actual rates. They are still negative. The Fed’s recent 50 basis-point move is a forty-fifth of the rate hike engineered by Paul Volcker when he tackled inflation in the late 70s.
The Fed isn’t raising rates dramatically, as Larry Summers advocates, to reduce inflation — for good reason. This assumes that inflation will subside on its own – something we are starting to see.
Finally, consider Dimon’s concern about the Fed’s reversing quantitative easing (QE). First, there’s no reason the Fed should change its balance sheet so quickly. It may do so gradually as it collects interest and principal on its personal asset holdings. And if it decides to expedite the swapping of private assets for Treasuries or reserves, there’s no reason it should affect bond prices or interest rates. It is the risk of cutting credit to the economy which leads to a sudden increase in interest rate, not swapping one asset for another which is very similar in nature. In this regard, it is worth noting that when Paul Volcker announced that he was going to target monetary aggregates, the credit market immediately went crazy. It is not clear whether the Fed is engaged in any open market operations that raised rates. It simply didn’t interfere with keeping them stable. As far as doing what he said he would do, Volker missed each of his goals. Volker, as I see it, took advantage of terror, not monetary policy, to raise rates, engineer a recession, and reduce inflation. Jerome Powell is not Paul Volcker. He sees current inflation as a short-term price increase that will soon be reversed. And the market thinks he is right.
Credit: www.forbes.com /