FOMC | Jobs Soar, Rate Hike Likely, But *100%*?

Payroll jobs in October exceed prior
months and forecasts.

The BLS reported this morning that nonfarm payrolls rose 271,000 in October, with a slight drop in unemployment to 5 percent.

The payroll-job increase was well above the 185,000 increase forecast by economists who do that kind of thing (a foolhardy activity, since a forecast on Thursday will definitely be proven wrong on Friday).

Caution: There will be another jobs report in early December before the FOMC meets in mid-December. But Bill Gross says there is a "100% chance" that the FOMC raises rates in December, regardless of the December jobs report.

The October increase is exceeds the 137,000 increase in September and a similar number in August, and paves the way for a December increase in the federal funds rate, which would be the first such move since the zero-bound level set in December 2008.

The Fed Funds rate has been at the zero bound for 7 years.

In January 2009 I posted a comment on the December 16, 2008 decision by the FOMC after hearing from Laurence Meyer, former Vice Chairman of the Fed.

Meyer recommended that the Fed take a long vacation, but I am pretty sure he didn't mean a vacation that would last this long.

The average monthly job growth for the three months August-October is about 150,000, well below the 210,000 per month first-half-2015 average.

The potential for a rate rise has pumped up the dollar to one-month high against the British pound and a three-month high against the euro.

Here are links to the BLS data:

Payroll employment rises by 271,000 in October; jobless rate essentially unchanged (5.0%)

Total nonfarm payroll employment increased by 271,000 in October, and the unemployment rate was essentially unchanged at 5.0 percent. Job gains occurred in professional and business services, health care, retail trade, food services and drinking places, and construction.

HTML | PDF | RSS | Commissioner's Statement.

BANKS | "Holidays"–Greece-2015 v FDR-1933

Monday morning, March 6, 1933, Day 1 of FDR's administration. The last column notes that FDR
authorized issuance of "scrip" to replace dollars. Instead, Secretary Woodin just printed more dollars.

June 29, 2015–Greece has declared a six-day bank holiday.

It applies to foreign banks operating in Greece. A cap has been imposed on withdrawals of deposits - a personal limit of €60 a day on withdrawals from ATM machines.

This sounds something like the four-day (Monday to Thursday) bank holiday that FDR declared on March 6, 1933, right after his inauguration.

FDR embargoed export of gold in the same way that Greece has put capital controls on transfers of deposits out of the country. Later, he made it illegal for individuals to own gold. Private holdings of gold for non-industrial use (with an exemption for holders of special gold coins in the hands of coin collectors) had to be turned in to be replaced with paper dollars. Months later, he significantly devalued the dollar against gold.

If you think of the U.S. link to gold as comparable to Greece's link to the euro, its imposition of capital controls shows some separation of the Greek financial system from the rest of Europe.

Greece is considering issuance of scrip to pay pensions and other internal obligations. One scenario is that the scrip could be the beginning of the reintroduction of the drachma.

Will Woodin, the incoming U.S. Secretary of the Treasury in March 1933, was authorized to issue scrip to the banks or to pay employees and pensioners when the bank holiday was over. But he said he had a "Eureka!" moment during a night of fitful sleeping when he realized that U.S. scrip would be the equivalent of printing new dollars.

Instead, he embarked on round-the-clock production of $2 billion of new greenbacks at the Bureau of Engraving and Printing. He personally supervised the printing and packing up of the greenbacks on trucks, and had film crews recording the event for the Pathe News shows at cinemas all across the country.

When the solvent banks reopened after having been subjected to stress tests, the panic that began in October 1929 and had intensified in the intervening three-and-a-half years was over. Once the panic stage ended, the Depression era settled into a fiscal and monetary battle over how much to stimulate the economy.

Then as now, sober people looked back on the previous era of profligacy that led to insolvencies, illiquidity and panic and were eager to mete out punishments. FDR had the common sense to see that the punishments would be a new crime against the unemployed who were bearing the brunt of the pain.

The difference between the United States then and Greece today is that the U.S. dollar was printed at the discretion of the Secretary of the Treasury under U.S. laws. Also, a crucial aspect was that the Treasury committed itself to reopening only solvent banks, promising deposit insurance (the Steagall part of the Glass-Steagall Act of 1933) and meanwhile standing behind the banks that were reopened.

The euro, on the other hand, is printed and minted by each national central bank under the control of the European Central Bank. The ECB announced in January its latest QE program, creating liquidity Europe-wide by buying $1.1 trillion of bonds over the next two years, injecting a steady stream of liquidity into the financial system. This has not been enough to stop the Greek panic.

Paul Krugman thinks Greece can't take any more austerity, and that - as in the United States of March 1933 - austerity measures are counter-productive. Today as in 1933, reforming the system needs to take a back seat to calming the panic and making sure that the economy is not further destroyed.

When speculators fail, they take their losses and move on. But when the economy fails, the biggest victims are unemployed people, who are innocent of the past crimes or excesses for which they are being punished.

The U.S. Recovery and the Fed - Global Concern

The euro sank below $1.05, a new 12-year low, last night briefly, before recovering above $1.06.

As the markets reflect Friday's good BLS report on U.S. jobs and unemployment, the likelihood of higher interest rates in the United States later this year is being discounted.

Money is flowing into dollar bonds out of bonds in Europe, where yields are falling.

The strong dollar is good for American tourists in Europe (not so much Britain, as sterling is also strong). It is also good for the ailing European economy, as is the U.S. recovery.

All eyes are now on the Federal Reserve, which has had its hands tied since 2008 trying to help the U.S. financial markets recover - with near-zero Treasury bill rates and then a quantitative easing program to try to lower bond rates. Europe and Asia are worried that if the Fed's likely move to higher rates within a few months is premature, it will damage the recovery in the United States and world-wide.

EURO | Will It Eclipse the Dollar? Not Yet. (Updated May 4, 2016)

Faith in the Euro peaked at the end of 2009.
Fear peaked ion June 2010. Swings have been
narrowing around €1.30 to the dollar.

March 4, 2008–The following three questions came to me from a former student in one of the finance courses I have taught:
"1. Do you think the euro will become the worldwide dominant currency?
2. Say hypothetically if that would happen, what do you think would happen to the world economy?
3. And how would it affect the U.S. dollar?
If you could give me your personal opinion on these questions, it would be a great."

1. Might Happen, If... It might take 15 years and it would depend on the UK joining the European Monetary Union and the United States continuing to run big current-account deficits. A contributing factor could be that the petroleum states buy mostly in euros. Also, in 15 years the Chinese renminbi and Indian rupee will be more important as trading and reserve currencies.

2. The City of London Would Gain on Wall Street. The pound sterling used to be the world's dominant currency 100 years ago. I don't think that it matters as much for the aggregate world economy whether the dollar or the euro is dominant, but it will matter a lot to the United States and New York City. It would actually be a good sign if the UK joins the EMU because it will mean that the world economy is working well, and specifically the EU is working. The European economy with the UK will be larger than the U.S. economy. On the other hand, the speed with which the euro takes over might be a result more than anything else from  many years of excessive borrowing by the United States–both budget deficits (most money we owe to ourselves) and current-account deficits (scarier money we owe to other countries). If the euro strengthens, it would be possible to speculate more easily against the dollar and it would be harder for the United States to borrow abroad to finance current-account deficits.

3. A Stronger Euro Means a Weaker Dollar.  Economic theory tells us that as the dollar gets weaker, our exports should be cheaper for overseas buyers and our exports should increase. Foreign imports should become more expensive and Americans should cut back on buying them. So supply-and-demand forces are supposed to reduce our trade and current-account deficits. However, these forces are taking a long time to have the predicted effects. One reason is that wage disparities are so great internationally that it takes a lot of adjustment to get within the range where the expected consequences occur. The United States is exporting higher wages and is importing lower wages. Eventually real wages will fall enough here and rise enough elsewhere that we will be competitive. But don't hold your breath waiting for this to happen.

Let me know if I have answered your questions.

Update May 4, 2016

It doesn't look as if the euro is going to replace the dollar yet! The UK is voting on whether to leave the limited partnership it has with the European Union. The idea that a properly functioning monetary union can exist in the absence of full political union is being challenged by the actions of debt-heavy countries like Greece, Spain and Italy. Independent monetary policies are incompatible with a monetary union if that means the sharing of a common currency.