San Francisco Fed Director of Economic Research John Williams was out today talking up the economy during a speaking engagement. Mr. Williams is currently filling in for San Francisco Fed President Janet Yellen, who is awaiting senate confirmation as vice-chairman of the Federal Reserve. Anyway, Mr. Williams went on to explain that the US economy is gradually improving but at a slow pace. He argued that the possibility of a recession was very low and that the SF Fed saw GDP growth at 2.5% for 2010 and 3.5-4%in 2011 (LMAO). Usually propaganda from the Fed is not worth mentioning, but I found the comments interesting because the San Francisco Fed recently published an economic paper which concluded that the odds of a recession were quite over the next 12-24 months. The paper is titled " Future Recession Risks" and was published Aug 6, 2010. The authors try a new method of predicting future recessions by tweaking the Conference Board's Leading Economic Index to reduce its limitations, most notably the weightings assigned to indicators within the index. The main difference is that the authors drop the spread between the Treasury bond and the federal funds rate from the 10 LEI indicators. This is a logical step since the Federal Reserve has manipulated treasury rates to the point where they no longer reflect economic reality. In fact, the entire yield curve has been reduced to mere manifestations of Federal Reserve intervention. This little change to the LEI gives a very different macro outlook for the US economy. The report concludes that "For the period 18 to 24 months in the future, the probability of recession goes above 0.5, putting the odds of recession slightly above the odds of expansion." This is much higher than what the original LEI is predicting. Below is a chart which shows the odds of a recession during the next 2 years under both methods (red line shows the index without the Treasury spread).
Figure 3
Probability of a recession over the next two years
So it seems we have a little miscommunication at the Ministry of Truth. The Fed publicly says the economy is recovering and that the US will not enter a double dip recession. However, their own research suggests otherwise and postulates that the risk of recession is elevated. Who are we to believe? We have to remember that it is not unusual for Fed officials to purposely deceive the public. In fact, San Francisco Fed President Janet Yellen mentioned in a speech that central bankers openly lie as a matter of policy. She recounts her discussions with two international central bankers at her first Jackson Hole meeting:
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Figure 3
Probability of a recession over the next two years
So it seems we have a little miscommunication at the Ministry of Truth. The Fed publicly says the economy is recovering and that the US will not enter a double dip recession. However, their own research suggests otherwise and postulates that the risk of recession is elevated. Who are we to believe? We have to remember that it is not unusual for Fed officials to purposely deceive the public. In fact, San Francisco Fed President Janet Yellen mentioned in a speech that central bankers openly lie as a matter of policy. She recounts her discussions with two international central bankers at her first Jackson Hole meeting:
Two of the leading central bankers in the world took me aside to help educate me about how to conduct myself so I would be an upstanding central bank citizen. They offered me the very same advice: Good central bankers never admit they pursue stabilization policy. Such an admission would reduce the confidence of the public in your commitment to price stability and therefore undermine your credibility and effectiveness as a monetary policymaker. I responded that I appreciated the advice, especially from such distinguished central bankers, but that it left me a bit confused. They seemed to be telling me that the best way to build credibility was to lie, specifically about how I understood the objectives and how I intended to conduct monetary policy.That sure inspires confidence in what Fed officials say. It should be obvious by now that the Fed's goal is to manipulate market perceptions and distort reality to serve their own purposes . This is why Bernanke claimed in 2006 and 2007 that there was no housing bubble, sub-prime was contained, and that the fundamentals of the US economy were sound. It was not because he was stupid, it was his attempt to delay the inevitable collapse a little longer (e.g extend and pretend). Personally, I have found Fed research papers a most accurate source of information compared to public statements by Fed officials. They know that most people will never read their publications and are therefore more candid. Public statements by Fed officials are meant to prop up confidence in the financial system and make everyone feel a little better before it all comes crashing down.
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The fed has been dead wrong so many times its not funny.
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