Federal Reserve and Monetary Policy: Fraught with Contradictions

Remarks by Vice Chairman Roger W. Ferguson, Jr.To the Association for Financial Professionals Global Corporate Treasurers Forum, San Francisco, California (via videoconference)May 12, 2005
Globalization: Evidence and Policy Implications
is fraught with contradictions. He cites papers that are no longer relevant in todays economic conditions and he makes comments that he says are good, that reality has be proved to be false. Here are some example that really stands out:
The Pew estimates that the change of Hispanic population for 2002:4 to 2004:4 was 2219. If one makes the assumption that this rate of change is valid for the 2000 to 2002 , then the number of illegal aliens is about (2219 + 2219) x 0.7 = 3.106 million unaccounted for in the Census Bureau data. The Census Bureau do not keep tabs on illegal aliens. This influx of illegal aliens clearly affects the population sample. The Federal Reserve has to use the Employment Situation Report in its communications with those in Washington DC. They know it is fraught with sampling and non-sampling errors. Some of these errors are not corrected for. Every body keeps pointing out on how well the data points to a “strong” job market without pointing out the qualifiers the Federal Reserver speakers plug into their speech: “... the slack in the job market is ...”. This qualifier should give a really big hint that things are not as they seem.

Here is another dozy.
“Economists who have studied rising income inequality in America generally conclude that, although international trade and migration have contributed slightly, the main factor by far has been progress in information technology, which has boosted the demand for educated workers relative to those with low skills.“

“Yet another potential implication of globalization is that the distribution of incomes across countries will shift. Professors Edward Leamer of UCLA and Peter Schott of Yale have recently suggested that the significant gains in Chinese and Indian per capita income over the past twenty years may have come at the expense of income growth in the so-called "middle income" developing countries such as Argentina and Brazil. Per capita incomes in many middle-income countries have stagnated while per capita incomes in the industrial countries have continued to grow. Leamer and Schott argue that few Chinese or Indian products compete with products made in the industrial countries, whereas many Chinese and Indian products do compete with products made in the middle-income countries. This is an interesting and provocative hypothesis, but as yet it has not been subjected to careful testing.”

Yet Dallas fed president has stated this in a recent speech:
“India has become a major information technology and business-processing center for U.S. companies, and jobs are shifting to Bangalore from Baltimore and to Delhi from Dallas”.

That does not sound like India is stealing from “middle-income” countries. The threat to the US economy is not the GDP of China nor India, it is the very cheap labor. It is interesting that both of these officials are trying to say that the US economy is strong and that trade will increase the wealth of US citizens. I guess they haven't heard that the trend of staying in one home has changed and people are now looking to leverage their future wealth in the hopes of striking it big in the real estate market.

The Federal Reserve is now sounding like a bunch of old guardish puppets that I'm going to change my mind about the up coming removal of the carry trade and its impact on the US economy. Greenspan opinion on hedge funds not being a problem is in doubt.

Because of the lack of respect I have for the current Federal Reserve officials, I'm going on record and say that the removal of the carry trade will cause an economic collapse in the US. The problems in the derivatives market WILL blow through the Fannie Mae and Freddie Mac back door and take out the US housing market. This event will force foreign investors to pull their cash out of the US. This in turn will force the Fed to pick up the pace of hiking Fed Funds Rate. This has happen before, except it was gold the Fed was trying to stop from flowing out. A currency collapse is imminent.

See you in the soup line.