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.

GREECE | The Euro 2015 v. Gold 1933 (Updated Aug. 4, 2015)

At one time, some greenbacks were "gold certificates" that could be
exchanged for gold coins.

(The following adds to a chapter of a biography of Will Woodin, FDR's first Treasury Secretary.)

Greece is still in the Eurozone. However, this outcome may be a case of just kicking the can down the road. Another crisis may await.

That thought is prompted by comparisons with 1933.

Similarities with 1933

Greece today has a similarly high unemployment rate to the one that FDR inherited in 1933 - one out of four people in the labor force being unemployed.

As in 1933, in the absence of action, those able to do so take their money out of the country. That happened in the waning days of the Hoover Administration. Until FDR was inaugurated on March 5, 1933, gold flowed out of Hoover's USA in the same way that euros have been flowing out of Greece.

According to Acting Comptroller of the Currency Francis Gloyd Awalt, p. 359, on the Friday before FDR's inauguration, March 3, 1933, the Federal Reserve Bank of New York saw $200 million of gold and $150 million in dollar currency transferred out of its vaults.  It was $250 million short in reserves and meanwhile the Chicago Fed alone needed $100 million in gold.

Another similarity is that in March 1933 when FDR came in, he declared a bank "holiday" for all banks, national and state. The Greek bank holiday used the same euphemism for a forced suspension of business, in response to depositor panic and the government's need for time to consider its options.

Differences from 1933

The differences between FDR's actions and those of Greece are multiple. In 1933 several essential and coordinated actions were taken to direct the United States toward stability and recovery, starting with devaluation. The Eurozone prevents Greece from taking such actions. FDR's devaluation had a triple benefit - a huge write-down of debt, a subsidy of exports and a tax on imports. The worst day of the Depression was just before FDR took office.

FDR quickly severed the formal connection with gold for American holders of currency. The Emergency Banking Act was brought before the Congress and passed before the banks were reopened. A smart lawyer at the Federal Reserve Board, Milton Elliott, had in 1918 inserted an amendment to the Trading with the Enemy Act giving power to the President to prohibit gold exporting or hoarding (Awalt, p. 365). This provision was invoked to require all private owners of gold (with exclusions for industrial use, dentistry, or numismatic uses) to sell their gold back to the U.S. Government. That meant that the United States could face foreign creditors with a gold standard that was nominally in place for international transactions.

In Greece's case, the banks reopened with another loan from the Eurozone authorities. Few fundamental changes were made within Greece that would strengthen the economy and reduce unemployment. From what I have read, the most significant change was the replacement of the defiant Greek finance minister by a less confrontational Oxford-trained economist.

What FDR Did after Closing the Banks

FDR's team, led by Treasury Secretary Will Woodin, used the bank holiday period to:

• Ensure liquidity by printing $2 billion worth of greenbacks.  Woodin had first toyed with the idea of printing scrip to pay government bills while the banks were closed, an idea passed on by outgoing Secretary Mills, as noted by Awalt, p. 363. Then Woodin realized that scrip would just be another form of greenbacks. The currency was packed off in trucks to the cities with Federal Reserve Banks, then other cities with clearing houses, and finally other cities.
• Review the solvency of each bank - what we call nowadays a "stress test" - to determine which banks should be allowed to reopen. This is what the Treasury did in 2008 and 2009 after the financial meltdown that put Lehman Brothers out of business. The Treasury's chief economist recollects that the principal reason Lehman was allowed to fail is that the Treasury didn't then have legal authority to lend it money against its assets.
• Raise public confidence by announcing and publicizing government actions to ensure bank solvency and liquidity.
• Map out a plan for addressing the consequences of the financial crisis, notably 25 percent unemployment. FDR said it would be "criminal" to adopt a plan that did nothing for the unemployed.
• Map out a plan for financial reform to avoid a repetition of the crisis, i.e., supporting a plan for deposit insurance (which the banks wanted) and increased regulation (which the banks did not want, but which they were willing to trade for deposit insurance). Rep. Henry B. Steagall of Alabama, Chairman of the House Banking Committee, championed deposit insurance. Sen. Carter Glass of Virginia championed stiffer financial regulation (he had Steagall's position in the House when the Fed was created in 1913).

The tension in the 1929-1933 period and in 2008-2009 in the United States and now for many years in the Eurozone is about the need for national leaders to encourage consumer demand by reducing the burden of debt and creating liquidity, while ensuring confidence in the money supply - confidence that investments today will be repaid in uninflected money. In essence, the government must balance the rights of creditors with the need to encourage investment. With such high unemployment in 1933, FDR was prepared to give borrowers a break as against lenders.

Lessons from the Panic of 1893

The remarkable fact is that the U.S. dollar was pegged to gold for so long, a century between 1834 and 1934, during which an ounce of gold was kept at $20.67, with the exception of the 1860-1879 war years when greenback notes were issued without gold backing. When the price of gold rose, the U.S. Treasury would increase the supply by selling gold. When the price of gold fell, the U.S. Treasury would decrease the supply by buying gold.

The closest that the United States came to going off the gold standard may have been after the Panic of 1893, the worst crisis the United States had hitherto suffered and one that affected Will Woodin's family personally.  As in the previous panic of 1873 it resulted from excessively easy credit, resulting in speculation and overbuilding of homes and railroads. On February 20, 1893 - 13 days before the inauguration of U.S. president Grover Cleveland - the Philadelphia and Reading Railroad went broke.
  A series of bank failures followed, and then the failure of three more railroads. Since Will Woodin's family business was selling to the railroads, his father Clement was deeply troubled by the Panic and his health never fully recovered.

In the Panic of 1893, stock prices plummeted, 500 banks closed, 15,000 businesses failed. Falling prices for export crops such as wheat and cotton pushed numerous farms into foreclosure. The unemployment rate in the country rose as high as 19 percent - Pennsylvania to 25 percent, New York to 35 percent, and Michigan to 43 percent.

Jacob S. Coxey, Sr. led a highly publicized march of unemployed laborers from Ohio, Pennsylvania, and several Western states to Washington, D.C. , demanding a jobs relief program. A wave of strikes in 1894, notably the bituminous coal miners' strike of the spring and the Pullman Strike in July, led to violence in Pennsylvania, Ohio, and Illinoi and a shutdown of railroads in much of the country.

Populists and Democrats responded to poorer cotton and wheat farmers in the South and West who needed easy credit to keep their farms going. The Free Silver movement gained support from farmers who sought to liberate the economy from the straitjacket of the gold standard. President Cleveland borrowed $65 million in gold from Wall Street banker J.P. Morgan and the Rothschild banking family of England to support the gold standard.

In the ensuing 1894 elections, the Democrats were blamed for the Depression and Populists lost heavily. The election marked the largest Republican gains in history, locking the GOP thereafter into defense of the gold standard (in the previous election the party was divided).

The presidential election of 1896 was fought on economic issues and the pro-gold, high-tariff. The pro-silver candidate William Jennings Bryan said:

You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon  cross of gold.

Republicans led by William McKinley won a decisive victory. It was the last major protest of agrarian America against the cities and the industries that were growing in them. Will Woodin decided to join the hard-money Republican movement and ran for Congress in 1898. However, a Civil War veteran advocating easier money defeated him.

FDR Devalues the Dollar

FDR was determined to jettison the gold standard at home because it would get in the way of his plan for recovery. His Treasury Secretary, Woodin, when the subject of going off the gold standard at home came up, would say: "Oh no, not that again." (Woodin was decidedly in the camp of the creditors rather than debtors, but he was also loyal to both his own workers and to FDR.) FDR greatly reduced the straitjacket of the gold standard in two ways:

• On May 1, 1933 by Executive Order, FDR required that all gold be sold to the Treasury at the existing price. The penalty was a fine of up to $10,000 or up to ten years in prison. This gave ample gold backing to the dollar for international purposes at the same time as it made clear to the U.S. public that backing of currency by gold was no longer on offer. 
• On January 30, 1934, FDR devalued the dollar against gold, pushing the peg up to $35/ounce, where it remained into the decade of the 1960s, when I worked for the Federal Reserve Board. The panic of 2008-2009 created uncertainty that pushed up the price of gold, which peaked at $1,900 an ounce in August 2011 but fell back in July to about $1,100 an ounce despite the problems in Greece. Both numbers are well above FDR's peg - $35/ounce in 1934 would be equivalent to $623 in 2015 based on changes in the cost of living, using the BLS inflation calculator.

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.

U.S. DEBT | Foreign Holdings

Nov. 20, 2007–Watch what they do, not what they say. Based on the latest available data issued November 16, amid the posturing at the recent OPEC meetings, oil exporters have been adding to their holdings of U.S. securities over the past year, from $114 billion to $126 billion.

Japan has pared $36 billion, but is by far the largest foreign holder of U.S. dollars ($582 billion). The People's Republic of China has added $7 billion (to $397 billion). The biggest friends of the United States have been the UK, which added $204 billion (to $266 billion), and Brazil, which added $64 billion (to $109 billion). These two buyers more than account for the growth in foreign holdings of U.S. securities of $222 billion (to $2,247 billion). The top five holders of U.S. securities (counting oil exporters as one holder) account for 66 percent of all foreign holdings.

The year-over-year increase in holdings uses the dollar measuring stick. It looks differently to someone translating the dollars to yen or renminbi or the euro. The euro rose from $1.27 in September 2006 to $1.39 in September 2007, so from the perspective of someone buying most of their goods from Europe, the value of the U.S. securities fell 9 percent, canceling out what Uncle Sam is paying by way of interest.

Two caveats: (1) The numbers for November and December may have a different look–we will know in January and February 2008. (2) The U.S. Treasury International Capital reports are "estimated" based "on annual surveys ... and monthly data".