Dollar Rises After Yellen Warns "Job Market Is Stalling" In Defense Of Biden Stimulus After Summers Slam
Dollar Rises After Yellen Warns “Job Market Is Stalling” In Defense Of Biden Stimulus After Summers Slam
The USDollar rose in early Asian trading against most G-20 peers after Treasury Secretary Janet Yellen doubled-down on the key ask of Biden’s agenda, demanding that Congress pass a massive stimulus (over the growing objections of such progressive economists as Larry Summers), and warning that the US risks a slower rebound in jobs and the economy if it fails to enact a robust stimulus package.
Speaking to CBS’s “Face the Nation” one of her two Sunday-morning interviews along with CNN, the former Fed chair who in 2017 predicted that there would be no financial crisis in her lifetime said “I’m afraid that the job market is stalling” the only thing that can return the US to full employment in 2022 is “sufficient” stimulus, by which she meant the full $1.9 trillion plan demanded by Joe Biden.
Going straight for the virtue signaling angle, Yellen – who as former head of the Fed has done more damage to US household wealth and income than almost any other person – said that low-wage earners, minorities and women are suffering the most and could face “permanent” damage from a prolonged slowdown. “We’re in a deep hole with respect to the job market and a long way to dig out,” she said. Without adequate support, it could take until 2025 for the U.S. labor market to recover.”
She repeated the same warning to CNN’s Jake Tepper, “we need a package that’s big enough to address this full range of needs and I believe that the American Rescue Plan is up to the job,” adding that “we face a huge economic challenge… and tremendous suffering in the country.” Which of course is laughable since the biggest beneficiaries of the recent trillions inject by Congress have been billionaires (and soon trillionaires) like Elon Musk who have seen a parabolic increase in their net wealth in 2020 while the middle class has to fight for scrap “stimmies.”
“We need a package that’s big enough to address this full range of needs and I believe that the American Rescue Plan is up to the job,” Treasury Secy. Janet Yellen discusses Covid-19 relief. “We face a huge economic challenge… and tremendous suffering in the country” #CNNSOTU pic.twitter.com/QA7ybkBtA6
— State of the Union (@CNNSotu) February 7, 2021
While Yellen conceded that Biden’s $1.9 trillion stimulus isn’t specifically aimed at job creation, she said that “the spending it will generate will create demand for workers.” Which is wrong: instead what it will do is many more short squeezes and more market chaos as millions of Americans directly funnel the newly created funds into the stock market, making the bubble even bigger.
The 74-year-old height-challenged Yellen was trotted out on the media circuit to defend Biden’s mammoth $1.9 trillion stimulus after objections to its size unexpectedly emerged last week not only from the economist community but the Democrat economist community, after Larry Summers warned the stimulus sought by Biden would overheat the US economy and came with “big risks,” including inflation. As we noted yesterday, commodities are already rising at a rate of 25% which coincides with overall headline inflation of 4%.
Many other economists agreed with Summers, including Republican Douglas Holtz-Eakin and former IMF head economist Olivier Blanchard, currently a senior fellow at the Peterson Institute, who tweeted on Friday that “the 1.9 trillion program could overheat the economy so badly as to be counterproductive.”
I am known as a dove. I believe that the absolute priority is to protect people and firms affected by covid. Still, I agree with Summers. The 1.9 trillion program could overheat the economy so badly as to be counterproductive. Protection can be achieved with less.
— Olivier Blanchard (@ojblanchard1) February 5, 2021
Sparing no vivid imagery, Blanchard warned that Biden’s plan would “increase in demand could be accommodated, it would lead to a level of output at 14% above potential. It would take the unemployment rate very close to zero. This would not be overheating; it would be starting a fire.“
If this increase in demand could be accommodated, it would lead to a level of output at 14% above potential. It would take the unemployment rate very close to zero.
This would not be overheating; it would be starting a fire.
— Olivier Blanchard (@ojblanchard1) February 6, 2021
While these economists agree that more needs to be done, they also agree that $1.9 trillion is too much, as it would leak to much faster inflation and an even bigger stock market bubble. Politically it could reduce the appetite in Congress for future fiscal action to tackle longer-term priorities such as infrastructure spending and fighting climate change.
Yellen pushed back on Summers’ laims, saying they were small compared to the “scarring” the economy faces by not spending enough now to emerge strongly from the coronavirus pandemic.
Repeating a laughable line uttered by Ben Bernanke a decade ago, Yellen said that If inflation becomes a problem, “I can tell you we have the tools to deal with that risk,” citing her own academic work and experience at the Federal Reserve, where she held various positions over 16 years, including chair. “As Treasury secretary I have to worry about all of the risks to the economy,” Yellen said.
Meanwhile, Biden doubled down on his pitch for a big package on Friday:
“Some in Congress think we’ve already done enough to deal with the crisis in the country. Others think that things are getting better and we can afford to sit back and either do little or nothing at all,” he told reporters at the White House. “That’s not what I see. I see enormous pain.”
Despite the fiery bombast, Biden’s plan has gotten little support from Republicans, whom Biden’s promised to work with. Ten Republicans — the number needed to join all 50 Senate Democrats to pass a bill — last week proposed a $618 billion stimulus plan, which Democrats have said is wholly inadequate.
“What you hear is these broad generalities about, well, people are suffering, so let’s spend another $2 trillion. It’s not the right solution,” Pat Toomey said Sunday on CNN, suggesting a more targeted approach. And while Yellen was seen as bringing at least some “intellectual heft” (in the words of Bloomberg) to Biden’s stimulus pitch to Congress after decades of work at an independent Fed, Toomey pushed back on viewing her as a non-partisan player.
“She is not the leader of the independent Federal Reserve any more. She is now the Treasury secretary,” he said. “Her job is to be the biggest cheerleader for whatever economic policy the President Biden wants.”
One key sticking point is the fate of $1,400 economic impact payments that Biden has promised. The president is negotiating with Congress on how best to target those payments to families who most need the money and are most likely to inject it straight into the economy, according to Yellen. She said the stimulus must “go to people in households that do need the money, and that is lower-income households. We need an appropriate cutoff.”
Even if Democrats decide on a go-it-alone reconciliation bill, negotiating will be difficult because of the Senate’s razor-thin margin. All 50 Senate Democrats, plus Vice President Kamala Harris as a tiebreaker, will be needed to pass a bill. At least one Democrat — Senator Joe Manchin of West Virginia — has been skeptical about some elements of the Biden plan. Like Toomey he wants stimulus payments to be more targeted and he’s also said he doesn’t support a $15 minimum wage.
In kneejerk response to Yellen’s comments, which suggest that a “unexpected slowdown” could be in the card if Biden doesn’t get the stimulus is after, the USD rose pushing the USDJPY lower by 0.1% to 105.33, the the EUR/USD dipped 0.1% to 1.2036, after closing up 0.7% last week, while GBPUSD also declined 0.1% to 1.3720.
Finally, for those who missed it, on Friday we published an op-ed by Joseph Carson, former chief economist at Alliance Bernstein who also sided with Summers warning that after a sugar high boom in 2021 and 2022, the US economy will face a bust in 2023 when the stimulus dries up. We republish it again below:
Fiscal Stimulus: How Much Is Too Much? Boom/Bust!, submitted by Joseph Carson, former chief economist at Alliance Bernstein
Suppose Congress passes something close to Biden’s Administration stimulus proposal of $1.9 trillion. In that case, that will lift the cumulative amount of fiscal stimulus in the past 12 months to $5 trillion—three tranches $2.2 trillion, $900 billion, and $1.9 trillion.
In the past year, nominal GDP totaled $21 trillion, so the cumulative injection of fiscal stimulus amounts to almost 25%.
Nothing in modern times comes close, especially during peace times. CBO published a report in 2010 on the military costs of significant wars. The military war costs of World War 1 amounted to 13.6% of GDP and World War 11 35.8%—-so the current spending/stimulus is in the middle of the two World Wars.
During World Wars, activity in the private sector is depressed. That’s not the case today. The housing sector is booming, with housing starts at the highest levels in 15 years, and prices are rising double-digit to record levels. At the same time, the manufacturing sector is experiencing a mini-boom in orders and production.
Given the scale of fiscal stimulus, one would expect the Fed to be thinking of “leaning against the wind.” But not this Fed–the Fed is using the same playbook from the Great Financial Recession, providing unneeded stimulus to the red-hot housing market.
What’s the economic and financial endgame? It’s hard to see anything but a “boom-bust” scenario playing out with fast growth and rising market interest rates in 2021 and early 2022, followed by a bust in late 2022/23 when the fiscal stimulus/support dries up.
The US experienced mild recessions following the sharp drop in government military spending after the Korean and Vietnam wars—-and back then, the scale of military expenditures amounted between 2% and 4% of GDP. The “sugar-high” today is unprecedented, raising the odds of a harder landing.