The inability of the financial media to explain economic causation never ceases to amaze me. The simplest ideas regarding cause and effect elude the analysts.
This headline caught my attention: Asia stocks rise as Summers exits Fed contention. It was supplied by the Associated Press.
Lawrence Summers is the former president of Harvard University who committed academic suicide when he said in a speech that women don’t do well at science, and then failed to blame this well-known fact on unfair discrimination by men.
The author of the story asserted a connection between Asian stock prices and Summers’ announcement.
BANGKOK — Asian stock markets rose Monday after economist Lawrence Summers withdrew as a candidate to head the Federal Reserve, a development that many investors believe will prolong the U.S. central bank’s monetary stimulus. The dollar fell.
Analysts said Summers was perceived as unenthusiastic about the Fed’s aggressive bond-buying program, dubbed quantitative easing, which helped push down interest rates to spur lending and jumpstart economic growth following the financial and economic crisis five years ago. The program has also weakened the dollar and boosted stock markets. Investors in equities want to see it continue for as long as possible.
Asian nations export goods to the United States. This means that it is to the advantage of Asian exporters that the U.S. dollar remain high, so that importers in the USA can buy more Asian currency per dollar, and then buy Asian goods less expensively than if the dollar were low.
So, we are told that Asian shares rose because Summers is out, and Summers was not a fan of quantitative easing, which kept the dollar low.
Something is missing in this analysis.
An Austrian School analyst would add that, if the FED tightens money, it will produce a recession. This will lower demand for imports. But this is not what the AP writer said, because she is not an Austrian School analyst.
The news that Summers, considered the leading contender to succeed current Fed chairman Ben Bernanke, was no longer seeking President Barack Obama’s endorsement gave an immediate boost to stock markets in Asia.
His withdrawal means Fed vice chair Janet Yellen, a supporter of quantitative easing, “is firmly in pole position for running toward the top job,” said Stan Shamu, market analyst at IG in Melbourne, Australia. “That’s really what lit up the board this morning,” he said.
So, a weak dollar is good for Asian exporters.
The Fed’s stimulus, which involves buying $85 billion a month in Treasurys and mortgage bonds, is certain to be scaled back once the economy recovers sufficiently. But many investors think the winding down will be slower without Summers as Fed chief.
Why did they think that? He is a Keynesian. Yellen is a Keynesian. Yellen voted with Bernanke every time, as did all but one of the members of the FOMC. The FOMC has issued boilerplate press releases ever since December 2012 insisting that not until the unemployment rate falls to 6.5% or consumer prices rise above 2.5% per year will the FOMC reverse its policy. Neither of these is likely in the near future.
Then what difference would Summers have made?
Summers’ withdrawal followed a growing chorus of criticism about his suitability for the Fed job, including from some members of the Senate committee that would need to back his nomination. As former director of the National Economic Council, Summers helped steer the U.S. through the financial crisis early in Obama’s term. But he was also the target of critics who felt he was too cozy with Wall Street.
So, he “helped steer the U.S. through the financial crisis early in Obama’s term.” What did he recommend? We are not told. For that matter, what did Obama do? We are not told. You may recall that he got his “shovel-ready” $800-billion Keynesian stimulus bill passed by Congress in early 2009. After that, nothing.
The article went on to say this:
Stocks rose broadly Friday, giving the Dow Jones industrial average its best week since January. The market got a lift from two economic reports, one showing that inflation remained tame in August and the other showing that Americans spent more at stores last month.
So, Asian stocks rose on Monday morning, as had American stocks Friday. Friday’s rise in American stocks had nothing to do with Summers. But, we are assured, Asian stocks rose on Monday because of Summers.
We are also told in the media that the FOMC will reverse course this week, and begin to reduce its purchase of Treasury bonds and Fannie/Freddie bonds: the long-predicted September taper. But that means that the FOMC is going to do this week what Summers was expected to press for, beginning on February 1.
Making sense of the financial media is a real challenge.